Preliminary Trends Announcement: National Office Market
Office Sector Trends
The office vacancy rate rose slightly over the quarter to 16.8% from 16.7% in the first quarter and 16.6% a year ago. This represents a 50 basis point increase over the sector’s recent low of 16.3% in Q1 2017. Average asking and effective rents both increased 0.6% in the quarter. At $33.79 per square foot (asking) and $27.43 per square foot (effective), both measures of rent have increased 2.2% from the second quarter of 2018. These rates are in line with previous quarters. Net absorption was 3.2 million SF, lower than the previous quarter’s
absorption of 3.9 million SF but slightly higher than absorption in the second quarter of 2018. Seven million SF of new construction came online in the quarter, approximately 2.5 million SF higher than the previous quarter’s construction figure. Still, construction has been well below levels recorded in previous years. Aside from last quarter, the second quarter saw the lowest number of new construction since Q1 2015.
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. Forty-three metros saw an increase in vacancy over the quarter. Metros with the highest increases in vacancy include Nashville, Fort Worth, St. Louis, Milwaukee, and Memphis. Metros that saw the biggest decline in vacancy include Fairfield County, Charlotte, Phoenix, Charleston, and Little Rock. Fourteen metros saw an increase in effective rent of 1.0% or more with Minneapolis, Seattle, Louisville, Austin, and Indianapolis leading the way. Only seven metros saw a decline in effective rent: Chattanooga, Rochester, Milwaukee, Knoxville, Wichita, Little Rock, and Memphis. Only five of 79 metros saw added inventory in the quarter: Dallas, Charlotte, Houston, Pittsburgh, and Los Angeles. Dallas, which also added a significant amount of new apartment units in the quarter, saw over 200,000 SF of new construction. Charlotte and Houston
each saw approximately 150,000 SF of added inventory. New York City (Manhattan) saw no added inventory in the second quarter after approximately 50,000 SF in the first quarter. New York
still boasts the lowest office vacancy rate of 8.1% and the highest effective rent of $61.44 per square foot. Absorption was positive in the quarter.
As of July 1 we have entered the 121st month in what is now a record-breaking run of economic growth – the longest period of economic expansion in recorded US history. However, despite a healthy job market and strong overall economy, the office market has moved – and continues to move – at a sluggish pace. With vacancies hovering at just 80 basis points below the sector’s cyclical peak of 17.6% in 2010, there is very little to prompt developers to build. Companies are investing in their own owner-occupied space – but few single- and multi-tenant market rate rentals are receiving financing without proof of robust pre-leasing. The office sector is contending with longer-term trends like mechanization and offshoring that are prompting employers to rethink their need for office space. With relatively flat national numbers, the widening gap between the stronger markets and weaker ones is particularly noteworthy. 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.
Note: Preliminary trends are subject to revision.
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