Office Market Seeing Economic Tailwinds

The U.S. office market maintained its steady improvement in the third quarter, sector analysts reported.

National office absorption reached 22.7 million square feet, vacancy remained stable at 10.1 percent and asking rents increased by 4.0 percent annually, Transwestern Research Director Ryan Tharp said. He noted the strong economy contributed to the office market’s momentum despite softer income growth in a very tight labor market.

Inflation-adjusted gross domestic product increased at a 3.5 percent annualized according to first estimates and personal consumption contributed 2.7 percent to that rate, Tharp said. “Because inflation has remained in line with the Federal Reserve’s target of 2.0 percent, consumer and business confidence should keep the office market healthy well into 2019,” he predicted.

Another positive indicator: year-to-date net office market absorption was 17.1 percent higher at the end of the third quarter than it was for the same period a last ago. Dallas-Fort Worth, San Francisco and Denver led in absorption by a significant margin for the prior 12 months, with a combined 13.3 million square feet, Transwestern said.

Meanwhile, demand and supply approach equilibrium as new construction activity peaked in early 2017. Only 146.3 million square feet was under construction nationally in the third quarter. “It’s encouraging to see that office demand is broad-based across multiple sectors, with the technology and co-working sectors driving demand as we move later in the cycle,” Transwestern Research Manager Michael Soto said. “If demand continues unabated, rental rate growth should moderate.”

Year-over-year, Minneapolis, San Antonio, and Charlotte, N.C. have experienced the most dramatic rent growth at in at 10 percent or greater. “The strong performance of secondary markets demonstrates that the office sector is not being propped up by a few formidable markets,” Soto said.

JLL, Chicago, agreed “robust” economic growth continues to power demand for office space, but noted competition is cooling as more new supply reaches the market.

“Even with near-full employment, broad-based macroeconomic fundamentals are keeping sentiment from employers and investors positive,” the JLL U.S. Office Outlook report said. It reported further movement toward a more balanced office market characterized by healthy activity from occupiers, positive but less acute asking rent growth and a widening array of space options across asset segments opening up for users.