Another Solid Quarter for Office as Fundamentals Hold Firm
Fundamentals in the 10 major office markets in the U.S. largely remained solid during the third quarter.
Rents held firm in eight of the markets tracked in this report. Only two markets experienced a rise in vacancy despite the fact that traditional office tenants are largely in cost-containment mode, reducing their office footprint in favor of space efficiency. The technology sector is playing a major role in decreasing vacancy in several major metros.
- Major office markets in the U.S. continued to show solid performance in Q3 2017. Rents held steady in eight of the 10 leading markets and rose in two. Only three markets had a rise in vacancy. However, expansion has largely slowed and been replaced by stability.
- A bifurcation in demand is emerging. Traditional office tenants from the professional and business services sector are increasingly in cost-containment mode. Some occupiers are reducing their office footprints in pursuit of space efficiency, with law firms being a prime example.
- At the same time, the tech sector continues to expand at a torrid pace. Dropbox signed San Francisco’s largest ever office lease and Amazon is still eating up space in multiple locations. These are just the leading examples. Additionally, creative office space providers—most notably WeWork—are increasing their presence in several markets with Boston a leading example.
- Manhattan, the San Francisco Bay Area and Seattle continue to lead the way. All have vacancy rates well below 10% and saw positive absorption in the third quarter. Rents are reaching new highs in San Francisco’s Financial District. Leasing activity in Manhattan is particularly strong and at the second highest year-to-date level seen in the past 10 years.
- Pre-leasing of high-end new office towers continues in downtown Chicago. Fulton Market has established itself as a credible and lower-cost option for tenants seeking creative space in a desirable neighborhood.
- Houston was affected by Hurricane Harvey in the third quarter. Unlike housing and infrastructure, the office inventory emerged relatively unscathed. However, both the office market and the city will face significant challenges.
- Two markets merit a note of caution—Los Angeles and Washington D.C. both have a sizeable volume of new supply that is seeing little leasing traction, in both recently completed developments and projects underway.