Office Preliminary Trends, Q1 2019

Preliminary Trends Announcement: National Office Market

 

Office Sector Trends

The office vacancy rate fell slightly in the quarter to 16.6% from 16.7% last quarter and 16.5% a year ago. The office vacancy rate had bottomed at 16.3% in Q1 2017.

The national average asking rent increased 0.4% in the first quarter while the effective rent, which nets out landlord concessions, increased 0.5% in the quarter. At $33.58 per square foot (asking) and $27.26 per square foot (effective), the average rents have increased 2.2% and 2.3%, respectively, from the first quarter of 2018.

Net absorption was 5.88 million SF – lower than the previous quarter’s absorption of 9.55 million SF but in line with absorption in the first quarter of 2018. Likewise, construction was 3.75 million SF – far lower than the 13.53 million SF completed in the fourth quarter. However, we expect construction to pick up in the next two quarters as 2019 is expected to outpace 2018 in terms of new inventory.

 

Office: National Vacancy & Rent Trends 

Source: Reis, Real Estate Solutions by Moody’s Analytics

 

Statistics by Metro

The gap between healthier metros and weaker ones has widened over the last few years. In the first quarter, 30 metros saw an increase in vacancy but most of those (29 metros) saw negative net absorption – or a decline in occupancy – versus 50 that saw positive occupancy growth. This was similar to the ratio of negative/positive occupancy growth in 2018 – 31/47 – but higher (worse) than the same ratios in 2017 and 2016. Metros with the highest vacancy rate increase include Tacoma, Ventura County, Charleston, Tulsa, and Columbus. Oddly enough, some of these metros have seen healthy office employment growth including Charleston and Tacoma. Metros that saw the biggest decline in vacancy include Wichita, Fort Lauderdale, Knoxville, Albuquerque, and Louisville.

Rent growth was also weak in the quarter as only three metros saw an increase in effective rent of 1.0% or more: Tampa-St. Petersburg, Colorado Springs, and Sacramento. Twelve metros posted an effective rent decline in the quarter including Milwaukee, Chattanooga, Syracuse, Columbus, and Tucson.

After adding 4.8 million SF of new inventory in 2018, New York City (Manhattan) saw no added inventory in the first quarter. Net absorption, however, was 769,000 SF. New York still boasts the lowest office vacancy rate of 8.1% and highest effective rent of $61.10 per square foot, which grew 2.1% over Q1 2018. Separately, Brooklyn saw 30,000 SF of new inventory – all of which was pre-leased. The vacancy rate fell 1% to 11% – it had climbed to 12% in 2018 with the addition of just over 1 million SF of new inventory. The vacancy rate in Queens increased 0.2% to 9.2%. The average rent fell 0.2% in Queens but was flat in Brooklyn.

At $52.47 per SF, San Francisco’s effective rent ranks second highest. Its rent growth was 2.6% over the year. Washington, DC’s rent of $47.40 per SF ranks third. It saw rent growth of 2.9%. Metros with the highest year-over-year rent growth were Raleigh-Durham, Tampa-St. Petersburg, Austin, Portland, and Orange County. Two metros that show an effective rent decline for the year were Syracuse and Fairfield County. Metros that lost office jobs in 2018 include Lexington, Long Island, Milwaukee, Tulsa and all three Connecticut metros: Hartford, New Haven, and Fairfield County.

 

Conclusion

In the tenth year of the expansion, the office market continues to move at a snail’s pace. That said, the widening gap between the stronger markets and weaker ones is particularly noteworthy and is otherwise obscured by the flat national numbers. The underlying data shows that tech firms are fueling much of the growth in the stronger office markets, particularly in west coast metros, parts of Texas and parts of the east coast.

With more construction underway in 2019, vacancy is expected to increase a bit more while rent growth should continue to stay below the rate of inflation.

 

Note: Preliminary trends are subject to revision.
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