U.S. Office Market on Pace for Highest Absorption in 5 Years

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According to Cushman & Wakefield, the nation's CBD and suburban office markets at the end of the third quarter remained on pace to achieve their lowest vacancy rates and highest occupancy gains in over 5 years.
 
The company's latest research findings, released today, also show CBD growth slightly outpacing that of the suburbs, as measured by absorption and leasing as a percentage of inventory.
 
"The economic recovery and a rapidly evolving workforce have pushed the office market into a positive trajectory that has held steady through the first nine months of the year," said Cushman & Wakefield's Maria T. Sicola, head of research for the Americas. "Corporate America is actively expanding and working to position itself for the millennial workforce, which by 2020 is expected to make up more than half of the labor pool. Companies are seeking to establish lifestyle-focused urban operations and/or retrenching in transit-oriented, amenity-rich suburban settings."
 
The national CBD office vacancy rate fell to 12.6 percent at the end of the third quarter, the lowest level since the first quarter of 2009. New York's Midtown South and San Francisco posted the lowest CBD vacancy rates, at 8.5 percent and 8.6 percent, respectively. Non-CBD office vacancy ended the quarter at 16.6 percent, the lowest national rate since the fourth quarter of 2008. Suburban San Francisco (7.5 percent) and the Silicon Valley (10.3 percent) represented the markets with the lowest vacancies.
 
"In some ways, these vacancy rates are misleading," Sicola said. "Activity for modern product is robust, and the market is tightening. Users looking for large Class A blocks in major markets are having trouble finding them."
 
In fact, office absorption is on track to reach its highest level since 2007, with 31.9 million square feet in occupancy gains year to date, compared to 14.9 million square feet last year at this time. "The absorption levels - both CBD and suburban - are dramatic," Sicola said. "For the CBDs, Manhattan, Chicago and San Francisco combined were responsible for about two-thirds of total absorption. In the non-CBD markets, growth was spurred by occupancy gains in suburban Dallas, Houston, Los Angeles Metro and San Francisco."
 
Leasing remains robust in the nation's CBD office markets, with 60.4 million square feet in transactions through the first three quarters, a gain of 10.3 million square feet year over year. New York's Midtown and Chicago are leading the charge, with 13.9 million square feet and 5.6 million square feet in volume, respectively. In the suburbs, 99.1 million square feet in year-to-date leasing lags behind last year by 7.3 million square feet. Los Angles Metro (8.8 million square feet) and Dallas (8.7 million square feet) are leading the nation in Non-CBD leasing.
 
"Rent growth in the CBD office markets is up 5.2 percent, year-over-year, to an average of $43.11 per square foot," Sicola noted. "While top-tier markets like Houston, San Francisco and Silicon Valley are still experiencing double-digit rent growth, causing some to wonder if we are beginning to see a pricing bubble, rates are also ticking up in some secondary markets." For example, California's Oakland market recorded the largest year-over-year uptick in rent, growing 19.1 percent to $30.77 per square foot.
 
Rent growth among suburban office markets remains more moderate, at 2.6 percent year over year and settling at $25.15 per square foot at the end of the third quarter. Still, several markets recorded strong year-over-year growth. Non-CBD Houston ($24.14 per square foot) and Oakland ($27.01) recorded gains of 12.6 percent and 9.0 percent, respectively.
 
By year-end, office new construction is expected to total 10.4 million square feet, roughly half last year's total, with major pockets of current and planned development in Houston, Dallas, New York, Washington, D.C., San Francisco, Silicon Valley and Seattle. "The pipeline for new construction shows more than 30 million square feet in projects planned to begin in 2015," Sicola noted "and renovation/conversion activity is also accelerating. While some of these projects will likely be pushed to 2016, timing the deliveries with an increase in job growth is important to achieving a healthy balance between supply and demand."
 
Cushman & Wakefield Research for the Americas is recognized worldwide for the originality of its research and the value of its thought leadership. The team performs rigorous, property-oriented research and data-driven analysis on a global basis. Its professionals collect data from publicly available sources, owners, agents and -- most importantly -- from the firm's brokers, appraisers and property managers.