_U.S. office market: Shifting gears

• Tenants absorbed 9.1m sq ft feet in the third quarter, bringing the year-to-date total to 31.2m sq ft—a solid performance but 18% below the year-ago total of 37.9m sq ft. Only one market, Dallas, broke the 2m sq ft threshold in the third quarter, while two markets, Manhattan and Houston, each saw negative absorption of more than 1m sq ft.
• Suburbs attracted the lion’s share of third-quarter absorption, approximately 7.8m sq ft, while the nation’s central business districts (CBDs) captured the remaining 1.3m sq ft. Suburban office markets were late to the recovery, but they are in expansion mode now, as discussed in a recent report by Newmark Grubb Knight Frank.
• Space under construction ended the third quarter at 92.6m sq ft. Construction totals have crept higher in recent quarters but seem to be levelling out, due in part to tighter lending standards.
• The vacancy rate ended the third quarter at 13.4%, down from 13.5% in the second quarter and 13.9% a year ago. It was the lowest level in more than eight years. Nashville and San Francisco have the lowest vacancy rates at 5.0% and 6.1%, respectively. 
• The supply of available sublease space levelled off at least temporarily, ending the third quarter at 91.5 million square feet. Sublease inventories remain well below previous cycles.
• The average asking rent across the U.S. ended the quarter at $29.64/SF full service, jumping 1.2% from the second quarter and 3.0% from the year-ago quarter. Four markets posted year-over-year rent increases in the double digits, led by Nashville at 15.2% and followed by Salt Lake City, Oakland-East Bay and Portland.

What to Expect

The economic expansion is in its 88th month, making it the fourth longest since World War II. Job growth often decelerates late in an expansion cycle as the labour market tightens, which appears to be happening now. The year-to-date average of 178,000 new jobs per month is down from 229,000 in 2015 and 251,000 in 2014, and there is room for further deceleration. With an unemployment rate of 5.0%, the labour market is close to full employment, and only 100,000 or so new jobs per month are needed to accommodate new entrants to the labour force.

Given the moderate slowing in job growth and the five-quarter slump in corporate earnings (soon to be six), the office market has been punching above its weight. Look for demand to remain solid in the next few quarters, but perhaps slightly below recent levels. Even with weakening demand, the levelling off of construction activity is likely to maintain upward pressure on rents.

To view the full report, click here.

Written by Robert Bach, Newmark Grubb Knight Frank, Director of Research – Americas.

Read previous U.S. market insights here