Office Forecasts Diverge Slightly
The office market saw both rent and occupancy gains in late 2015, but analysts diverge slightly on the sector’s outlook for the rest of this year.
CBRE Research, Los Angeles, said offices experienced their highest net absorption in nearly a decade in fourth-quarter 2015. Nearly 90 percent of the markets the firm tracks posted positive absorption last year. “However, financial market volatility and fear regarding a global economic slowdown have tempered the outlook somewhat in 2016,” the firm’s MarketView report said. “Overall office market fundamentals remain strong, but the impact these risk factors have on hiring and leasing activity in the year ahead will bear watching.”
Victor Calanog, Chief Economist with Reis, New York, showed a slightly more optimistic view. He noted that national office vacancies declined 20 basis points in the fourth quarter to 16.3 percent. “This is the first time since 2011 that national vacancies declined by more than 10 basis points and suggests that the office recovery is finally gaining long-awaited momentum,” he said.
Though the national office vacancy rate remains roughly 400 basis points above its mid-2007 cyclical low, Calanog said net absorption, new construction and vacancy compression combined to make 2015 the best year for the office market in recent history.
“The solid recovery in GDP growth and the labor market provides confidence that the acceleration in the improvement in the office market will persist in 2016,” Calanog said. “With the labor market nearing full employment, the environment is ripe for faster compression in vacancy, stronger rent growth, greater demand for space and more construction.”
Though the current office recovery has stalled in the past, “that does not appear to be the case now–unless the U.S. economy itself is plunged into a recession,” Calanog said.
A vast majority–63 out of 82–of Reis’s major markets posted positive absorption figures during 2015, Calanog said; sixty-seven markets posted effective rent increases in the final quarter.
“Speculative projects with little to no pre-leasing commitments are making a return to the market, and if no untoward development knocks the U.S. economy off its current growth path, optimism for the office sector should continue to benefit,” Calanog said.
CBRE noted that its fourth-quarter underwriting survey found that investors remain confident in office’s future performance, “reflected in their willingness to transact underwriting at very competitive (low) cap rates and target internal rates of return.” Unlevered target IRRs averaged 6.9 percent for central business district acquisitions and 7.7 percent for suburban properties, the firm said.
