Office sector remains strong despite declines in absorption in 2017

The U.S. office market maintained its vigor in 2017. Occupancy remains at peak levels and rents are holding firm. The national office vacancy rate has been virtually static for eight successive quarters. Construction remains elevated, but deliveries look to have peaked. Absorption and sales volume were down over the year but there is no immediate sign of a market correction.

KEY TAKEAWAYS

  • Vacancy Hits a Cyclical Low: The U.S. office vacancy rate fell slightly in Q4 and is now marginally lower than the level seen at the peak of the previous cycle, but it has been virtually static for eight successive quarters.

  • Rents Continue to Hold Firm: The pace of rent acceleration declined in 2017 and growth over the past two quarters has been minimal. Annual rent growth for 2017 was just 1.8%, only one-third of 2016’s rent growth rate of 5.4%. The highest rent growth is concentrated in the nation’s secondary metros as well as leading tech markets. 

  • Construction Remains Elevated but Deliveries Have Peaked: While still elevated, the volume of office space under construction fell slightly for the second successive quarter to 107 million square feet. There was 70.5 million square feet of new supply delivered in 2017, likely the peak for new supply in the current cycle.

  • Absorption Falls as Tenants Focus on High-End Space: While U.S. office absorption held steady in Q4 2017, it fell by 28% year over year to 41.9 million square feet. Class A space accounted for 84% of space absorbed in Q4 2017. Tenants are focusing on high-end space to provide the optimum environment to retain and attract the best talent.

  • Investment Volume is Down. Suburban Assets Remain in Most Demand: Total U.S. office sales volume for 2017 was $131.9 billion, down by 8% over the year. Investors continue to focus on the suburbs in search of higher yields, accounting for 63% of the 2017 sales total. CBD sales volume fell by 21% in 2017 to $48.8 billion. Capitalization (cap) rates are holding firm but price appreciation continues to slow with only a 3% increase in 2017.

For a detailed, interactive view of the latest office data and forecasts, explore Colliers International's Your Market Insights Hub | U.S. Office Market.