Office Market Cools Slightly
Demand for office space slowed in the first quarter, primarily due to continued oil-sector weakness and a tech-sector pullback, reported Cushman & Wakefield, New York.
But net absorption remained strong enough to push occupancy levels and rents higher in most markets, said Cushman & Wakefield Chief Economist Kevin Thorpe.
“The financial market volatility to start 2016 weighed heavily on the tech sector in particular,” Thorpe said. “For the first time in years, we saw the venture capital faucet tighten and certain tech hubs such as Silicon Valley and Boston began to pull back.”
Economic conditions have stabilized since the first six weeks of the year and U.S. businesses continue to add jobs at a healthy pace, Thorpe said. “The U.S. economy seems to be pulling out of this mini-Q1 slowdown, and given that job creation and consumer confidence have remained steadfast, we should see the office demand metrics pick up from here.”
Ryan Severino, Senior Economist and Director of Research with Reis, New York, called the sector’s steady pace of improvement a heartening sign.
“Given the relative weakness during this recovery phase, it is realistic to expect that any acceleration in vacancy compression will occur gradually and inconsistently, he said. “The vacancy rate has now declined in six of the last seven quarters and remains at its lowest level since the second quarter of 2009.”
Severino said both construction and net absorption pulled back a bit in early 2016, but said the pullback should not be interpreted as a retrenchment. “Moreover, beginning the year with a compression in vacancy–which has not occurred consistently during this recovery–positions the market well,” he said, adding that a 10 basis point vacancy drop in the first quarter met expectations, “and [it] leaves the possibility that the market could slightly surprise to the upside if office-using employment growth remains robust.”
In addition, the U.S. labor market continues to show improvement, which portends continued demand improvement for office space, Severino said: “Meanwhile, with vacancy remaining elevated, new construction remains limited. This relationship between supply and demand should continue to remain favorable through the balance of 2016.”
Thorpe agreed that the office sector is under building relative to office-using job creation. “So even when the economy throws a weak absorption number on the board, vacancy stays tight,” he said. “The way this is tracking, if job growth continues to follow a similar script, then we are going to see rent growth spike to double-digits in a growing number of markets this year.”
