Office Benefits from Pickup in Jobs and GDP — Leasing and Rents Rise Again

As highlighted in Colliers’ Q3 2018 U.S. Office Market Outlook, the U.S. office market remains on solid ground. Absorption rebounded in Q3 2018 to the highest level in two years. CBD rents rose, and suburban rents held firm. Office vacancy is now at a cyclical low of 11.8% on average for the U.S.

A recent uptick in GDP combined with solid job growth should generate more demand for office space in the near term, but leasing is likely to slow with the expected economic slowdown next year as the economy absorbs higher interest rates and battles labor shortages created by extremely low unemployment rates. Growth is widespread geographically. Positive trends this quarter were led by several lower-cost, high-growth markets.

Key takeaways from this report include:

  • Vacancy still at historic lows: The U.S. office vacancy rate declined by 20 basis points (bps) in Q3 2018 to 11.8%, within the same narrow range around 12% where it has held since early 2016.
  • Rents hold firm: U.S. office asking rents increased by 0.3% in the past quarter and by 2.75% from a year ago. Trends for Class A office asking rates were strongest in the CBD markets, where rents rose by 0.5% for the quarter and 4.1% from a year ago. Rent growth remains strong in tech-driven markets as well as lower cost, high-growth markets throughout the country.
  • Absorption rebounds: Office absorption increased from 12.1 million square feet in Q2 2018 to 15.5 million square feet in the third quarter, bringing the year-to-date level to 35.1 million square feet, 33% higher than the same time a year ago.
  • Construction falls but expected to remain near recent levels: The amount of office space delivered fell sharply this quarter, from 18 million square feet last quarter to 10.7 million square feet in the third quarter. While this volume represented the lowest level in the past four years, the amount of space currently under construction rose, indicating that new supply going forward is likely to be more similar to recent historic levels. Not all of this space will be delivered in the next year. Thus, we expect new supply to have peaked in 2017.
  • Sales volume holds firm: U.S. office sales volume increased in the third quarter to $35.2 billion but fell by 5% over the past year on a rolling four-quarter basis. Non-major markets continue to account for a larger proportion of sales, equivalent to 46% of sales over the past year, up from 38% two years ago.