Office Demand Steady on Strength of ICEE Industries
We often use the term “measured rebalancing” to describe the current state of the U.S. office property market. This refers to the long process of working through an oversupply of office space according to materially different demand drivers. The market must recalculate the amount of office space required, and recalibrate in areas that space demand has shifted. As the subsequent recession and recovery has unfolded, financial and real estate businesses are no longer growing in the way they once were. Now, a newset of demand drivers has taken hold.
- A national re-balancing of business growth from FIRE (Finance, Insurance & Real Estate) to ICEE (Intellectual Capital, Energy and Education) has shifted office demand to ICEE industry concentration.
Rents and Absorption Showed Improvement over Last Year
The U.S. has seen a sustained modest improvement in vacancy and absorption in recent quarters. However, a more robust recovery in office demand—such as is occurring in multifamily and industrial real estate—remains elusive. Uncertainties in the economy are keeping businesses from hiring and leasing offices.
For Q1 2012, approximately 14.9 percent of the inventory that Colliers tracks was vacant; an improvement of 8 basis points from year-end 2011. With only 7.5 MSF of new supply delivered to these 81 markets in Q1, net absorption was a positive 8.1 MSF. With this amount of vacant space, and anemic office-related job growth, office rents improved just marginally in the 36 CBD markets that reported rent increases. The other 36 CBD markets registered flat or declining rents. Thirty-two Suburban markets reported rent growth, while 37 suburban markets reported flat or declining quarter-over-quarter rents. Class A CBD rents improved from $40.73 per square foot to $40.96 per square foot. Class A Suburban rents increased from $25.86 to $26.14 per square foot.
Energy and iPads
One of the key differences between improving and lagging office office markets is the type of industry concentrations each have. Office Space demand is now driven by tech industries in “Knowledge Gateway” markets such as Austin, Boston and Silicon Valley: and energy markets extending North from Houston into Canada.
We have chosen two categories to distinguish between leading and lagging industries: FIRE and ICEE.
- Finance, Insurance and Real Estate (FIRE) markets are seeing stalled growth in demand for office space.
- Intellectual Capital, Energy and Education (ICEE) markets feature concentrations in a combination of technology, higher education and energy industries. These growing industries are pushing up demand for office space in select markets, especially in Class A buildings.
Office demand has shifted away from FIRE and toward ICEE, thereby favoring cities with higher concentrations of ICEE industries.
- Houston and Calgary were the only two markets with over 1 million square feet (MSF) of absorption in Q1 2012.
- Toronto boasted the lowest vacancy (5.3 percent) of any market with over 10 MSF of inventory.
- Seattle ranks 5th highest in absorption, with a vacancy rate below 13 percent.
- Silicon Valley was in the top 10 US markets for decreased vacancy rate.