The U.S. office market boasted modest improvements in total net absorption and vacancy rates during the second quarter, according to a new research report on quarterly activity in the U.S. office market fromColliers International. The core, gateway cities outperformed the national market as a whole, continuing the overall positive momentum that has been building since last summer. However, slower-than-anticipated recovery in the national economy, concerns about the debt ceiling prior to reaching the recent agreement, and a sudden halt in job creation have restrained demand for office space.

According toColliers International'sSecond Quarter 2011 North America Office Highlightsreport, the U.S. office market recovery will likely continue to be uneven in nature and fairly volatile.New York,Washington, D.C.,San FranciscoandSeattleare the clear leaders in terms of demand, buoyed by educated workforces and further reductions in new construction starts, limiting supply.Yet Boston,Dallas,Denver,Houston,Philadelphia,Raleigh,San Diego,San JoseandWest Los Angelesare all seeing modest gains in occupancy.

Office vacancy rates were essentially flat overall, dropping just slightly quarter over quarter to 15.28 percent. National Central Business District (CBD) vacancy was healthier at 13.84 percent compared with the suburban markets at 16.00 percent. Meanwhile, the U.S. registered 9.9 million square feet of positive net absorption, the fifth consecutive quarter of rising occupancy, with a flight to quality particularly evident in many markets. The nearly 10 million square feet was a significant improvement from the first quarter, when occupied space increased by only 4.2 million square feet, and slightly more than twice the absorption recorded a year ago when occupied space expanded by 4.9 million square feet.

After a small increase in the first quarter, both CBD and suburban rents drifted lower in the most recent three-month period. Second-quarter data shows Class A CBD rents decreased by 1.5 percent to average$38.98per square foot, with Class A suburban rents dropping 0.7 percent to average$26.06per square foot.

Somewhat positive is the seventeen-month-long gain in private-sector employment, although recent data shows a slowdown in that part of the labor market as well. One bright spot remains: office-using employment was reasonably strong during the April-June period, highlighted by professional and business employment in particular, up 2.9 percent year-over-year (June).

Taking the various economic factors and real estate fundamentals in total, widespread rent increases are unlikely to occur this year and may not materialize until well into 2012.

"The national office market has been improving overall, and though the recovery has slowed of late, the long-term indicators are strong," saidDylan Taylor, chief executive officer forColliers Internationalin the U.S. "Gateway cities likeNew York,Washington, D.C.andSan Franciscocontinue to drive the national real estate sector, with absorption gains strongest in those markets and a feverish appetite among investors from around the globe looking to acquire assets in these urban markets."

"The national real estate market was in the midst of a modest recovery, but recently hit an unexpected soft patch," saidRoss Moore, chief economist forColliers International. "The most pressing question we face is how long the slowdown will last. There are many economic variables at work, both nationally and overseas, impacting the U.S. market."

Additional highlights from the full research report, which analyzed the sixty-two largest office markets in the nation, are listed below:

• The largest year-over-year percentage increases in average asking rents were reported byCharleston(19.8%),San Francisco(10.8%),Manhattan'sMidtown South(9.3%),Washington, D.C.(7.7%) andSeattle/Puget Sound (7.4%).
• San Jose,Dallas,Atlanta,San Diego,San Francisco Peninsula,Denver,HoustonandRaleigh/Durhamwere the Q2 leaders in suburban market absorption.
• Continuing a trend seen over the past few quarters, Class A buildings continued to attract "move-up" tenants: Class A absorption totaled 8.5 MSF, or nearly 86 percent of overall absorption.
• After a modest increase in Q1, second-quarter office completions totaled just 3.9 MSF—returning to levels recorded during Q4 2010. Construction underway increased by almost 4.7 MSF relative to Q1, with 30.4 MSF in various stages of development at the end of Q2, although construction activity remains exceptionally low by historic standards.