CHICAGO — Tech and financial services firms are the most aggressively expanding office users through the first half of the year, according to a report from Cushman & Wakefield. Of the 144.6 million square feet of absorption closed in the first six months of 2018, the tech industry was responsible for approximately 23 percent.
Tech and software firms are investing heavily in their own operations, including expanding in markets they deem necessary to house their staffers. Back in May, Facebook signed a full-building office lease for a 43-story tower under construction in San Francisco. The 764,700-square-foot space will be a much more convenient location for the company’s San Francisco-based employees, who now are shuttling to Facebook headquarters in Menlo Park.
Like the Facebook lease, a good portion of the office transactions closed in the first half of the year by tech firms have been larger in scope. Amazon leased 430,000 square feet of office space within W.S. Development’s Seaport project in Boston, and Nokia signed a 350,000-square-foot lease in Dallas within Billingsley Co.’s Cypress Waters mixed-use project.
The No. 2 most active office-using industry was the financial services sector, which accounted for roughly 17 percent of all office leasing in the first half of the year, according to Cushman & Wakefield.
Evercore, a global independent investment banking advisory firm, signed a 350,000-square-foot lease expansion/renewal at Park Avenue Plaza in Manhattan. Mercedes-Benz Financial also recently preleased a 200,000-square-foot office building within Hillwood’s AllianceTexas campus in Fort Worth.
According to Cushman & Wakefield, the list of the tightest major U.S. office markets comprise cities that have posted the strongest job growth in both tech and financial services industries during the current economic expansion:
• Midtown South Manhattan (6.7 percent)
• San Francisco (7.4 percent)
• Raleigh/Durham, N.C. (7.6 percent)
• Puget Sound, Wash. (8.1 percent)
• Charlotte, N.C. (8.2 percent)
Despite the strong leasing activity from tech and finance firms, the large amount of new office space delivered has pushed the national office vacancy rate up to 13.4 percent in the second quarter, a 10 basis point increase from the first quarter.
Swelling Development Pipeline
New construction continued its forward charge throughout the second quarter with a total of 18 million square feet of office space delivered in the United States, the highest quarterly total since the fourth quarter of 2008, according to Cushman & Wakefield. This volume is also a substantial increase from the first quarter of 2018, when 10.8 million square feet of new space was delivered.
“The supply of new buildings is rising rapidly — to the highest levels we’ve seen over the last decade,” said Revathi Greenwood, head of Americas research at Cushman & Wakefield.
The volume of office space under construction also ticked up to 107.2 million square feet, up from 105.1 million square feet at the end of the first quarter. According to Ken McCarthy, principal economist and Americas head of applied research at Cushman & Wakefield, construction activity is concentrated in the top few markets experiencing significant job growth.
“The 10 markets with the largest new construction pipelines accounted for almost half of new completions nationwide, but job growth in those markets is substantially stronger than the nation as a whole, signaling to us that new construction can be absorbed,” said McCarthy.
Rents Up to Record Levels
Average office asking rents increased 1 percent over the quarter to a record $30.94 per square foot nationally. Nearly two-thirds of the markets tracked by Cushman & Wakefield saw rents increase in the second quarter of the year compared to the first quarter.
Major markets with the most significant rent growth over the past year include:
• Orange County, Calif. (16.2 percent)
• Brooklyn, N.Y. (11.3 percent)
• Atlanta (10.1 percent)
• Charlotte, N.C. (8.5 percent)
• Oakland, Calif. (8.1 percent)
Nationally, New York City and Northern California continue to top the list of the country’s highest-rent markets. Midtown Manhattan’s average asking rent of $77.44 per square foot leads the field, followed by San Francisco at $72.30 per square foot and Midtown South Manhattan at $71.07 per square foot.
As both a haven for both tech and financial services jobs, Midtown Manhattan South is able to command an average asking rent of $77.44 per square foot, according to Cushman & Wakefield. The submarket is also the country’s tightest, at 6.7 percent vacancy.
Downtown Manhattan commands an average asking rent of $62.92 per square foot, and the Silicon Valley submarket of San Mateo County averages about $58.69. Only one other national market, Washington, D.C., posted asking rent above $50 at $55.01 per square foot.
— Staff Reports
Cushman & Wakefield surveyed the top 87 office markets for the second-quarter report.