National Office Market Withstands Hints of Deceleration

Elevated construction activity could affect vacancy, net absorption in coming quarters

On Feb 5, 2020

Despite some trepidation in the commercial real estate industry heading into 2020, the office market closed the year strong, according to Transwestern’s latest U.S. office market report. Annual average asking rental rates grew 2.3% year over year, ending the quarter at $27.08 per square foot. Markets exhibiting the greatest rent growth included Tampa (10.6%), San Francisco (8.7%), Pittsburgh (8.4%), California’s Inland Empire (8.4%) and Manhattan (8.0%).

U.S. payroll jobs grew 2.2% in the 12 months that ended Dec. 31, and of the 2.1 million new jobs added, 598,000 were office-using positions. The technology and financial services industries, which are dominant players in the high rent-growth markets noted above, each accounted for 20% of total job growth, with the medical and business consulting industries also making considerable contributions to new demand.

“A durable economy combined with strong business confidence positions both tenants and landlords well for 2020,” said Elizabeth Norton, managing research director at Transwestern. “However, trends do indicate that market fundamentals, although healthy, may start to decelerate slightly.”

For example, while the national average vacancy rate remains below 10%, it ended the year 10 basis points higher than one year ago. Similarly, although U.S. net absorption topped 15 million square feet in the fourth quarter, led by Chicago and Dallas-Fort-Worth, the 2019 total of 62.8 million square feet is significantly below the prior year’s total of 84.8 million square feet.

Meanwhile, construction activity has not receded, growing 11.3% during the past 12 months. Currently, Manhattan, Austin, Boston, Seattle, and Dallas-Fort Worth lead the nation in square footage under construction. When compared to total market inventory, the greatest percentage of space under construction is occurring in Austin, Nashville, Charlotte, San Jose/Silicon Valley, Seattle and Salt Lake City, all registering above 5%, with Austin’s new construction topping 14% of current inventory.

“There is some concern in a number of markets that office construction deliveries will outpace demand over the next year or two, and this ultimately could give tenants some negotiating leverage,” Norton added.

Download the full fourth quarter 2019 U.S. office market report at: https://twurls.com/us-office-4q19

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