Office Sector Completions Slip as Apartment, Retail Deliveries Remains Consistent

Office sector completions continue to drop as the apartment and retail sectors see inventory gains consistent with recent history, reported Reis, New York.

Reis Economists Hsiao-Shan Yang and Thomas LaSalvia noted the 6.5 million new square feet of office space delivered in the third quarter represented the sector’s lowest quarterly completion figure in nearly three years. “Given the slow increase in vacancy rates experienced during the last couple of quarters, this slow down comes at a welcomed time,” Yang and LaSalvia said in the firm’s Construction First Glance report. “In contrast, both the apartment and retail sectors realized quarterly inventory gains consistent with recent history.”

Meanwhile, “robust” multifamily sector construction is beginning to translate into higher apartment vacancy rates, the report said. While still significantly lower than its office and retail counterparts, the multifamily sector’s current 4.8 percent national vacancy rate 40 basis points above its year-ago figure.

More than 51,000 new apartments delivered in the third quarter, down slightly from the previous quarter but close to the 55,000-unit quarterly average over the past two years, Reis reported.

“Combining these still strong supply numbers with plateauing absorption figures, an expectation of higher [apartment] vacancy is reasonable,” Ythe authors said.

The 38-percent decrease in office completions was in “lock-step” with demand, as the national vacancy rate remained at 16.6 percent, Reis said. The report noted employers increasingly question the need for the traditional 200- to 250-square-feet of office space per employee as the workplace evolves and teleworking becomes more popular.

“Developers also now seem to be catching on to this trend,” the report said.

Retail completion activity was similar to the apartment sector, Reis said. The 2.3 million square feet of retail space delivered in the third quarter fell slightly short of the nearly 2.5 million square feet recent average. “This low mark seems to be part of a downward trend, as this figure has now dropped for five consecutive quarters,” Yang and LaSalvia said. “It is very possible that developers are now slowing activity to account for the changing retail environment.”

The retail sector’s 10.2 percent national vacancy rate is unchanged from last quarter and 20 basis points higher than one year ago, reis reported.

“Apartment sector completions are still greatly outpacing both office and retail from a relative perspective,” the report said. “Reis expects this level of continued activity for this sector through 2019 before dropping off. As for the office sector, it is possible that the paltry completion figures could be a signal of a coming downward trend in development. Transitions occurring regarding the meaning of “place-of-work” are possibly making developers think twice about size and location of new sites.”

As for the retail sector, it has long been in a transition stage and long-term trends indicate slowing activity consistent with the sector’s troubles, Reis said.