Office Vacancy Rate Declines Slightly, Led by Suburbs

Vacant office space declined by 10 basis points during the third quarter to 12.9 percent, reported CBRE, Los Angeles.

“The slow, steady improvement in the office market continued in the third quarter after a second quarter pause,” said CBRE Americas Chief Economist Jeffrey Havsy. “Demand remains positive but modest.”

Suburban office markets set the pace for declines, continuing a recent pattern, Havsy noted. The vacancy rate in suburban markets decreased 20 basis points to 14.1 percent while downtown vacancy dipped just 10 basis points to 10.6 percent. “Vacancy continued to fall in a majority of U.S. office markets, and the national office vacancy rate remains near its post-recession low,” he said.

Reis Senior Economist Barbara Byrne Denham said the third-quarter office sector numbers showed clear deceleration in occupancy, rent and employment growth. “We expect this trend to continue over the next few quarters as well, although market conditions should not fall much further despite higher construction expected over the next six quarters or so,” she said. “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 should keep a lid on rent growth over this year and next.”

Byrne Denham noted office employment growth has averaged 2.0 percent year-over-year through August, down from a 2.4 percent average annual growth rate last year and 2.8 percent in 2015. “This means that office demand growth has been slightly weaker over the last eight months than in previous years,” she said.

CBRE reported largest metro-area declines occurred in Trenton, N.J. (220 basis points), Las Vegas (140 basis points) and Phoenix (110 basis points). Tucson, Ariz., Detroit, Memphis, Tenn., Stamford, Conn. and Richmond, Va. each declined by 80 basis points or more.

Havsy noted September’s job report showed continued growth in office-using jobs and said that growth should lead to continued relatively modest positive absorption. “The supply pipeline in certain markets has started to increase and this may lead to a slowing of the vacancy decline in early 2018,” he said.