Offices Could See Stronger Demand

The office market slowed slightly in early 2016. But as financial markets stabilized later in the first quarter, office-using job growth accelerated, which could signal stronger tenant demand to come, analysts said.

Employers added just 151,000 jobs in January compared to 242,000 in February and 215,000 in March, the Labor Department reported. On Friday the department said unemployment remained unchanged at 5.0 percent in April.

“With healthy office-using employment growth and limited new supply expected in 2016, rents will likely further increase,” said CBRE Americas Head of Office Research Andrea Cross. “However, we continue to keep a close eye on any impact from financial market volatility and global risk factors on office market fundamentals.”

Victor Calanog, Chief Economist and Senior Vice President with Reis, New York, called it “almost tempting to be very optimistic about the office sector.” He noted that 52 of the top 82 markets posted occupancy improvements in the first quarter, while 75 of those markets posted effective rent increases.

“While the financial and commodity markets have gotten off to a jittery start in 2016, the economy remains solid,” Calanog said. “Real GDP growth should continue to be good if not great and the labor market continues to firm up, even almost seven years removed from the advent of the economic recovery.”

Calanog said the labor market continues to improve, “which portends continued improvement in demand for office space.”

Meanwhile, new construction remains limited, Calanog said. “This relationship between supply and demand should continue to remain favorable through the balance of 2016,” he said, predicting that vacancy could drop by another 30 to 40 basis points by December and asking and effective rents could grow by 3.6 percent and 3.8 percent, respectively.

Cross noted that tech companies continue to drive growth, “resulting in a scarcity of creative space in many cities,” she said. “Conversely, energy-dominated markets slowed further [in the first quarter] due to sustained low oil prices.” In addition, she said many companies continue to seek space in vibrant downtown and suburban areas near public transportation to attract talent seeking a “live-work-play” environment.