Office Market ‘Stable’ But Transaction Volume Slips

Transwestern, Houston, said the U.S. office market showed continued growth in early 2018 as vacancies remained stable for the sixth consecutive quarter.

The sector ended March with a 9.7 percent national vacancy rate; 22 of the 48 markets Transwestern examined registered vacancy improvements.

Transwestern Director of Research Stuart Showers said office sector net absorption slightly outpaced the five-year average of 14 million square feet absorbed in the first quarter. “As a result, average asking rental rates continued to climb at a modest pace,” he said.

The first-quarter national average asking rental rate of $25.66 per square foot marked the 20th consecutive quarterly increase, Showers said.

Continued restraint in new office development helped the sector, Showers said. After peaking at 147.6 million square feet a year ago, the construction pipeline has started to recede; first-quarter 2018 marked the fourth straight quarter of declining deliveries.

“When examining vacancy and rent growth by market, we see a number of metros still in a stage of recovery or market correction for a variety of reasons,” Showers said. “But these are more than offset by metros we consider stabilized or peak performers.”

New York, Dallas-Fort Worth, Washington, D.C. and Seattle had the highest new office asset construction starts in the first quarter, Transwestern said.

JLL, Chicago, reported office property transaction volume softened 5.6 percent during the quarter “but still exceeded expectations.” Office transactions fell a full 12 percent in full-year 2017.

“Core liquidity remains soft, but is expected to improve modestly for gateway markets and best-in-market product,” JLL said. “The share of transactions in primary markets posted a moderate uptick, representing the highest proportion since 2015. Active secondary markets such as Atlanta, Houston, Phoenix and Raleigh were indicative of sustained demand for [office] product in the Sunbelt.”

As off-shore investor demand for U.S. offices slipped, domestic investors accounted for a larger share of office purchase transactions, JLL said. Canadian buyers maintained their position as the most active non-domestic investor with nearly $1.5 billion in acquisitions.