Office Sector Vacancy Steady; Rents, Absorption Strong

Though the office sector vacancy rate did not move in the fourth quarter, office rents grew and net absorption was strong, reported Reis, New York.

The office sector vacancy rate held steady at 16.7 percent in late 2018, said Reis Senior Economist Barbara Byrne Denham.

“The national office vacancy rate was once considered the most compelling measure of the overall state of the market,” Byrne Denham said. “But when that metric has fallen just 90 basis points in eight years of recovery, one must seek other metrics.”

Reis reported both the national average asking rent and effective rent net of landlord concessions increased 0.7 percent in the fourth quarter. At $33.43 per square foot (asking) and $27.13 per square foot (effective), the average rents have increased 2.6 percent and 2.7 percent, respectively, year-over-year, barely above the 2.5 percent inflation rate.

Net office absorption rose to 7.3 million square feet, up significantly from the year’s first three quarters, which all saw decelerating occupancy growth. “The fourth quarter tends to see the highest activity in both office completions and leasing,” Byrne Denham said.

Construction also remained relatively strong. Office inventory expanded by 10.4 million square feet in the fourth quarter, above the previous quarter’s 8.9 million square feet but below the three prior quarters’ 11.9 million-square-foot average.

“The gap between metros with stronger office metrics and those with weaker ones narrowed in 2018 after widening a bit in 2017,” Byrne Denham said. “In 2018, only one metro (Fairfield County, Conn.) saw a year-over-year rent decline and only one (San Jose, Calif.) saw rent growth above four percent while in 2017, three metros incurred a rent decline for the year and four saw rent growth above four percent.”

In terms of office employment growth, 50 of the 79 metros Reis tracks saw stronger growth in 2018 than in 2017 and fewer metros saw significant declines than in 2017. The research firm noted the U.S. added an average of 51,400 office-using jobs per month through November 2018, up from a 49,000-job average increase in the same period in 2017.