Flat Office Sector Defies Economic Growth

Defying employment growth trends, the U.S. office market vacancy rate remained flat in the third quarter at 16.6 percent, reported Reis, New York.

“The office real estate statistics contrasted with office employment numbers that were more robust,” said Reis Senior Economist Barbara Byrne Denham, noting the U.S. office sector added 601,500 office jobs over the past year, a 1.9 percent growth rate.

Byrne Denham said two-thirds of national job growth occurred in a few metro areas led by Austin, Texas; Houston; Seattle; Tacoma, Wash.; and San Jose, Calif. Those metros saw 4.3 percent or better job growth rates.

“Once again, leasing activity remains tepid compared to previous expansions,” Byrne Denham said. Office occupancy growth increased slightly from 3.48 million square feet in second-quarter 2018 quarter to 3.54 million square feet in the third quarter. New completions fell to 5.93 million square feet, down from an average of 11.2 million square feet added per quarter in 2017.

Office rent growth accelerated somewhat early in the year but fell to 0.4 percent in the third quarter, down from 0.7 percent in the second, Reis reported. Both the average asking rent and average effective rent including landlord concessions grew at the same rate between July and September as they did in the prior six quarters. “This suggests that landlord concessions have seen little change over the last year,” Byrne Denham said. The average asking and effective rent growth also equaled 0.4 percent one year ago.

Byrne Denham noted the gap between higher-performing office markets and lagging markets narrowed a bit during the quarter because few metros saw robust rent growth; vacancy rates increased in more than half of the 79 metros Reis tracks. Most of the vacancy increases in these metros was due to negative net absorption, with 37 of 79 metros reporting negative net absorption in the third quarter.

Metros with highest vacancy rate increases included Tucson, Ariz.; Dayton, Ohio; Albuquerque, N.M.; Buffalo, N.Y.; and San Diego. New Haven, Conn., saw the biggest drop in vacancy followed by San Francisco; Colorado Springs; Memphis, Tenn.; and Denver.

“The sluggishness in the office market is nothing new, but the deceleration contrasts an otherwise healthy economy as office employment growth has picked up in 2018 from rates seen in 2017,” Byrne Denham said. “The recent higher rent growth had suggested that landlords were gaining confidence in leasing conditions, but net absorption has persistently trailed new completions over the last seven quarters as tenants have been hesitant to take on added space, which has kept a lid on rent growth.”