U.S. Office Market Success More Linked To Tech Sector Growth Than Ever

U.S. Office Market Success More Linked To Tech Sector Growth Than Ever

Commercial News » San Francisco Edition | By Michael Gerrity | October 12, 2017 8:22 AM ET

According to Cushman & Wakefield, a strong tech sector and the effects of a robust construction pipeline influenced U.S. office fundamentals during 2017's third quarter.

"More and more, the office market's fortunes in 2017 are linked to the rise of the tech sector," said Cushman & Wakefield's Revathi Greenwood, Head of Research, Americas. "In 2016, Seattle was the only technology hub to rank in the top 10 cities for space absorption. To date in 2017, the top 10 cities for office absorption included Santa Clara, Brooklyn, Seattle, Raleigh/Durham and San Diego. These five tech-centered markets each have seen more than 1.0 million square feet (msf) in space absorption - with Santa Clara reaching nearly 3.4 msf."

Overall, though, the strength of these and additional top markets - including Midtown Manhattan and Dallas - was offset by significant negative absorption elsewhere. Out of the 87 markets tracked by Cushman & Wakefield, 27 markets posted a combined total of 5.3 msf of negative absorption during the third quarter, a third more than the 3.4 msf of negative absorption recorded in the second quarter.

"The flow of tenants into new construction is beginning to impact fundamentals in some markets," Greenwood noted. "Developers delivered more than 11 msf of office space nationwide during the third quarter. The pipeline of new product is and will remain an important influence on the U.S. office market for the balance of 2017 and beyond."

Currently, Cushman & Wakefield tracks approximately 104 msf of new office development - representing 2.0 percent of total U.S. office inventory - in 87 markets across the U.S. That figure is down from nearly 109 msf at midyear, but it still marks the sixth consecutive quarter that the pipeline has exceeded 100 msf. Markets with significant square footage under construction include Midtown Manhattan (9.5 msf), Dallas/Fort Worth (6.3 msf), Washington, DC (5.3 msf), San Francisco (5.1 msf) and Boston (5.0 msf).

"The 12 most active markets for new development housed 55.9 msf of construction," noted Ken McCarthy, Cushman & Wakefield Principal Economist. "Not only does this represent 54 percent of the total U.S. development pipeline, it also represents 3.6 percent of total inventory in these markets. While these regions have been among the healthiest office markets in the nation throughout the current cycle, several are experiencing rising vacancy rates as new product comes online faster than it can be absorbed."

The net result is a national vacancy rate that crept up from 13.2 percent in the second quarter to 13.3 percent in the third quarter. After reaching a cyclical low of 13.1 percent last year at this time, vacancy has remained essentially flat. Among major markets, Midtown South recorded the lowest office vacancy in the nation at 7.3 percent, followed by Seattle (7.5 percent) and Nashville (7.7 percent). Florida stands out as one of the most improved regions in the nation. Vacancy rates have declined by 100 basis points or more year-over-year in six Florida markets, led by Palm Beach, Jacksonville and Orlando.

Average asking rents for available space in all markets - both suburban and central business district combined - continued to climb steadily. In the third quarter, average asking rents reached a record high $30.57 per square foot, up 0.6 percent from the second quarter and 3.8 percent from a year ago.

"This marks the 25th consecutive quarter that asking rents have increased, by far the longest streak of rising rents over the past 20 years," McCarthy said. "After bottoming out in the second quarter of 2011, average asking rents have increased 24.3 percent. And, over the past 12 months, asking rents increased in 68 of the 87 markets tracked by Cushman & Wakefield."

Oakland/East Bay ranked highest among strongest markets for rent growth over the past year (+19.5%). Other notable increases came from Orange County, CA (+10.1%) and Boston (+9.8%). As has been the case throughout the current expansion, New York and San Francisco remain the highest rent districts. Midtown Manhattan ranks as the most expensive, at $77.67 per square foot, followed by San Francisco ($70.51 per square foot) and Midtown South Manhattan ($69.23 per square foot).

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