_U.S. office markets: Who has momentum?

Seven of the top 10 markets in the fourth quarter remain at the top in the first quarter: Austin, Dallas, Orlando, Oakland-East Bay, Phoenix, Raleigh-Durham and Seattle. New to the top tier in the first quarter are Washington, DC, Atlanta and Orange County, which replaced Nashville, Salt Lake City and Broward County.

The Office Momentum Index ranks the 56 U.S. office markets in metropolitan areas with populations of at least 1 million. The index consists of 17 variables updated every quarter: seven demographic variables measuring population, millennials, income and education; four economic variables addressing past, present and future employment trends; and six real estate variables covering vacancy and rent change, absorption, leasing, construction and barriers to entry. The three categories of variables—demographic, economic and real estate—account for 20%, 30% and 50% of the final score, while each of the 17 variables within these categories is given a weighting of one (somewhat important), two (important) or three (very important). Click here to view the list of variables and their weightings.

Because demographic and economic variables, which change little in the short term, account for half of the metros’ scores, fast-growing markets in the West and South congregate at the top of the list quarter after quarter. The top market in the Midwest, Columbus, Ohio, is in 31st place, followed closely by Minneapolis and Indianapolis. These three markets have solid economies and active office leasing and investment markets, but it is harder for them to rise to the level of a Denver or Portland, where the underlying demographic and economic forces will fuel a faster rate of growth in the long run.

Any ranking of markets like this one, while instructive, comes with some caveats:

• A rising tide lifts all boats. Development and investment opportunities may be less numerous in markets that fall farther down the list, but there tends to be less competition and better pricing in these markets, creating opportunities for regional and local players with the local knowledge and resources to exploit them.
• A wise decision boils down to the submarket and property type and, of course, buying at the right price. A slower-growing market may have one or more submarkets that present compelling opportunities.
• There is no right set of evaluation criteria and no right way to weight them. These depend on the objectives of the developers and investors using this sort of analysis to screen markets for opportunities. Every market participant has a comfort zone, and the criteria and weights should be selected to reveal markets fitting that profile.
• Finally, an analysis like this holds all markets to the same set of standards. Another way to uncover opportunities would be to measure the position of each market relative to its historic performance rather than compare markets with each other.

Click here to view a list of all 56 metro office markets and their scores.

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

Read previous U.S. market insights here