Office Top & Bottom Markets, Q1 2019

Office Top & Bottom Markets: Effective Rent Growth

The U.S. aggregate YoY effective revenue growth this quarter was 2.1 percent, just a tiny bit lower than last quarter’s 2.3 percent. With the exception of San Francisco, which had a growth rate of 3.7 percent, all the top metros had growth rates ranging around 4.0 percent, plus or minus 100 basis points.


Effective Revenue Per Square Foot, Percent Change 2018Q1 – 2019Q1

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

The chart above ranks markets by their year-over-year effective revenue growth, which is calculated as the annual change of effective rent multiplied by the occupancy rate. On the left side of the chart, we have the five markets with the highest effective revenue growth, and on the right side, we have the five markets with the lowest effective revenue growth. The navy blue bars represent the metro-level growth rates, and the gray and teal bars represent the submarkets with the highest and lowest growth rates in the metro, respectively. 


A trend we occasionally observe in the office sector is that the distribution of property-level performance clusters at two points. Last quarter, San Jose, which was the best performing market on that chart, had this characteristic. This quarter, in Raleigh, there is a group of properties that perform close to a 5 percent YoY effective revenue growth, and a group that performs closer to approximately 12 percent. Seattle experienced this distribution trend as well, but it is significantly less pronounced than it is in Raleigh.

While metros in the bottom five did perform negatively overall, it was only slightly so. Aggregate performance ranged from -0.9 percent to -1.5 percent, and many of these markets such as Dayton, Tacoma, and even New Orleans, did have a number of properties with strong positive performance. The worst performing properties were in Buffalo and Ventura County. Submarket location is an especially important consideration for office property performance given the slow and unspectacular performance of the office sector overall.


Analysis by Victor Calanog, PhD CRE®. Calanog is the Chief Economist & Senior Vice President at Reis. He and his team of economists and analysts are responsible for the firm’s market forecasting, valuation, and real estate portfolio analytics services. He holds a PhD in Applied Economics and Management Science, trained by a dissertation committee composed of faculty from the Wharton School of the University of Pennsylvania and Harvard Business School.


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