U.S. Office Sector Fundamentals Heating Up


Posted by Heidi Schwartz

Cassidy Turley, a commercial real estate services provider in the U.S., reports that U.S. office sector fundamentals continue to tighten, which is causing rent growth to heat up in the majority of the country. Cassidy Turley Chief Economist Kevin Thorpe said the tightening in the office sector links directly to stronger trends in the labor markets.

U.S. office markets absorbed 20.5 million square feet (msf) of office space in the third quarter of 2014, which is an increase of 20% compared to the previous quarter and an increase of 38% compared to the same quarter one year ago. U.S. vacancy rates fell 20 basis points (bps) from 15% in the second quarter to 14.8% in the third quarter. Of the 80 metros tracked by Cassidy Turley, 64 reported occupancy gains in the third quarter.

“The single most important factor for the office sector is employment,” Thorpe said. “Businesses have been creating well over 200,000 net new jobs per month for several months now, the highest stretch of job creation in almost 15 years. About 30% of those new jobs require office space, so this clearly creates a stronger economic backdrop for the office sector.

“It is also encouraging to see that job openings in the U.S. are as high as they have ever been, suggesting the strong employment trends are likely to continue,” Thorpe continued.

The third quarter report also revealed that both rental rates and development activity are heating up.  Average asking rents in the U.S. rose 2.3% compared to a year-ago to $22.48—the strongest appreciation rate in five years. There was 83.5 msf of new office space under construction as the third quarter closed, up 40% compared to a year ago.

Thorpe added, “Developers are hustling now to get new product to the market given the stronger absorption trends particularly for newer, high-quality space. But it will take a couple of years for all of this new development to materialize, meaning demand will continue to outstrip supply, which will keep upward pressure on rents.”

Regionally, net absorption in the Northeast increased by 76.4% from the second quarter; the West was up 13.9%; the South was up 6.9%; the Midwest was down 14.8%.

The top 10 strongest markets in terms of demand for office space were New York, with 2.7 msf of net absorption; San Jose, CA, with 1.0 msf; Sacramento, with 1.0 msf; Chicago, with 975,000 square feet (sf); Boston, with 871,000 sf; Denver, with 831,000 sf; Los Angeles, with 829,000 sf; Raleigh, with 657,000 sf, San Diego, with 650,000 sf; and Baltimore, with 635,000 sf.

The top 10 strongest markets in terms of rent growth were San Francisco, with 14.4% year-over-year rental appreciation; Houston, with 10.8%; New York, with 8.3%; Denver, with 7.4%; Boston, with 7.3%; Phoenix, with 7.1%; Raleigh, with 6.9%; Minneapolis, with 6.2%; San Jose, with 5.6%; and Austin, with 5.5%.