Demand for office space surged in the fourth quarter of 2012 despite economic uncertainty related to the fiscal cliff, according to research released today by Cassidy Turley, a leading commercial real estate services provider in the U.S.

U.S. office markets absorbed 20.1 million square feet (msf) in the fourth quarter, up from 7.1 msf in the third quarter, resulting in the strongest quarter of demand for office space since pre-recession 2007. Vacancy rates in the fourth quarter fell 40 basis points (bps) from the previous quarter to 15.3%.

“There clearly was pent up demand forming in the office sector,” said Kevin Thorpe, Chief Economist at Cassidy Turley. “The job numbers have been reasonably healthy for quite some time, but the office demand data have been largely disappointing.  This report suggests the office sector is finally falling in line with the momentum we are observing in the rest of the economy.”

In the fourth quarter, all four census regions in the U.S. recorded positive demand for office space and falling vacancy.  Of the 80 metros Cassidy Turley tracked in the study, 65 reported gains in occupancy.

“Fourth-quarter results were impressive when you consider the worst-case scenario the fiscal cliff presented and the possibility of relapse into recession,” Mr. Thorpe said. “Businesses generally don’t expand into more space unless they feel confident in the economic trajectory.”

Average asking rents in the fourth quarter of 2012 rose to $21.70, a 1% increase compared to the same period a year-ago.

“Make no mistake, this remains a tenant’s market,” Mr. Thorpe said. “Vacancy is eroding, but is still 200 bps above the norm. Until that space is filled, tenants can press for lower rents. The rent growth you are seeing nationally primarily is being propelled by a handful of West Coast, tech-driven markets and the New York City market. The majority of the metro areas we track are still fighting to eke out any rent growth at all.”

The top 10 strongest markets in terms of demand for office space are Phoenix, with more than 1.2 msf of fourth-quarter net absorption; Boston, with more than 1.2 msf of net absorption; Seattle, with 1.1 msf of net absorption; Houston, at 969,000 sf of net absorption; Chicago, with 940,000 sf of net absorption; Long Island, NY, with 910,000 sf of net absorption; and Silicon Valley, with 908,000 sf of net absorption.

The top 10 strongest markets in terms of rent growth are San Francisco, with 14.5% year-over-year rent growth; New York, with 10.4%; Salt Lake City, at 10.3%; Silicon Valley,  at 10.2%; Columbus, OH, at 8.5%; Houston, with 6.9%; Little Rock, AR, with 6.1%; San Mateo County, CA, with 5.7%; Dallas, with 5.6%; and Denver, with 5% rent growth.