Recovery Elusive For National Office Sector
The national office sector’s recovery is not gaining much traction as completions outpaced net absorption for the fifth consecutive quarter, reported Ten-X Commercial, Irvine, Calif.
A look at local markets shows several different reasons underlying the “general malaise,” said Ten-X Chief Economist Peter Muoio. “Strong markets with fast-growing economies saw significant development and are now grappling with increased supply, while weak markets continue to languish due to their struggling local economies,” he said.
The report noted in most markets technological innovation is an additional factor acting as a headwind for the office sector. “Shrinking office space requirements for employees is at the core of market pricing softness,” Muoio said. “With employers fitting more workers into open floor plans, more employees working remotely and cloud computing reducing the need to spend physical space on filing cabinets and servers, the strong correlation between rising employment figures and the strength of the office market has waned.”
But some markets are more promising than others, Muoio said. Nashville, Kansas City, Washington, D.C., Sacramento and Oakland are top markets office investors should considering “because these markets have strong overall economies and specific industry sectors generating job growth.”
Milwaukee, Washington, D.C.’s Maryland suburbs, Chicago, Austin and Baltimore ranked as the top markets where conditions might cause investors to consider selling their office properties, the report said. These markets have either weak economies with tepid job growth and population outflows or have booming growth, which lead to “overzealous” development activity and oversupply.
U.S. office vacancies inched up to 16.5 percent in the second quarter from the low- to mid-16 percent range where they have been mired for nearly three years as completions outpaced net absorptions for the fifth straight quarter, Muoio said. As a result, rent growth has lost steam and now approaches 2 percent, down from 3.8 percent growth in 2015.
Ten-X said it expects absorption to fall in 2019 and 2020, which could lift vacancies to 18.7 percent nationwide. It expects conditions to improve in 2021.
“Rent growth is not likely to recover enough to hit the pace seen earlier in this cycle,” Muoio said. He noted the current ‘heat map’ is overwhelmingly red and pink, “which reflects the vulnerability of the office segment across the country. While every submarket and individual asset tells its own story, it’s clear that the overall picture for the office sector is decidedly bleak.”
