Strong Tech Sector, Robust Construction Pipeline Influence Office Fundamentals

A strong tech sector and a “robust” construction pipeline influenced U.S. office fundamentals during the third quarter, said Cushman & Wakefield, New York.

“More and more, the office market’s fortunes in 2017 are linked to the rise of the tech sector,” said Cushman & Wakefield Americas Head of Research Revathi Greenwood. “In 2016, Seattle was the only technology hub to rank in the top 10 cities for space absorption. To date in 2017, the top 10 cities for office absorption included Santa Clara (Calif.), Brooklyn (N.Y.), Seattle, Raleigh/Durham (N.C.) and San Diego.”

Greenwood said these five tech-centered markets have each seen more than one million square feet in space absorption. Santa Clara led with nearly 3.4 million square feet absorbed. But significant negative absorption elsewhere offset the strength of these top markets. Of the 87 markets Cushman & Wakefield tracked, 27 markets posted a combined total of 5.3 million square feet of negative absorption during the quarter, much more than the second quarter’s 3.4 million square feet of negative absorption.

“The flow of tenants into new construction is beginning to impact fundamentals in some markets,” Greenwood noted. “Developers delivered more than 11 million square feet of office space nationwide during the third quarter. The pipeline of new product is and will remain an important influence on the U.S. office market for the balance of 2017 and beyond.”

The national office vacancy rate increased 10 basis points to 13.3 percent during the third quarter. “After reaching a cyclical low of 13.1 percent last year at this time, vacancy has remained essentially flat,” Cushman & Wakefield said. Among major markets, Manhattan’s Midtown South recorded the lowest office vacancy in the nation at 7.3 percent, followed by Seattle (7.5 percent) and Nashville, Tenn. (7.7 percent). Florida saw significant improvement with vacancy rates declining 100 basis points or more year-over-year in six markets, led by Palm Beach, Jacksonville and Orlando.

Average asking rents for available space continued to climb steadily in all markets, the report said. In the third quarter, average asking rents reached a record $30.57 per square foot, up 0.6 percent from the second quarter and 3.8 percent from a year ago.

“This marks the 25th consecutive quarter that asking rents have increased, by far the longest streak of rising rents over the past 20 years,” said Cushman & Wakefield Principal Economist Ken McCarthy. He noted average asking rents have increased nearly 25 percent since bottoming out in second-quarter 2011.