North American Office Highlights – 2Q 2013

by CoyDavidson on August 14, 2013

Skyscrapers in Houston, Texas.

Colliers tracks office space in 87 markets in the U.S. and Canada totaling nearly 6.4 billion square feet. The 75 U.S. markets account for the lion’s share of this space, with about 5.9 billion square feet of tracked inventory. Our coverage includes 22 markets with more than 100 million square feet of space, which combined account for 3.8 billion square feet, or about 60% of our office market inventory. The largest U.S. markets are New York, Washington, D.C., Chicago, Dallas and Atlanta; Toronto is the only Canadian market with more than 100 million square feet of space.

Key Takeaways

  • U.S. monthly job creation accelerated to an average of more than 200,000/month in H1 2013. The recovery in office-using employment is ahead of the recovery in overall employment, with more than 90% of office-using jobs lost during the recession regained compared with about 75% of all jobs regained. The professional and business services sector, which contains employment at many technology, engineering and other knowledge-based companies, is leading the recovery. Canadian employment growth slowed in H1 2013, but the Canadian economic and office market recoveries remain well ahead of the U.S.
  • The ICEE industries remain the primary drivers of job growth, even in some traditionally FIRE markets. However, we believe that the U.S. housing market recovery is real and sustainable, even with expected increases in mortgage rates, and should spur job creation in related industries and office absorption in a greater number of markets, especially suburban markets. Both housing starts and mortgage rates remain well below long-run historical averages.
  • Absorption accelerated in Q2 2013 to 15.5 million SF, up from 4.0 million SF in Q1 2013. Notably, FIRE market absorption increased from -8K SF in Q1 2013 to 3.2 mil. SF in Q2 2013, approaching Q2 2013 ICEE market absorption of 4.1 mil. SF. However, increasingly efficient space utilization continues to temper office absorption relative to previous economic expansions.
  • According to Dodge Pipeline data, U.S. office construction activity totaled 75 million square feet at mid-year 2013, with medical office accounting for about 27% of this. Construction, especially spec development, is geographically concentrated in metro areas and submarkets with the strongest job growth, such as San Jose, San Francisco, New York and Boston. Construction in Colliers’ primary ICEE markets in the U.S. and Canada totaled 28.7 million SF, compared with 14.5 million SF in the primary FIRE markets. Industries in which the competition for talent is fierce, such as technology and energy, are using new high-quality office space as a recruiting and retention tool.
  • Office transaction volume surged by 21% quarter-over-quarter and 36% year-over-year to $20.2 billion in Q2 2013, as fears regarding sequestration and other factors that constrained investment activity in Q1 2013 were alleviated. Investors are moving out along the risk spectrum in terms of property type and location in search of higher yields, a trend that should continue as the economic recovery broadens.
  • The likely reduction in bond purchases by the Fed by year-end 2013 resulted in a spike in the 10-year Treasury in May and June. We think that the reduction is a positive sign, in that it signals that the economy is healthy enough to grow without artificial stimulus. Spreads between the 10-year Treasury and average office cap rates remain wide (400-500 bps), and rising NOIs should help support office values going forward. The greatest risk lies in the approximately $400 billion in 2005-2007 CMBS set to mature between 2015 and 2017, composed primarily of interest-only loans and issued at peak market pricing. Current delinquency rates on these vintages are elevated relative to pre-2005 and post-2007 vintages.

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