Leasing Still Solid Across Major Office Markets in Q3 2018: New Deliveries Fall but Construction Still Growing and Will Challenge Occupancy Rates in 2019

The Q3 2018 U.S. Top Office Metros Snapshot reports that all but one of the top 10 U.S. office markets posted positive absorption in Q3 2018 — though absorption declined in the five markets relative to Q2 2018. Construction fell markedly this quarter versus last, with less product coming to market in seven of the 10 metros. Still, construction continues to be a concern in some markets as building area under construction continues to rise and new supply is undercutting occupancy gains, even where leasing activity is quite strong. Rents rose at least 1% compared with Q2 2018 in six of the 10 metros, led by 2.4% in New York, but fell significantly in the San Francisco Bay Area. With coworking accounting for a large and growing share of leasing in key markets, traditional property metrics like vacancy rates are becoming less reliable and less meaningful.

Key takeaways from this report include:

  • The San Francisco Bay Area continues to power ahead, with leasing activity well above long-term averages, fueled primarily by large tech firms.
  • Manhattan leasing surged to a four-year high last quarter, up 20% over Q3 2017, driven by the FIRE (financial services, insurance and real estate) sector.
  • After a stellar start this year, vacancies in Boston increased in Q3 2018, rising to 9.5% in the core areas covered by this report, but still, the fourth-lowest vacancy rate of the 10 markets in this report, and rents still rose more than 1% over the quarter.
  • The worst may be over for Washington, D.C. Vacancies dropped 20 basis points (bps) in the quarter despite a doubling of new supply delivered, but space under construction declined by almost 20%.
  • Los Angeles continues to face supply pressures, though vacancies dipped in Q3 2018 and rents rose modestly as new demand kept pace with deliveries.
  • Chicago’s central business district (CBD) suffered a disappointing quarter, with vacancies climbing 150 bps to 14.8%, its highest rate in years, as tenants vacate older offices to lease in the new construction being delivered.
  • Seattle’s office market continued to shine in Q3 2018 as strong leasing caused vacancy to drop to 7.7% in the areas covered by this report.
  • Houston continues to struggle but is making some progress. Though vacancies dropped by 10 bps in the quarter, its vacancy rate remains by far the highest among the top 10 markets at 21.5%.
  • With net absorption in its core areas of more than 900,000 square feet, Dallas saw vacancies drop 70 bps, the most of any top 10 metro. A key reason: more than 30 leases of 10,000+ square feet were signed in the quarter.
  • Atlanta tread water this quarter, with no new supply added and net absorption essentially zero, so the vacancy rate stayed at 13.7% for the core submarkets tracked for this report.