U.S. Top Office Metros Snapshot | Q1 2017

by CoyDavidson on May 18, 2017

Office Markets Nearing Peaks as Rent Growth Slows

Some of the top U.S. office markets are seeing strong rents and solid demand while other markets are experiencing challenges, from rising vacancies to new supply impacting West Coast markets.

While more than half of the 10 markets tracked in this report witnessed office rent growth in the first quarter, a slowdown in the rate of rent appreciation is already underway. Growth is likely to continue to slow as we near the top of the current market cycle, though notable bright spots remain in some markets.

KEY TAKEAWAYS

  • Seven markets saw office vacancy rise modestly and five witnessed negative absorption. Weak GDP growth could be restraining demand, but other indicators — such as rising income growth, increased spending and faster global growth — suggest possible absorption upside.
  • Manhattan made a strong start to 2017 with high leasing volume, record rents and sustained tight vacancy.
  • In Chicago, pre-leasing of new trophy office towers remains strong. The rapid take-up of this space is allowing landlords of existing trophy assets to push rents.
  • West Coast markets — including Los Angeles, the San Francisco Bay Area and Seattle — are seeing an increase in speculative supply that will likely suppress rents and cause vacancy to rise. However, there is still healthy lead-in time for some projects to pre-lease.
  • In some markets — notably Washington, D.C. — asking rents are rising due to new product entering the market. Expect the gap between asking and effective rents to widen as concessions increase.
    Tech firms continue to be a significant driver of office leasing activity and market shifts. For example, tech demand is fueling Boston’s Class B space and conversions to outperform prestigious Class A towers.

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