Office-Using Employment Trends
Office Market Setting Up For Strong 2015, But Then What?
The U.S. added 2.95 million jobs in 2014, the greatest number since 1999. During the third quarter, GDP growth reached 5.0%, its highest mark in 11 years. Economists seem confident that GDP growth will hover around 3.0% during 2015. Consumers are spending more on food as well as on durable goods such as automobiles and electronics. Decreased oil prices are generally expected to boost U.S. household spending power in the coming quarters. Capital Economics, for example, recently estimated that the $45 fall in oil prices since midyear will free up $225 billion for American households.
While the broader economy and labor market is gaining traction, wage growth is still wavering. There are exceptions – people who write code or maintain networks, for example, or those extracting oil and gas – are enjoying significant wage gains, but most workers are seeing negligible improvement on an inflation-adjusted basis. As of December, average hourly earnings rose by 1.7% year-on-year, essentially on par with core consumer price inflation. Although the nation is approaching what the Fed considers full employment, there still seems to be some slack in the economy and more room for growth.
In terms of office space, availability is likely to register a second or third straight year of solid declines in many areas due to a combination of improving demand and limited new supply. A long list of markets – Atlanta, Boston, Downtown Chicago, Los Angeles and Tampa Bay – have hit their stride and do not show signs of slowing in the short term. Tenants leased 14.4 msf in 2014 in Los Angeles, for example, the biggest annual total since 2006. The top 20 U.S. office markets have only 49.9 msf scheduled to deliver in 2015. Looking ahead, though, the development pipeline will increase markedly in 2016 and 2017 and it cannot be assumed that demand in all markets will be as robust as it is today.
Availability Rate Trends
Asking Rent Trends
Leasing activity may actually fall a bit next year in some of the largest markets such as Midtown Manhattan and Washington, DC that rely heavily on traditional space-users (banks and law firms). Deal volume in the two big Texas markets could drop off a bit as well. Lower energy prices will put a damper on expansion in Houston, and leasing activity in Dallas/Fort Worth may have simply peaked.
Meanwhile, despite some slowing in these markets, the upcoming year could be just as strong as, if not better than, 2014 for U.S. office market fundamentals because the mindset of businesses has improved. More companies in a greater number of sectors are anticipating increased sales and revenues. In turn, many are considering whether their space can accommodate additional workers and if it has the amenities and features that will give them the edge in recruiting, retaining and motivating employees.
Additionally, a greater number of areas are benefitting from demand for space. In several markets – including Manhattan, West Los Angeles and Downtown Chicago – strong demand on the part of tech and creative-sector companies is spilling over the traditional boundaries of “tech submarkets.” Demand from tech and creative-sector companies in these markets is not running rampant over the entire market, as it is in Silicon Valley and San Francisco, but it is spreading. Additionally, other sectors such as healthcare, real estate and general professional/business services are growing moderately. The key to a strong 2015 is sustained expansion in the tech sector and continued improvement in professional/business services.
Availability Rate Comparison
Rental Rate Comparison
The office market still has quite a bit of excess space to absorb. Nevertheless, limited new construction and steady leasing during 2014 reduced availability.
Landlords are sticking more rigidly to their face rents and continue to challenge tenant requests for cancellation rights and expansion options, although concessions exceed pre-recession levels.
Leasing slowed during the second half of 2014. It remains to be seen whether this reduction in activity will become a long-term trend or is just a lull. Of concern, the slowdown coincides with soaring development in certain submarkets.
As the availability of big blocks of space in the CBD and LoDo dwindled, Denver’s office market tightened and leasing spread to suburban submarkets that offer a larger pool of big blocks, causing availabiity in Suburban Denver to dip markedly.
The office market faces sinking oil prices and a potential oversupply of office product. Not since the 1980s has Houston encountered these two problems simultaneously and to this degree.
Sustained job growth supported steady demand for office space in 2014. Leasing attained its highest annual total since 2006. Nevertheless, overall vacancy is high and tenants usually have multiple opportunities in a given submarket.
Elevated availability is forcing most landlords to be accommodating. Tenants with geographical flexibility have a wealth of options and smaller to mid-sized tenants can find space almost everywhere.
New York City
Some opportunities for tenants still exist in this market (particularly for those looking for 10,000 sf to 40,000 sf) but owners who have achieved 90% occupancy across their portfolio are bullish and not ready to shift pricing yet.
Major Savills Studley Transactions
Quarterly leasing volume was the greatest since the first quarter of 2011. Activity remained below its historical average, though, due to a combination of restrained hiring and continued space consolidation.
Office market fundamentals remained flat at year-end. Average asking rent was even with the previous quarter. Leasing activity was on par with the last three quarters, just missing its long-term quarterly average. The overall availability rate ticked up modestly.
The frenetic pace of leasing seen at the close of the third quarter carried into the fourth quarter. Although availability rates remained stable, asking rents registered their seventh straight quarterly increase.
The office market seems poised for sustained activity, with several immediate substantial requirements from larger tenants. Companies flush with confidence are growing and committing to new leases. Competition for certain spaces is starting.
Quarterly leasing volume decreased to its lowest level in the past five years. The lack of activity caused the Class A availability rate to jump to its highest mark in the past ten years. Asking rents registered declines.
Annual leasing volume reached its highest level since 2011 but the overall availability rate remained elevated. This is largely because an above-average portion of transactions were renewals, often involving a significant decrease in space.
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(1) Percentage point change for availability rates.
Unless otherwise noted, all rents quoted throughout this report are average asking gross (full service) rents psf.
Statistics are calculated using both direct and sublease information.
Short-term sublet spaces (terms under two years) were excluded.
The information in this report is obtained from sources deemed reliable, but no representationis made as to the accuracy thereof. Statistics compiled with the support of The CoStar Group.
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