CHICAGO — A strong tech sector and the effects of a robust construction pipeline influenced U.S. office fundamentals during 2017’s third quarter, according to Cushman & Wakefield. The commercial real estate services firm today released its third quarter statistics, which demonstrated that nationally markets remained stable during the past three months.
Overall, though, the strength of these and additional top markets — including Midtown Manhattan and Dallas — was offset by significant negative absorption elsewhere. Out of the 87 markets tracked by Cushman & Wakefield, 27 markets posted a combined total of 5.3 million square feet of negative absorption during the third quarter, a third more than the 3.4 million square feet of negative absorption recorded in the second quarter.
“The flow of tenants into new construction is beginning to impact fundamentals in some markets,” says Greenwood. “Developers delivered more than 11 million square feet of office space nationwide during the third quarter. The pipeline of new product is and will remain an important influence on the U.S. office market for the balance of 2017 and beyond.”
Currently, Cushman & Wakefield tracks approximately 104 million square feet of new office development — representing 2 percent of total U.S. office inventory — in 87 markets across the U.S. That figure is down from nearly 109 million square feet at mid-year, but it still marks the sixth consecutive quarter that the pipeline has exceeded 100 million square feet. Markets with significant square footage under construction include Midtown Manhattan (9.5 million square feet), Dallas/Fort Worth (6.3 million square feet), Washington, DC (5.3 million square feet), San Francisco (5.1 million square feet) and Boston (5.0 million square feet).
Ken McCarthy, Cushman & Wakefield
“The 12 most active markets for new development housed 55.9 million square feet of construction,” says Ken McCarthy, principal economist at Cushman & Wakefield. “Not only does this represent 54 percent of the total U.S. development pipeline, it also represents 3.6 percent of total inventory in these markets. While these regions have been among the healthiest office markets in the nation throughout the current cycle, several are experiencing rising vacancy rates as new product comes online faster than it can be absorbed.”
The net result is a national vacancy rate that crept up from 13.2 percent in the second quarter to 13.3 percent in the third quarter. After reaching a cyclical low of 13.1 percent last year at this time, vacancy has remained essentially flat. Among major markets, Midtown South Manhattan recorded the lowest office vacancy in the nation at 7.3 percent, followed by Seattle (7.5 percent) and Nashville (7.7 percent). Florida stands out as one of the most improved regions in the nation. Vacancy rates have declined by 100 basis points or more year-over-year in six Florida markets, led by Palm Beach, Jacksonville and Orlando.
Revathi Greenwood, Cushman & Wakefield
Average asking rents for available space in all markets – both suburban and central business district combined – continued to climb steadily. In the third quarter, average asking rents reached a record high of $30.57 per square foot, up 0.6 percent from the second quarter and 3.8 percent from one year ago.
“This marks the 25th consecutive quarter that asking rents have increased, by far the longest streak of rising rents over the past 20 years,” says McCarthy. “After bottoming out in the second quarter of 2011, average asking rents have increased 24.3 percent. And over the past 12 months, asking rents increased in 68 of the 87 markets tracked by Cushman & Wakefield.”
Oakland/East Bay ranked highest among strongest markets for rent growth over the past year (+19.5 percent). Other notable increases came from Orange County, Calif., (+10.1 percent) and Boston (+9.8 percent). As has been the case throughout the current expansion, New York and San Francisco remain the highest rent districts. Midtown Manhattan ranks as the most expensive, at $77.67 per square foot, followed by San Francisco ($70.51 per square foot) and Midtown South Manhattan ($69.23 per square foot).
— Staff Reports