Office Markets Remain Solid as Rents Peak and Vacancy Levels Off
Fundamentals in the 10 major office markets in the U.S. largely remained solid during the second quarter.
Rents held firm in six of the markets tracked in this report. At the same time, two key factors point to upward pressure on vacancy rates: tenant downsizing and new supply. Taking into account new supply, vacancy rose in four markets, fell in three and remained unchanged in three — about the same as in Q1 2017.
- Three markets — Manhattan, the San Francisco Bay Area and Seattle — have office vacancy rates well under 10% and saw no increases in the second quarter. These rates are substantially lower than those in the other seven markets.
- Office leasing in Manhattan shows little sign of abating and remains on par with activity in the first half of 2016. Although new supply will be entering the market, this is not a concern given the shortage of large blocks available for lease.
- Concerns over the impact of new supply in San Francisco and Seattle are receding, but two markets — Los Angeles and Washington, D.C. — remain exposed to construction risk.
- Overall office vacancy is rising in Chicago, but confidence in trophy Class A space located downtown remains strong. In addition to construction kicking off on another major office tower, Blackstone is investing more than $500 million to upgrade and reposition the Willis Tower.
- Boston and Dallas remain on solid ground. Office rents in Dallas have risen to an all-time high, and leasing volume for Class A space in Boston’s Financial District has picked up considerably.
- In Houston, vacancy is back above 20% and there is no appreciable leasing traction on the large inventory of sublease space. Any turnaround in the market is dependent on a rebound in oil prices.