Lackluster Second-Quarter Office Performance

The office market continued its “lackluster” pace in the second quarter–recording the lowest quarterly net absorption in three years–said Reis Senior Economist Barbara Byrne Denham.

The sector’s vacancy rate remained flat at 16 percent, down just 10 basis points from a year ago, Byrne Denham noted. “In the current expansion–which is now seven quarters longer than the previous expansion–the vacancy rate has fallen from a high of 17.6 percent to only 16.0 percent as tenants have leased far fewer square feet per added employee than in past cycles,” she said.

Barbara DenhamByrne Denham said the office vacancy rate fell from a high of 17.0 percent in 2003 to just 12.5 percent in 2007 during the last expansion.

“New [office] construction was also low by historic standards, but developers have been cautious throughout these last few years and have expanded the office supply at a less aggressive rate than in previous cycles,” Byrne Denham said. She noted just 7.5 million square feet of office space delivered during the quarter. Net absorption fell to 3.3 million square feet, the lowest since second-quarter 2014.

Asking rents increased 0.4 percent or $0.12 per square foot to $32.24 per square foot, Reis reported. Effective rents increased 0.3 percent as concessions played a smaller role in negotiations this quarter. Asking and effective rents have both increased 1.6 percent since second-quarter 2016–the lowest annual rent growth rate since 2011.

The annual growth statistics put Seattle, Oakland, Calif., Charleston, S.C., Nashville, Tenn., Atlanta and Charlotte, N.C. at the top of the effective rent growth charts with growth rates between 3.4 percent and 5.1 percent for the year, Reis reported. “Not surprisingly, these rent growth rankings parallel office employment growth trends that put these six metros in the top 12 metros of year-over-year office employment growth along with Dallas, Las Vegas, Orlando, Raleigh-Durham and Tampa,” Byrne Denham said. She noted only two metros–Minneapolis-St. Paul and Wichita, Kan.–showed effective rent declines for the year.

Across the U.S., overall office employment grew at a slightly slower but still healthy 2.0 percent rate, Byrne Denham noted. “Thus, we expect occupancy growth to remain positive in 2017,” she said. “We expect stronger construction in 2017 than in 2016 which means that the vacancy rate could continue to stay flat as occupancy grows at or near the same pace as new completions just as it has over the last two years. This has kept rent growth low and should continue to do so this year and next.”