Office Supply-and-Demand Dynamics Change

Changing supply-and-demand dynamics will take center stage in the office market in late 2018 and into 2019, said JLL, Chicago.

“Economic growth, robust job creation and positive consumer, employee and business sentiment will keep demand for space healthy over the near term,” the company’s Office Outlook report said. “The injection of new, quality supply will also provide a wider variety of options for tenants, further boosting leasing volumes as occupiers take advantage of more generous deal terms spurred by landlords competing for tenancies through larger and more comprehensive incentives packages.”

JLL noted these trends will only amplify over the next 24 months across a broader swath of markets.

Another factor benefitting office occupiers is the trend toward more co-working and flexible office space. In a separate report, JLL reported flexible workspace has grown at a 23 percent average annual rate since 2010. “After more than nine years of economic growth, employers are having a tough time finding talent and occupancy growth is slowing,” JLL said in its Coworking’s Unstoppable Market Growth report. “With that, the flexible space/coworking sector has emerged as the primary growth driver within the office market.”

The report said expansion from the shared office space sector claimed more nearly 30 percent of total U.S. office absorption over the past 24 months.

“No segment of the market has demonstrated more overall growth than the coworking industry,” JLL said. “Given the massive amount of venture capital that’s being poured into the sector, this aggressive growth rate shows no signs of slowing.” It predicted flexible space will remain one of the office market’s primary growth catalysts “for quite some time.”

Year-to-date, more than 27 million square feet of new space has come online and 36 million more square feet is set to deliver through the end of the year. JLL reported nearly 94 million square feet of new space will deliver over the next six quarters, which will likely push vacancy upward. But as the U.S. and global economy maintain forward momentum, most indicators from absorption to vacancy, rent growth to development activity, paint an “optimistic” picture for the near term, the report said. Beginning in 2020, new supply will moderate sharply, with only 12.4 percent of current development to be completed in 2020, 2021 and 2022.

That new supply is fueling changing market conditions and will continue to do so through 2019. “More than any other force in the office market, the increasing intensity of deliveries is causing leverage to move in a tenant-favorable direction,” JLL said.