Office Property Market Cools
Tenant demand for office space slowed in the first quarter, dragged down primarily by continued oil sector weakness and a tech sector pullback, reported Cushman & Wakefield, New York.
But net absorption remained strong enough to push occupancy levels and rents higher in most markets, said C&W Chief Economist Kevin Thorpe.
C&W said net absorption of office space slowed by 59 percent in the first quarter from the previous quarter to 9.7 million square feet following very strong demand last year. “Despite the deceleration, tenant demand for office space kept pace with new construction,” Thorpe said, noting that the national office vacancy rate remained flat at 13.5 percent–its tightest level since third-quarter 2008.
“The slowdown mirrors the choppy performance of the U.S. economy and was concentrated in certain markets,” Thorpe said. “The financial market volatility that marked the start of 2016 weighed heavily on the tech sector and for the first time in years we saw the venture capital faucet tighten and certain tech hubs such as Silicon Valley and Boston began to pull back.”
Office market conditions stabilized after the first six weeks of the year and U.S. businesses continued to add jobs at a healthy pace, Thorpe said: “Given that job creation and consumer confidence have remained steadfast, we should see the office demand metrics pick up from here.”
The strongest markets in terms of demand include Dallas/Fort Worth with 2.2 million square feet of absorption, Denver with 909,000 square feet, Miami with 907,000 square feet and Philadelphia with 818,000 square feet.
U.S. office rents increased 4.1 percent in the first quarter compared to a year ago to $28.45 per square foot. The construction pipeline expanded modestly for the quarter, with 9.5 million square feet of new office buildings delivered to the market and 95.1 million square feet expected to deliver over the next two years, Thorpe said. Both readings were down slightly from year-ago levels.
Midtown Manhattan remained in the lead with office rents of $78.40 per square foot but San Francisco, which reported the lowest vacancy rate in the country at 5.7 percent, started to close the gap with asking rent averaging $68.44. As recently as early 2010, the difference between Midtown Manhattan and San Francisco averaged $30.30.
Rent-growth leaders included San Jose, Calif., with 22.1 percent year-over-year rental appreciation, Dallas/Fort Worth with 17.5 percent, San Mateo County, Calif., with 16.5 percent and San Diego, with 13.5 percent.
“A number of factors indicate the U.S. office market will continue to tighten,” Thorpe said. “Developers and lenders have held to a disciplined approach to new construction throughout this cycle. The combination of equity market declines early in the quarter and continuing weakness in energy-driven markets has reinforced this discipline.”
Thorpe noted that the office sector is “underbuilding” relative to office-using job creation. “So even when the economy throws a weak absorption number on the board, vacancy stays tight,” he said. “If job growth continues to follow a similar script, we are going to see rent growth spike to double-digits in a growing number of markets this year.”
