NEW YORK — Tenant demand for U.S. office space remained strong in the third quarter of 2015, pushing average asking rental rates up in three-fourths of the country, according to new research by Cushman & Wakefield.
Office rents in the U.S. increased 3.1 percent in the third quarter on a year-over-year basis — the strongest quarterly gain since peaking in 2008. Average asking office rents rose in 60 out of the 80 metros tracked, and the construction pipeline continued to expand. In the third quarter of 2015, there was 107.5 million square feet of new office construction, up 25 percent compared to the same quarter one year ago.
Kevin Thorpe, Cushman & Wakefield’s chief economist, says the U.S. office sector continues on a strong, steady path despite a number of global economic headwinds.
“There were plenty of reasons for the office metrics to slump this quarter: financial market volatility, China’s economic slowdown, the rapid appreciation of the U.S. dollar, uncertainty regarding monetary policy, along with the possibility of a government shutdown,” says Thorpe. “But what we are learning is that the U.S. economy and the property markets are proving, time and time again, to be resilient in the face of all of these headwinds. This quarter was still one of the strongest in the cycle in terms of occupancy gains.”
Absorption Slowdown
Preliminary data show that U.S. office markets absorbed 19.2 million square feet of office space in the third quarter of 2015, which is down 12.6 percent from the same quarter one year ago. Even with a deceleration in leasing, demand for office space continues to outstrip the new development, which pushed vacancy rates down by 10 basis points from the previous quarter to 14.1 percent in the third quarter of 2015.
“Tech markets are absolutely soaring, and they continue to drive the overall gains,” says Thorpe. “But one emerging trend is the increasingly impressive performance of secondary and tertiary markets. If you look at office-using job growth in these cities, compared to the size of the labor force, it’s the secondary markets that are now at the top of the list. We expect this narrative to continue as an increasing number of firms are drawn toward more affordable markets, and that will be reflected in the leasing fundamentals.”
Regionally, the West led the way with 7.3 million square feet of net absorption in the third quarter of 2015, down from 9.3 million square feet registered in the previous quarter. Average asking office rents in the West increased by 6 percent in the third quarter on a year-over-year basis.
In the South region, net absorption registered at 6.3 million square feet, down from 7.7 million square feet in the previous quarter. The South region’s office asking rents rose by 2.3 percent.
Net absorption in the Northeast registered at 2.9 million square feet, up from 2.1 million square feet absorbed in the previous quarter. The Northeast’s office market’s asking rental rates rose by 2.3 percent.
In the Midwest, net absorption totaled 2.6 million square feet, up from 2.2 million square feet in the previous quarter. The Midwest’s asking office rents increased by 1.1 percent.
The merger of Cushman & Wakefield and DTZ closed on Sept. 1. The firm now operates under the Cushman & Wakefield brand. Chairman and CEO Brett White and global president Tod Lickerman lead the new Cushman & Wakefield. The company is majority owned by an investor group led by TPG, PAG and OTPP.
Cushman & Wakefield has more than 43,000 employees in more than 60 countries. The firm’s revenues of $5 billion are spread across core services, such as agency leasing, asset services, capital markets, facility services, global occupier services, investment and asset management, project and development services, tenant representation and valuation and advisory.
— Staff Reports