C&W, CBRE: Office Demand Still Strong

Demand for U.S. office space remained strong in the third quarter despite recent global volatility, sector analysts said.

Kevin Thorpe, chief economist with Cushman & Wakefield, said the U.S. office sector continues on a strong and steady path despite a number of global economic headwinds. “There were plenty of reasons for the office metrics to slump this quarter: financial market volatility, China’s economic slowdown, the rapid appreciation of the U.S. dollar and uncertainty regarding monetary policy along with the possibility of a government shutdown,” he said, but he added that “the property markets are proving time and time again to be resilient in the face of all of these headwinds.”

Thorpe said the quarter yielded one of the strongest in the cycle in terms of occupancy gains. U.S. office markets absorbed 19.2 million square feet of space in the quarter. Though down in year-over-year terms, demand for office space continues to outstrip new development, which pushed vacancy rates down by 10 basis points from the previous quarter to 14.1 percent.

Jeffrey Havsy, Americas chief economist for CBRE, Los Angeles, said economic fundamentals point to a “sustained” U.S. office expansion in 2015 as firms continue to hire workers and office market investment volumes staying high.

“The Federal Reserve’s September decision to delay its interest rate hike will help to keep interest rates down, further promoting real estate investment,” Havsy noted. “Robust office demand is expected to continue to outpace new supply in the near future, leading to further tightening of the vacancy rate and keeping rent growth above inflation in a majority of U.S. office markets.”

Both suburban and downtown markets saw vacancy fall as the suburban rate dropped 10 basis points to 15 percent and the downtown rate declined 20 basis points to 10.4 percent, the lowest rates for both since 2008, Havsy said. Indianapolis recorded the largest quarterly decline of 210 basis points while Miami, Oakland and San Jose each declined by more than 100 basis points. “Over the past four quarters, markets in California, the Southeast and the Midwest have seen the greatest improvement,” he said. “Among these are Jacksonville [Fla.], Ventura [Calif.], Indianapolis, San Jose, Detroit, Oakland, Orlando, Nashville and Orange County [Calif.].”

Thorpe mentioned the emerging trend of increasingly impressive performance in secondary and tertiary markets. “If you look at office-using job growth in these cities compared to the size of the labor force, it’s the secondary markets that are now at the top of the list,” he said. He expect this narrative to continue as more firms seek out more affordable markets.

“We know we are reaching a strong place in the cycle when we see that both gateway cities and secondary cities are benefitting more evenly in the expansion, which is what we are now observing,” Thorpe said.