Auction.com: West Coast Accounts for Four of Top Five Office Investment Markets
IRVINE AND SILICON VALLEY, CALIF. — Four of the top five office markets for investments are located on the West Coast, according to a new report by Auction.com.
The top markets for buying offices, from first to fifth, are located in San Jose, Calif.; San Francisco; Seattle; Orange County, Calif.; and New York.
The top office acquisition markets as determined by Auction.com are based on projected net operating income growth, vacancy improvement, rent growth and valuations.
Much of the strength of West Coast office growth is abetted by the recent tech surge, the report says, which is also a key factor for growth in New York and Boston.
In San Jose, payrolls stand at an all-time high due to 15.3 percent year-over-year growth. REIS data shows that more than 450,000 square feet were added in the first quarter of 2015, but robust demand has absorbed it.
According to Auction.com’s 2015-2018 U.S. Office Projections, San Jose will see a 22 percent increase in rents in the next three years, as well as a decreased vacancy of 440 basis points (bps).
Rent growth from July 2014 to July 2015 in San Jose was 7.2 percent, and as supply evens out, Auction.com expects vacancies to fall below 13 percent in 2018 from current levels of 17 percent.
Pittsburgh, however, is the nation’s top office market in which to divest, with projections of comparatively small 2 percent increase in rent growth and a vacancy decrease of 110 bps, the report predicted.
Total employment in Pittsburgh has decreased 0.5 percent from its all-time peak set earlier in the year. Unemployment shot up 70 bps from late 2014, to 5.4 percent.
The nation’s office market as a whole will see an 11 percent increase in rent and a 140 basis point decrease in vacancy from 2015 to 2018, according to the report.
Further supply additions in the office sector this year and next will keep vacancies above 16 percent through 2016, and see a modest improvement after, the report predicts.
According to the report, office vacancies have reached a new cyclical low, 16.6 percent, an improvement of 30 basis points from a year ago, but just 100 bps below the cyclical peak seen in 2010.
Office absorption nationwide has picked up in recent quarters, averaging just under 7 million square feet (msf) per quarter over the last four quarters, according to the report, though still well below the average net take-up levels of 14 msf per quarter in the 2000s and 18 msf per quarter in the 1990s.
Rent growth has increased 1 percent in the past two consecutive quarters, bringing effective rents 3.3 percent above their year-ago level to $24.43 per square foot. As a result, effective rents are just 2.6 percent below their all-time peak of $25.07 in 2008.
According to Auction.com, the recent uptick in absorption rates can be tied to gains in the labor market that have strengthened the backdrop for the office sector. However, the sector continues to battle with supply additions that undercut the demand.
Other challenges still face the office sector, including the decline in office space per worker, as more efficient floor layouts, increased remote work and cloud file storage gain prominence. According to the report, office square footage per office employee has dropped nearly 10 square feet in the five years prior to 2014.
Click here to read the full report.
— Scott Reid