Reis: Office Demand Grows While Rent Growth Slows
Office market demand grew in fourth-quarter 2016, but rent growth decelerated to 0.3 percent in the quarter, reported Reis, New York.
Reis Economist Barbara Denham said office rents decelerated throughout 2016.
The national office vacancy rate declined to 15.7 percent in the fourth quarter from 15.9 percent in the third quarter and 16.2 percent at year-end 2015, Reis reported. Net absorption exceeded new supply by the widest margin since before the recession.
“These office market statistics were consistent with the office employment statistics,” Denham said. She noted that office jobs in the metros Reis tracks increased by 2.5 percent in 2016. “Although 12 metros posted declines in office employment, many showed strong gains including San Jose (Calif.), Tucson (Ariz.), Richmond (Va.), Fort Lauderdale and Tampa (Fla).”
Metros that saw the greatest annual decline in vacancy rates included Las Vegas, San Bernardino/Riverside, Calif., Orlando, Fla. and Oakland, Calif, Denham said.
Energy-focused Houston posted the highest vacancy rate increase for the year–17.8 percent–up from 15.6 percent at year-end 2015. Houston also saw the most construction with 5.13 million square feet of new inventory in 2016. But net absorption remained positive for the metro at 204,000 square feet, Denham said: “Houston had lost office jobs through the first half of the year, but it has since added jobs.”
Denham noted that as office demand continues to exceed new construction, vacancy should decline and rent growth will likely pick up. “There could be some volatility in growth rates from quarter to quarter, but the overall trend should be upward, barring some sort of idiosyncratic shock,” she said.
The mixed office demand and rent growth figures likely reflect seasonal trends because the fourth quarter tends to see the strongest net absorption, Denham noted. “Still, this quarter was stronger than most, yet rent growth was still pretty low,” she said. “This suggests that tenants still have the upper hand with negotiations, although higher effective rent growth rates means that concessions are less generous.”
Both the economy and the labor market picked up “considerably” since early 2016, and some say the prospect of increased infrastructure investment under President-Elect Trump has boosted confidence, Denham said. She noted that preliminary fourth-quarter GDP figures indicate that growth has accelerated “meaningfully” from the first quarter’s 0.8 percent annualized growth rate and job growth has increased as well.
“If the office market statistics improve noticeably in the coming quarters–and we feel strongly that they will–it will be testament to the fact that the office market’s response to wider macroeconomic forces is felt at a lag by a quarter or two,” Denham said. “Thus recent employment growth should pull the vacancy rate down further in 2017, while rent growth should accelerate back towards a 3 percent annual growth rate. While this still does not qualify as robust, it is a far improvement from just a few years ago.”
