Reis: No Office Market Surprises
The national office vacancy rate held steady in the second quarter–which should not surprise anyone, said Victor Calanog, Chief Economist with Reis, New York.
The vacancy figure remained moored at 16 percent, Calanog said. “This probably shouldn’t come as a surprise given the similarly haltingly pace of job creation throughout this year,” he said. He noted a “very nice filip” of 287,000 jobs created in June but said 2016’s monthly average remains well below 200,000, down from both 2015 and 2014’s pace.
Asking and effective rents rose just 0.6 percent during the quarter, Calanog said. “The office sector has been recovering since late 2010, so rents have been rising for the last five years. But the pace of rent growth really hasn’t been accelerating that much.” He said annual rent growth did not exceed 3 percent until last year. “That’s respectable, but it’s really nothing to write home about and really nothing to motivate a lot of market participants to start investing in office properties.”
Calanog said tech-oriented metros such as San Francisco and San Jose, Calif. dominated in both absorption and rent growth for the past few years. “But given how rents have grown in the office market in these gateway cities, they dropped out of the top 10,” he said. “Still, you have the Seattles and Portlands (Ore.) powering through and making sure that tech is still represented in the top 10.”
Julia Georgules, Director of Office Research with JLL, Chicago, deemed this “a literal turning point” in the office market cycle. “Markets are about to receive millions of square feet of new supply and it’s really going to transform skylines primarily in the primary markets like Chicago, New York, Boston, Washington, D.C. San Francisco and Seattle,” she said. “But we are seeing some new development in secondary markets like Austin and Dallas where it’s really transforming the landscape and it’s going to be exciting to see how tenants respond to that and how it changes the streetscape of these markets into much more lively and vibrant locations.
Looking ahead, Calanog said Reis believes the office market’s recovery will probably continue to keep pace with the economy with vacancy declining another 20 basis points to end the year at close to 15.8 percent. “Fingers crossed,” he said, “We’ll see rent growth actually exceeding three percent again to end the year between 3.2 percent and 3.3 percent.”
