Strong Economy Bolsters Absorption, Rents in U.S. Office Market, Says Transwestern Report

Dallas-Fort Worth's office market led the nation with 4.7 million square feet of absorption for the past 12 months ending on Sept. 30. (Source Transwestern)

HOUSTON — A robust American economy is strengthening the fundamentals of the country’s office market, keeping vacancy in check and driving asking rents up, according to a new report from Houston-based Transwestern.

Strong job growth resulting in a 3.7 percent unemployment rate in October, coupled with a 3.5 percent increase in GDP during the third quarter, propelled the U.S. office market to nearly 23 million square feet of positive net absorption. Year-to-date absorption in the office market has now increased by 17.1 percent compared to the first three quarters of 2017, per the report.

Year-over-year, the national vacancy rate has held steady at 10.1 percent, nearing its lowest mark during the current cycle. Asking rents have increased by 4 percent year-over-year to a national average of $26.03 per square foot.

Transwestern’s report tracked competitive single- and multi-tenant office buildings in 49 select U.S. markets. Owner-occupied, medical offices and government-owned buildings were not included in the analysis.

Source: Transwestern

According to Ryan Tharp, director of research in Transwestern’s Dallas office, the combined momentum from quarterly job and GDP growth was strong enough to offset soft wage gains, which would otherwise have dampened the sector’s performance. Despite a tight labor market, wages increased by just 0.2 percent in September, the smallest monthly gain in a year.

“Real gross domestic product increased at an annualized 3.5 percent, according to first estimates, and personal consumption contributed 2.7 percent to that rate,” Tharp said. “Because inflation has remained in line with the Federal Reserve’s target of 2.0 percent, consumer and business confidence should keep the office market healthy well into 2019.”

Office demand appears broad-based across multiple sectors, with technology and coworking sectors leading the charge. The report states that office-using employment in the U.S. is increasing at a 1.7 percent clip on an annualized basis.

Top Performers
Many of the country’s largest office markets emerged as pack leaders in key categories.

Dallas-Fort Worth (DFW), a perpetual leader in job and population growth, led the nation in 12-month net absorption with roughly 4.7 million square feet. San Francisco and Denver took the silver and bronze medals, posting approximately 4.5 million and 3.9 million square feet of positive absorption, respectively.

Dallas-Fort Worth led the nation in terms of office absorption. Approximately 4.7 million square feet has been absorbed in DFW the past 12 months, and roughly 7.7 million square feet of office space is currently under construction. (Photo courtesy of Matt Pasant)

Asking rents continue to be steepest in the gateway markets of San Francisco, New York and Washington D.C. However, some smaller markets, namely Minneapolis, San Antonio, Charlotte and Nashville, experienced double-digit rent growth on an annual basis.

A number of markets posted sub-8 percent vacancy for the third quarter, including Salt Lake City, Seattle and Austin. Overall, construction of new office product continues to decline, having reached its peak in early 2017. Approximately 146 million square feet of office space was under construction as of the third quarter.

— Taylor Williams

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