U.S. office occupancy still at peak levels but absorption and sales slow
As highlighted in Colliers’ Q1 2018 U.S. Office Market Outlook, the U.S. office market showed continued strength in Q1 2018. The office occupancy rate has remained near its cyclical peak for nine successive quarters and rents showed an uptick in the first quarter. The market remains on very solid ground although absorption and sales volume have fallen.
Economic growth in 2018 is expected to be the strongest in three years. But with unemployment at historic lows, the available pool of workers is shrinking, so job growth is slowing, particularly in office-using sectors.
Office leasing continues to ease outside of the tech sector. Indeed, just four leading tech markets (San Francisco-San Jose, Seattle, Raleigh-Durham and Austin) account for 87% of net absorption this year. Otherwise, most businesses are seeking to limit their real estate footprint.
Office construction rose in Q1 2018 to its highest quarterly total in over nine years, but much of the new supply is focused on a few high-demand markets, limiting widespread supply concerns. Indeed, firms continue to pay up for the newest, high-quality space as they seek to attract and retain the best talent and provide the optimum work environment.
As tenants vacate their current premises, this presents an opportunity to reposition such assets and increase rents through more efficient floorplans. Nonetheless, tenant improvement allowances are rising faster than rents in a competitive leasing environment.
Key takeaways from this report include:
- Vacancy Remains at a Cyclical Low: The U.S. office vacancy rate held steady in Q1 2018 at its cyclical low of 12.1%, essentially stable for nine successive quarters. One third of U.S. office markets have sub-10% vacancy rates including Austin, Manhattan, Portland and the San Francisco Bay Area; high-vacancy markets include Dallas and Houston.
- Rents Rise More Downtown: Office rent growth increased to 2.1% in Q1 2018 driven by gains in selected downtown markets. The general picture remains one of stability following larger gains earlier in the cycle.
- Construction Activity Increases: After modest declines over the past two quarters, the volume of office space under construction increased to 120.6 million square feet in the first quarter. This is the highest quarterly total in over nine years and close to the prior cyclical peak. Five markets account for half of the space underway: Dallas, Manhattan, San Francisco-San Jose, Seattle and Washington, D.C.
- Absorption Continues to Slow: U.S. office absorption fell to a modest 5.4 million square feet in Q1 2018. This continues a downward trend which has seen national absorption fall over the past two years.
- Investment Volume Falls in Both CBD and Suburban Markets: U.S. office sales volume in Q1 2018 fell almost 25% from Q4 2017 to $27.3 billion, representing a decline of 12% year over year. While suburban markets remain the principal investor focus, sales volume in the suburbs is now declining.