Q3 North American Office Outlook
The pace of job creation in the U.S. remains weaker than needed for a meaningful reduction in the office vacancy rate, especially as tenants across most industries focus on using their space more efficiently. Job growth averaged 186,000 per month during the first ten months of 2013 and—other than an unexpected jump in October—decelerated through the year, from an average of 207,000 jobs created per month during Q1 2013 to an average of just 163,000 per month in Q3 2013. The uncertainty resulting from the gridlock in the federal government has spilled over into the private sector. Private-sector employment data from ADP disappointed in recent months, with just 130,000 jobs created in October 2013—below market expectations, and the lowest total in six months.
Despite the weak trend in overall job creation, the recovery in office-using employment remains ahead of the recovery in total employment. As of October 2013, 97% of office-using jobs lost during the recession had been regained, compared with 83% of all jobs. However, the performance of the two primary office-using sectors continues to vary substantially, and the impact of this bifurcated recovery is reflected in the performance of office markets and submarkets across the country.
On the positive side, the professional and business services sector (which contains many jobs within the technology, R&D, engineering and other intellectual capital industries) remains one of the strongest, with current employment 139% above the pre-recession peak. This trend is reflected in continued robust tenant demand in markets like Boston, San Francisco, Silicon Valley, Austin, Raleigh-Durham, Seattle, Denver, Pittsburgh and Houston.
- The North American vacancy rate improved for the seventh straight quarter, down 25 basis points to 13.71%. The recent trend of small increases in the Canadian vacancy rate and small decreases in the U.S. rate continued. U.S. vacancy was still nearly double the Canadian rate.
- Net absorption accelerated in Q3 2013 to 21.6 million square feet, slightly more than the 1H 2012 total of 21.2 MSF.
- Intellectual capital, energy and education (ICEE) markets continued to drive absorption in Q3. Finance, insurance and real estate (FIRE) market absorption is increasing (approx. 73% of ICEE absorption during Q3 2013, up from 44% in 1H 2013), but much of the FIRE absorption occurred in submarkets with ICEE industry concentrations (e.g., River North and West Loop in Chicago, West Los Angeles).
- YTD construction completions totaled 22.3 MSF. Total inventory increased by just 0.4%, about half of net absorption during the period. Completions were concentrated in markets with the strongest economies (e.g., Houston, Silicon Valley, Dallas and Boston). However, the amount of space under construction in markets tracked by Colliers increased 10.6 MSF in Q3, to 86.3 MSF.
- Investors remained undeterred by rising interest rates, with a 38% year-over-year increase in office transaction volume in Q3 2013. Although unlikely to match the Q4 2012 surge in anticipation of 2013 tax increases, we expect another robust quarter in Q4 2013.
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