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Growth of U.S. Office Market Continues to ‘Disappoint,’ Says Reis

Source: Reis

Source: Reis

One measurement of the health of the U.S. office sector stood out in the first quarter of this year. Net absorption totaled 4.9 million square feet, down from an average of 9.4 million square feet per quarter in 2016 and the lowest since 2014.

In short, growth in the office sector “continued to disappoint,” according to Reis. The New York City-based real estate research firm, which tracks 82 markets nationally, recently released its analysis of the property sector’s vital signs in the first quarter.

The positive news is that the office vacancy rate held steady at 15.8 percent from the prior quarter, and was down 20 basis points from the first quarter of 2016. The overall asking rent rose 1.8 percent on an annual basis.

Construction was also relatively low at 7.9 million square feet in the first quarter of 2017, down from an average of 8.8 million square feet in 2016.

Much like retail real estate’s war with e-commerce, office markets are competing with the pressures of using space more efficiently and hiring employees who work from remote locations, says Reis senior economist Barbara Byrne Denham.

“Firms have persistently leased less space for their growing workforce,” she says. The good news is that ‘shadow’ space, which plagued the market in the early part of the recovery, has been absorbed, so firms are leasing more square footage per employee than they were in 2011-2014.

“Modest construction kept the vacancy rate flat, but the office market has yet to see any bounce in this seven-year expansion,” says Denham. “Few signs suggest that it will do so this deep into the expansion.”

The national office market has recorded a sub-16 percent vacancy rate for four consecutive quarters, and has yet to see a quarter-by-quarter increase in vacancies since the rate plateaued at 17.6 percent in 2010.

The metros that saw the biggest declines in the vacancy rate in the first quarter included Ventura County, Calif. (1.7 percent); Lexington, Ky. (1.5 percent); Dayton, Ohio (1.4 percent); Orlando (1.4 percent) and Detroit (1.3 percent).

The average asking rent on a year-over-year basis increased 1.8 percent in the first quarter, rising from $31.56 per square foot to $32.13 per square foot. The metros that posted the most growth in asking rents during the 12-month period included Oakland-East Bay (5.8 percent), Seattle (4.9 percent), Dallas (4.1 percent) and Atlanta (3.8 percent).

Throughout the recovery, job growth in the office sector has held steady between 2 and 2.5 percent per year. Approximately one-third of the metros tracked are still experiencing office employment growth at or above that rate.

With construction limited and occupancy growing every quarter, vacancy rates should continue falling while rent growth rises, especially with a little help from Washington, D.C., according to Reis.

“If the new administration follows through on campaign pledges to invest in infrastructure and lower tax rates, job growth could pop,” says Denham. “This would spur higher growth in the office market.”

Taylor Williams

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