C&W: 4.9% Increase in Office Rents

U.S. office rents increased at their fastest pace in seven years in 2015 as robust job gains and lagging construction created tighter market conditions in most markets, reported Cushman & Wakefield, New York.

U.S. office markets absorbed 21.3 million square feet of space in the fourth quarter, up 2 percent from the previous quarter, C&W said. For all of 2015, net absorption registered at 81.7 million square feet, the highest level since 2006. Office vacancy has slowly declined since 2011 but remains 100 basis points higher than pre-crisis levels. The national office vacancy rate fell 80 basis points from fourth quarter 2014 to 13.9 percent.

Cushman & Wakefield Chief Economist Kevin Thorpe said the expansion is now rolling more aggressively into mid-sized and smaller metro areas. “Secondary and tertiary markets really came on strong in 2015–that was the news for the office sector,” he said. “Up until last year, it was still mostly the gateway cities driving the demand metrics. Gateway cities are still performing well, but the fourth-quarter data show that seven of the top 10 absorption cities were non-gateway markets.”

Thorpe noted markets such as Phoenix and California’s East Bay and Sacramento are surging. “On a risk-adjusted basis, the secondary markets should appear increasingly compelling to both foreign and domestic investors,” he said.

U.S. office rents increased 4.9 percent in the fourth quarter compared to a year-ago–the strongest quarterly gain since peaking in 2008. Office rents increased in 70 of the 87 markets Cushman & Wakefield tracked between fourth quarter 2014 and fourth quarter 2015. In addition, the construction pipeline continued to expand, with 93.9 million square feet of new office construction in fourth-quarter 2015, up 2.7 percent compared to the same quarter one year before.

“Although construction is ramping up in certain markets, particularly in tech-fueled cities, in general the supply pipeline continues to lag in this cycle”, Thorpe said, noting that absorption has been nearly 75 percent higher than new construction levels since 2011. “As a result, rents are jumping in many cities. Twelve markets hit double-digits in rental appreciation in the fourth quarter, and many more are on their way.”

Strongest markets in terms of demand for office space included Phoenix with 1.5 million square feet absorbed, Los Angeles Metro with 1.4 million square feet and Denver with 1.1 million square feet, C&W reported. Strongest markets for rent growth included San Jose, Calif. with 20.3 percent year-over-year rental appreciation, downtown Manhattan with 16.7 percent and Seattle with 16.4 percent.