Economy, Tax Law Reshaping Office Sector

The new tax law and an increasingly competitive employment market are reshaping companies’ office needs–and the potential implications for investors are significant–said Marcus & Millichap, Calabasas, Calif.

“With the U.S. economy in its eighth year of growth, the stimulus created by the new tax law could accelerate economic growth, driving demand for additional staffing and sparking increased competition for talented employees,” said Marcus and Millichap Senior Vice President Al Pontius. “The windfall tax savings will reinforce already-elevated confidence levels at companies large and small, boosting infrastructure spending and job creation in the midst of the tightest labor market in 17 years.”

In that context, office space will further distinguish itself as a competitive recruiting element for employers, causing companies to rethink their space allocations and the amenities available near their offices, Marcus and Millichap’s office investment report said.

This year could represent a “turning point,” the report said, as a many companies choose to relocate their offices to more suburban locations to better tap the workforce that resides there and to expand space allocations at a more affordable price point.

Shifting space demand will also come into play as investors make strategic decisions on how to position for the extended growth cycle. “Amid restrained office construction and strengthening demand drivers, office vacancy rates will likely continue their downward trend, supporting steady rent gains,” the report said. “These positive metrics, together with the sector’s position as a late-emerging property type this cycle, help office investments deliver highly sought yield premiums compared with other asset classes.”

The report said several forward-looking metrics point to a potential  “extended runway” for office assets.

Marcus and Millichap’s National Office Property Index said “robust” office demand from growing technology firms moved the Seattle-Tacoma metro to the top of this year’s list of healthy office markets. Boston was in second place, supported by higher education institutions that provide a well-educated workforce that attracts companies to the region.

San Francisco and Portland, Ore. retained the third and fourth positions, boosted by strong tech employment. Last year’s leader, San Jose, Calif., fell four places as it adjusted to a “spike” in deliveries last year. New York City maintained its sixth-place ranking while growing tech markets Raleigh, N.C. and Austin, Texas changed spots to rank seventh and eighth, respectively, as Austin deliveries surpassed absorption.

Tampa-St. Petersburg, Fla. registered the greatest leap in Marcus and Millichap’s index, jumping nine places to ninth place as persistently low deliveries dropped vacancy rates significantly. Other metros also moved up the ranking due to low new inventory . Sacramento climbed six places and Milwaukee moved up five places. “Milwaukee will benefit from the construction of the Foxconn [Technology Group] facility as suppliers search for office space nearby,” the report said.