Preliminary Trends Announcement: National Office Market
Office Sector Trends
The office vacancy rate was unchanged at 16.8% in the fourth quarter. It was 16.7% in the fourth quarter of 2018 and 16.4% at year-end 2017.
Both the national average asking rent and effective rent, which nets out landlord concessions, increased 0.5% in the fourth quarter. At $34.31 per square foot (asking) and $27.87 per square foot (effective), the average rents have increased 2.6% and 2.7%, respectively, from the fourth quarter of 2018. This was close to the 2.7% growth rate in 2018 and above the 1.8% growth rate in 2017.
Net absorption jumped to 12.2 million SF this quarter, 35% above the 9.0 million SF last quarter. Construction was 12.5 million SF, 6% higher than the 11.8 million SF completed last quarter. With new completions of just under 40 million SF in all of 2019, overall office supply growth trailed the 2018 addition of 49 million SF. Yet, net absorption of 30.1 million SF in 2019 was stronger than the 24.0 million SF in 2018. Still, vacancy is 0.1% higher than a year ago.
Office: National Vacancy & Rent Trends
Source: Moody’s Analytics REIS
Statistics by Metro
Only 24 of 79 metros saw a vacancy rate increase, down from 29 and 43 in the third and second quarters, respectively. Those with the highest vacancy rate increase include Louisville, Oklahoma City, San Antonio, Little Rock, and Greenville. Metros that saw the biggest decline in vacancy include New Haven, Suburban Maryland, Tampa-St. Petersburg, Columbus, and Atlanta.
Rent growth was better than in previous quarters as 13 metros saw rent growth of 1.0% or more, led by Seattle, Austin, Phoenix, Denver, and Tampa-St. Petersburg – all of which had rent growth of 1.2% to 1.8% in the fourth quarter. Only six metros posted a small (0.1% – 0.2%) effective rent decline in the quarter including Tacoma, Milwaukee, San Antonio, Cleveland, Oklahoma City, and Tucson.
At 8.1%, New York City saw a slight (+0.1%) increase in vacancy; New York’s average effective rent was flat in the fourth quarter at $62.44 per SF, up 2.8% over 2018. Still, two new buildings were completed in the quarter: newly renovated 1271 Avenue of the Americas was added back to the inventory (2.1 million SF) and Hudson Quarters at 441 Ninth Avenue was added as well (700,000 SF). Separately, Queens saw the addition of the Jacx building at 28-07 Jackson Avenue and Brooklyn added two buildings.
Chicago saw the addition of the Old Post Office building at 433 Van Buren Street (2.4 million SF) along with 333 N Green Street (583,400 SF). Chicago’s vacancy declined 0.2% to 17.5% while its effective rent growth for the quarter was 0.4% and for the year was 2.6%. Metros that posted the highest effective rent growth for the year include Seattle, Austin, Denver, Charlotte, and Tampa-St. Petersburg – all of which saw growth rates of 4.2% to 6.1%. Markets with the weakest growth include Milwaukee (-0.9%), Chattanooga (0.2%), Hartford (+0.1%), Tacoma (+0.2%) and Rochester (+0.3%).
These numbers are only loosely consistent with office employment growth for the year as Orlando, San Francisco, Salt Lake City, Dallas, and San Jose led job growth with rates of 3.9% to 5.3%. However, 20 metros registered a decline in office jobs for the year including Long Island, Columbia, Rochester, Dayton and Tulsa that had job declines of 1.4% to 3.7%.
Office: YoY Effective Rent Growth
Source: Moody’s Analytics REIS
Office occupancy growth was much stronger in the fourth quarter; however, three metros saw the lion’s share of the growth: Chicago, New York, and Dallas captured exactly half of the positive net absorption in the quarter with 6.6 million SF. Offsetting this, 21 metros recorded negative net absorption in the quarter. Thus, the gap between the healthy metros and weaker ones continued, although it was not as wide as in recent quarters.
Many remain concerned about the fate of WeWork’s occupancies as the co-working company had over-expanded and may need to reconsider some of its office leases. This could raise vacancies in a few metros, but it’s too early to draw any conclusions.
The 2019 results extend the protracted expansion to nine years – a near-decade that has been dogged by sluggish growth relative to both the apartment sector and historical expansions. The 16.8% vacancy rate is one-third higher than the low vacancy of 12.6% in 2007 and more than twice the rate (8.3%) in 2000. Likewise, annual rent growth of 2.7% is above the low national inflation rate of 1.8%, but well below peak rent growth of 10.5% and 12.3% in those respective years.
Office employment growth in 2019 for the 82 primary metros tracked by Reis was 1.4%, below the five-year average growth of 2.1%. Still, job growth should stay positive in 2020 and support continued occupancy growth in the office sector at a similarly tepid pace as in 2019.
Note: Preliminary trends are subject to revision.
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