U.S. Office Market Outlook | Q2 2016

by CoyDavidson on August 25, 2016

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Positive U.S. Office Fundamentals Point to Continued Gains in Occupancy & Asking Rents

U.S. office-market indices outperformed the general economy in the first half of 2016, particularly in the second quarter as absorption picked up steam despite disappointing GDP growth. The strong office leasing in Q2 could prove to be a harbinger of stronger economic growth in the second half of the year. Job growth weakened somewhat in the beginning of 2016 but accelerated again this summer and is fueling office leasing, despite economic uncertainty over slower global economic growth, Brexit, and the November elections. Moreover, Class A asking rents in both the Central Business District (CBD) and suburban areas posted solid quarterly and annual increases. But sales volumes have declined from 2015 largely due to slowing interest in suburban assets, despite core CBD markets showing increased interest and activity in Q2. Overall, another good performance for the office sector.

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Key Observations:

  • The U.S. economy decelerated in early 2016 from its already weak pace of recent years, but the news wasn’t entirely bad. Despite slower job growth and disappointing GDP figures, a host of other indicators strongly suggest a pick-up in the second half of the year sufficient to fuel continued improvements in property markets.
  • U.S. office-market fundamentals continued to strengthen into mid-year as the national vacancy rate declined 10 basis points (BPS) in the quarter to 12.5%, 60 BPS lower than a year ago. The gains have been widespread, with 78% of metros registering stable or declining vacancies compared to mid-year 2015.
  • Absorption rebounded to 15.2 MSF, a 60% increase over the relatively slow first-quarter pace. Absorption should continue to increase through the second half of the year, though may not achieve the record totals seen the past two years due to limited space availability and a rising densification trend among major tenants.
  • Class A asking rents continued their ascent in both CBDs ($46.47) and suburban ($29.14) areas, registering gains of 7.0% and 5.0%, respectively, from this time last year. The largest year-on-year gains were seen in the booming Dallas and Atlanta markets as well as tech-heavy markets such as Austin, Boston,East Bay (SF), Manhattan and Seattle.
  • With an increasing trend toward densification, occupiers are building out collaborative spaces that can accommodate more employees and have fewer private offices and areas, continuing to drive down the rentable square foot per employee. In response, landlords are gearing more space to smaller, multitenant configurations. The two main drivers: net absorption by new-era technology/creative tenants and workplace expectations prompted by a millenial-weighted workforce.

 Please click here to access the Q2 US Office Market Report 

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