WASHINGTON, D.C. — Although net absorption slowed in the first quarter of 2015, demand for office space remained consistently strong enough to push rents upward in over 70 percent of the country, according to commercial real estate services firm DTZ.
The U.S. office market absorbed 10.6 million square feet of office space in the first quarter of 2015, down 5 percent from the same quarter one year ago. Despite the deceleration, net absorption has remained positive for 20 consecutive quarters. The U.S. vacancy rate tightened by 10 basis points from the previous quarter to 14.4 percent in the first quarter of 2015. Out of the 80 metros tracked by DTZ, 60 reported occupancy gains, while 20 reported occupancy losses.
Kevin Thorpe, DTZ’s chief economist for the Americas, says that the slowdown in absorption was expected and can mostly be explained by seasonal factors.
“For six years in a row, absorption levels have been weakest in the first quarter of the year,” says Thorpe. “The weakness is simply a function of weather, budget cycles, and other seasonal data quirks. It has never amounted to a sustained down trend. Looking past seasonal volatility, job growth in most office-using sectors is as robust as nearly ever, which points to stronger occupancy gains and more aggressive rent growth in the coming months for the majority of the country.”
U.S. office rents increased by 2.3 percent in the first quarter compared to a year ago, the strongest year-over-year gain for any quarter since peaking in 2008. Office rents rose in 73 percent of the country (58 out of 80 metros tracked by DTZ).
The construction pipeline is also picking up. In the first quarter of 2015, there was 98.5 million square feet of new office construction, up 51 percent compared to the same quarter one year ago.
“If one takes a moving average of absorption trends, it suggests that if all of the new supply currently under construction delivered today, most of it would be occupied in a little over a year,” says Thorpe. “In other words, barring a negative economic shock, there does not appear to be any danger of overbuilding in the current cycle. If anything, it appears as though the industry is underestimating future demand levels.”
For the first quarter of 2015, the top 10 strongest markets in terms of demand for office space were Houston, with 1.7 million square feet; San Jose, Calif. (1.6 million square feet); San Mateo County, Calif. (980,000 square feet); Oakland (859,000 square feet); Dallas (777,000 square feet); Boston (675,000 square feet); Atlanta (507,000 square feet); Minneapolis (400,000 square feet); Memphis (353,000 square feet); and Austin (312,000 square feet).
The top 10 strongest markets in terms of rent growth were San Francisco with 16.6 percent year-over-year rental appreciation; San Mateo County, Calif. (11.2 percent); Atlanta (9.5 percent); Orange County, Calif. (6.8 percent); San Jose, Calif. (6.4 percent); Denver (6.1 percent); Portland, Ore., (5.4 percent); Oakland, Calif. (5.2 percent); Louisville, Ky. (5.2 percent); and Dallas (4.9 percent).
DTZ’s full first-quarter office and industrial market reports will be available on the company’s website on Thursday, April 16.
— Matt Valley