Office Preliminary Trends, Q3 2019

Preliminary Trends Announcement: National Office Market

 

Office Sector Trends

The Office vacancy rate was flat in the quarter at 16.8%. In the third quarter of 2018, it was 16.7%. Overall vacancy has declined only 0.3% in the last five years.

Both the national average asking rent and effective rent, which nets out landlord concessions, increased 0.6% in the third quarter. At $34.06 per square foot (asking) and $27.65 per square foot (effective), the average rents have increased 2.6% from the third quarter of 2018.

Net absorption of 4.53 million SF was lower than the previous quarter’s absorption of 4.9 million SF. However, construction was only 4.36 million SF, much lower than last quarter’s 9.47 million SF. We expect some revisions to these numbers, but they show a marked decelerating in growth. This year is expected to add 48.1 million SF of office space, just below 2018’s total of 49 million SF.

 

Office: National Vacancy & Rent Trends

Source: Moody’s Analytics REIS

 

Statistics by Metro

In better news, fewer metros saw a vacancy rate increase in the quarter: 29, down from 43 last quarter. Most of the increases were due to negative net absorption. Metros with the highest vacancy rate increase include Wichita, Knoxville, Oklahoma City, Tucson, and Palm Beach. Metros that saw the biggest decline in vacancy include Las Vegas, Columbia, San Antonio, Austin, and New Haven. Some of these top 5 and bottom 5 metros have had strong job growth (Austin and Las Vegas) while others have not (Columbia and New Haven). One can argue that the office property statistics are not highly correlated to office job growth.

Rent growth was weaker in most metros as only 10 saw an increase in effective rent of 1.0% or more, led by Los Angeles, San Francisco, Seattle, Austin and San Diego that had rent growth of 1.2% to 1.5%in the third quarter. Only three metros posted an effective rent decline in the quarter including Hartford, Omaha, and Dayton.

New York City saw steady net absorption as vacancy declined 0.2% to 7.9%, still the lowest in the U.S.; the average effective rent grew 0.3% to $62.31 per square foot.

At $53.76 per SF, San Francisco’s average effective rent is approaching New York City’s. San Francisco’s effective rent growth for the quarter was 1.4% and for the year was 3.9%, New York City’s average rent increased 3.0% for the year. Metros that posted the highest effective rent growth for the year include Austin (+4.8%), Los Angeles (+4.5%), Seattle (+4.4%), Raleigh-Durham (+4.3%) and Tampa-St. Petersburg (+4.0%). Markets with the weakest growth include Milwaukee (-0.2%), Hartford (-0.1%), Little Rock (0.0%), Fairfield County (+0.1%) and Rochester (+0.2%).

 

Office: YoY Effective Rent Growth

Source: Moody’s Analytics REIS

 

Conclusion

Office occupancy growth has been sluggish throughout this expansion as firms lease far fewer square feet per added job. Rent growth has also disappointed owners. Each quarter seems to bring more cautiousness as firms weather continued uncertainty from the trade war and global economy. Still, the U.S. has added 350,000 office jobs this year through August, down from 470,000 office jobs added in the first eight months of 2018, but further evidence of steady growth. This should keep office occupancy growth positive. Indeed, the news on the office market has not generated headlines, but growth remains positive and should remain positive this year and next.

 

Note: Preliminary trends are subject to revision.
Copyright © 2019 Reis Inc.

 

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