Brisk Job Growth Spurs Office Market Demand

The U.S. office market continues its relatively strong performance as healthy demand for space increased asking rents 0.5 percent over the past three months, reported Yardi Matrix, Santa Barbara, Calif.

Yardi Matrix noted continued job growth in office-using industries drove recent demand for office space. Office-using jobs increased 2 percent between January 2017 and January 2018. This demand growth boosted absorption, pushing the national occupancy rate up 10 basis points month-over-month in January despite accelerating office property development.

The firm’s National Office Report cited just under 170 million square feet of office space under construction in February, nearly three percent of existing inventory. “The development pipeline remains well stocked in the office sector,” it said, predicting projects in the planning phase will add another 6.7 percent to inventory in the years to come.

“As in many other real estate sectors, office deliveries have been slowed by construction delays as a result of labor shortages; however, ample capital remains,” the report said. “As demand for new commercial real estate continues, many of the projects in planning phases will move forward even if they are not delivered for a few years.”

Transaction activity averaged $7 billion over the past three months, in line with the “soft decline” seen throughout 2018, the report said. But December’s investment activity exceeded $10 billion as investors sought to close deals before year-end.

Primary markets including Manhattan, Washington, D.C. and Boston saw the most investment, but suburban transactions topped $8 billion over the last three months, a sign that investors are also looking for value-add properties and higher yields offered by suburban markets, Yardi Matrix said.

Financial activities grew fastest in southern markets including Dallas (0.9 percent), Charlotte (0.7 percent), Tampa (0.6 percent) and Houston (0.6 percent), Yardi Matrix said. “Many large and regional banks and financial institutions are expanding their offices in secondary markets as a strong talent pool combined with lower cost of labor makes business expansion comparatively more attractive than in some gateway markets,” the report said.