Office Sector ‘Sluggish’ Despite Economic Growth

Last week the U.S. economy entered its longest expansion in history. Yet the office market remains “sluggish,” noted Reis Chief Economist Victor Calanog.

The National Bureau of Economic Research said the GDP has now grown for 121 consecutive months, surpassing the 120-month expansion seen between 1991 and 2001.

“Despite a healthy job market and strong overall economy, the office market has moved and continues to move at a sluggish pace,” Calanog said, noting vacancies remain just 80 basis points below the sector’s 17.6 percent cyclical peak at 16.8 percent.

“There is very little to prompt developers to build,” Calanog said. “Companies are investing in their own owner-occupied space, but few single- and multi-tenant market-rate rentals are receiving financing without proof of robust pre-leasing.”

Calanog said the office sector must also contend with longer-term trends such as job mechanization and offshoring that decrease employers’ need for office space.

The relatively steady national office vacancy makes the widening gap between stronger markets and weaker ones particularly noteworthy, Calanog said. “The underlying data shows that tech firms are fueling much of the growth in the stronger office markets, particularly in west coast metros, parts of Texas and parts of the east coast,” he said.

That gap between healthier metros and weaker ones has widened over the last few years. Calanog said 43 metros saw vacancy increases over the quarter. Metros with the highest vacancy jumps included Nashville, Tenn., Fort Worth, Texas, St. Louis, Mo. Milwaukee, Wis. and Memphis, Tenn. Metros with the biggest vacancy declines were Fairfield County, Conn., Charlotte, Phoenix, Charleston, S.C. and Little Rock, Ark.

Several metros saw effective rent increases exceeding one percent, including Minneapolis, Seattle, Louisville, Austin, Texas and Indianapolis, Reis reported. Only seven metros saw effective rent declines: Chattanooga, Tenn., Rochester, N.Y., Knoxville, Tenn., Wichita, Kan. and Little Rock.

Net office absorption equaled 3.2 million square feet during the quarter, lower than the previous quarter’s absorption of 3.9 million square feet but slightly higher than the year-ago figure. Nearly seven million square feet of new construction came online, well below the levels recorded in previous years. “Aside from last quarter, the second quarter saw the lowest number of new construction since first quarter 2015,” Calanog said.