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Downtown Office Markets Receive Disproportionate Amount of New Supply in US

Downtown Office Markets Receive Disproportionate Amount of New Supply in US

Commercial News » New York City Edition | By Michael Gerrity | January 25, 2018 7:40 AM ET



32 million square feet of positive net office absorption forecasted in 2018

According to CBRE's 2018 U.S. Real Estate Market Outlook, improved U.S. office market fundamentals should continue, downtown markets will receive a disproportionate amount of new supply, the tech sector will likely remain a primary demand driver, and occupiers will pursue space efficiency and agility in 2018.

"The strongest gains in employment, occupancy and rents will likely occur where recovery has lagged during this cycle, and where there is little or no construction underway, including many former housing-bubble markets in the South and West," said Scott Marshall, Americas President, Advisory & Transaction Services at CBRE. "Suburban submarkets that offer a range of housing choices along with urban amenities--including retail and restaurant options, public transit and walkability--are well positioned to capture demand from maturing millennials, and thus could be attractive to both real estate investors and occupiers."

CBRE expects continued U.S. office market growth in 2018, with net absorption projected to total 32.1 million sq. ft. As occupiers have focused on maximizing efficiency and productivity in their portfolios, net absorption has become more muted in recent years than in past expansion periods. That has led to more moderate but sustainable growth rates, which should continue in 2018.

Downtown Markets to Receive Disproportionate Amount of New Supply
 
With significant construction activity occurring in Manhattan, San Francisco, Washington, D.C., and other large downtown markets, city centers are expected to account for a disproportionate share of new supply in 2018. This will likely result in the downtown vacancy rate increasing more (60 basis points) than the suburban vacancy rate (10 basis points).

Overall, completions are expected to outpace net absorption for a second straight year in 2018, driving a modest 20-basis-point increase in the vacancy rate to 13.2 percent--only slightly above the cyclical-low of 12.9 percent in Q3 2017. Given the modest increase in vacancy, CBRE expects overall rent growth to decelerate to 2 percent from 2.4 percent in 2017.

Tech Sector to Remain Top Occupier

The tech sector has accounted for nearly 20 percent of major office leasing activity in recent years and will likely remain a primary demand driver in 2018 in leading tech markets like the San Francisco Bay Area and Seattle, as well as in emerging, lower-cost tech hubs like Charlotte and Phoenix. The tech sector is expanding at about twice the rate of overall job growth, despite having slowed during the past few years.

"Several lagging sectors, such as financial services and energy, have increased their shares of office leasing activity in 2017--a positive indicator of demand coming from a wider range of industries," said Andrea Cross, Americas head of office research, CBRE. "Prospects for reduced financial industry regulation and oil price stabilization have fueled optimism in these sectors, and markets with concentrations of these industries like New York and Houston should benefit."

Occupiers Will Continue to Pursue Space Efficiency and Agility

Labor remains the primary challenge facing occupiers, due in varying degrees to cyclical low unemployment, technology-driven competition and a widening skills gap.

"Occupiers are taking a balanced approach to real estate strategy, continuing to pursue space efficiency while reinvesting savings into workplace enhancements that will help them attract and retain employees," said Whitley Collins, CBRE's Global President of Advisory & Transaction Services.

Occupiers in the financial and technology sectors are leading this charge, but more conservative industries--like the legal sector--are adopting these principles as well. U.S. law firms have lowered their space requirements by an average of 27 percent over the past 18 months, with many moving into prime office space and implementing improved workplace design.

Although there has not been a material shift away from long-term leased office space, occupiers are showing clear interest in flexible-serviced agreements. Those include a spectrum of shorter-term offerings like traditional serviced offices, enterprise coworking models and on-demand space offerings.

"With personal devices and cloud technology making employees more mobile and rendering the physical office an optional place to work, employers are seeking more choice in workplace locations and greater flexibility in reducing long-term commitments in an uncertain business environment," said Julie Whelan, Americas head of occupier research, CBRE. "We expect occupiers' interest in shorter-term leases and third-party space aggregation to grow as these models are more widely tested and understood."

 

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