US OFFICE MARKET - Office Market Bounces Back in Q2
After a lackluster first quarter performance, the US office market rebounded in Q2. Vacancy, which was unchanged in Q1 compared to Q4 of 2015, resumed its decline, falling 20 basis points to finish the period at 10.1%. Net absorption more than doubled and average asking rental rates moved up again to extend a more than five year run of quarterly increases.
Office markets including New York City, Washington, DC, Chicago and Orange County, CA, all reported net gains in occupied space in Q2 after posting negative net absorption in Q1. That helped bring net absorption nationwide to a healthy 37.5 million square feet compared to just 15.2 million square feet in the first quarter. Talk of a slowdown in tech sector growth hasn’t slowed down net absorption in the San Francisco and Silicon Valley markets, as those areas together reported over 1.7 million square feet of gains in occupied space.
The Seattle/Puget Sound market, another tech hot spot added 921,000 square feet to the total of occupied space. Los Angeles also had a good quarter, as its occupied space total swelled by over 1.2 million square feet. Even Houston, despite challenges posed by the energy sector slowdown, managed to nearly break even for the period reporting negative absorption of just 61,000 square feet. Average asking lease rates for the US moved up $.12 in Q2 to $23.56 per square foot, which represents .5% increase for the period.
Rents are moving up in most office markets around the country, but markets with large TAMI and healthcare sectors tend to see bigger rent gains. Energy markets are beginning to see rental rates slide back. Houston, perhaps the biggest energy market in the country, saw a $.36 decrease in asking rents, ending the quarter at $27.70 for all building classes combined. The looming problem there is the large blocks of space that have been coming back on the market for sublease, which is putting downward pressure on rents. That pressure on rents and net absorption, as well, is likely to persist until the slack in demand caused by under-utilization tightens back up.
The level of new deliveries remained steady in Q2 at just over 19 million square feet in 313 new buildings. Another 142.6 million square feet is still being constructed, and 55% of that is concentrated in just 10 of the nation’s largest markets. New York City is at the top of that list with nearly 13.3 million square feet underway. Dallas/Fort Worth is not far behind at 11.3 million square feet, followed by Washington, D.C. at 9.6 million square feet and South Bay/San Jose (Silicon Valley) at 9.2 million square feet. Another tech-heavy market, Seattle/Puget Sound, rounds out the top five at 7.8 million square feet. The largest project delivered in Q2 was the 1.7-million-square-foot 10 Hudson Yards building in New York City. Developers continue to focus on mixed-use projects in urban core areas that are near public transit and entertainment venues, which appear to be high priorities for the millennials.
As we have been reporting for the past two years, institutions and private investors, both large and small, have been chasing short supply of office product for sale. Cap rates remain compressed to record lows and core assets are trading hands below 5%. Foreign buyers are still hungry for US assets, and that is likely to continue given increasing concerns over a weakening global economy and new concerns over the European Union occasioned by the recent Brexit vote. Investors everywhere still see the US as the safest of safe havens to stash capital when the going gets tough.
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