Office Market Recovery Gaining Steam

Slowly and quietly, the office market recovery is gathering pace, reported Reis, New York.

“2015 is shaping up to be the best year for demand for office space since 2007, before the recession,” said Reis Senior Economist and Director of Research Ryan Severino. “Year‐to‐date figures for most metrics are already well ahead of last year.”

Severino said some in the industry might not notice the improvement because of its slow pace. “However, improvement is becoming stronger and more consistent, which portends better times ahead for the office market over the next five years,” he noted.

Net office absorption exceeded construction during the third quarter, causing vacancy to decline by 10 basis points to 16.5 percent, Reis reported–the fourth time in the last five quarters that vacancy declined. “This resumes the continued gradual declines in the national vacancy rate after [the second quarter’s] brief pause,” Severino said.

For much of this economic recovery, the office market lagged behind other sectors due to the relative lack of new office‐using jobs. But Severino said the labor market “clearly shifted into a higher gear” in 2014, which led to a consistent and material impact on the office market. “Vacancy compression is poised on the precipice of accelerating in the next year or so,” he said.

Severino said the second quarter’s strong bounce back in real GDP growth reaffirmed that the economy remains on solid footing despite recent stock market gyrations. “This can be seen in the labor market, which continues to churn out new jobs, including those that utilize office space,” he said.

The Labor Department reported Friday that the nation added 142,000 jobs in September. Though a lower job-gain figure than expected, the unemployment rate remained at 5.1 percent. “Although the labor market could not maintain the torrid pace of improvement from late 2014, the ongoing gains have been sufficient to translate into vacancy compression and rent growth,” Severino said. “The outlook for the labor market during the fourth quarter of this year is slightly more optimistic than what occurred during the second and third quarters.Therefore, we expect vacancy to compress by another 10 to 20 basis points during the fourth quarter of 2015 while rent growth should continue to accelerate.”

Effective rents–net of landlord concessions–grew by 0.7 percent during the third quarter and 3.5 percent compared to a year ago, Reis reported. “Effective rent growth of 3.5 percent is quite strong for a market with such an elevated vacancy rate,” Severino noted. “To put that in context, year‐over‐year effective rent growth in the office market is roughly on par with year-over‐year effective rent growth in the apartment market.”