All but one of the 10 largest office markets in the country can expect to see improvement in real estate fundamentals in 2016, according to a third-quarter report titled “Top Office Metros Snapshot” from Colliers International.
The report measures absorption, rents and vacancy rates in 10 major U.S. metro areas — Manhattan, Washington, D.C., Chicago, Dallas, San Francisco, Houston, Atlanta, Los Angeles, Boston and Seattle.
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In the third quarter of 2015, vacancies declined in all of the top 10 metros except Houston. Overall vacancy across the markets decreased to 12.9 percent, which is 30 basis points lower than the second quarter and 60 basis points lower than a year prior.
Absorption trends were mixed overall. Only half of the metros saw more office absorption in the third quarter than in the second quarter, but the report notes that all but Los Angeles still recorded positive absorption. For example, Dallas saw less absorption in the third quarter, but still managed to absorb more than 5.6 million square feet of office space.
“With construction restrained in most markets, even this moderate leasing has helped reduce the backlog of vacant space, enabling vacancies to continue to track downward,” according to the Colliers report.
As a result, average rents also increased across nine of the 10 metros, with only Washington, D.C. seeing a decrease.
This is the second consecutive quarter of strong results, notes the report, which is a relief after weather and economic conditions caused a weak first quarter that raised concerns. Recent trends have led Colliers to predict that the future looks bright for the office sector in the near term.
“Looking forward, our forecast for the top markets remains generally positive,” according to the report. “Despite rising risks in the near-term outlook, the economic and job recovery will continue to fuel office leasing.”
Although the outlook is positive, the report notes that the office growth has rebounded more slowly than other property sectors.
“Recovery in the office sector continues to lag behind that in the multifamily and industrial sectors, both of which are now back to prior peak occupancies,” according to the report. “At current trends, the office may not reach its prior peak for two to three more years.”
— Jeff Shaw