Office Market Reaches Supply Demand Sweet Spot

Office Market Reaches Supply Demand Sweet Spot

U.S. office market demand growth rebounded in the second quarter of 2015 following slower-than-expected net absorption in the first three months of the year as businesses continued to add office jobs and lease space.

Net absorption roared to 25 million square feet in the second quarter, the second-highest quarter for demand growth since 2006 and more than double the 12 million square feet absorbed during the first quarter.

After years of slow and steady increase in office supply, the level of office space under construction reached 124 million square feet in the second quarter, the highest total since 2009 and slightly eclipsing the 15-year average of 122 million square feet.

Rent growth reached s 4% annual rate in the first half of 2015, while the national office vacancy rate declined 20 basis points to 11.2%. The 27 million square feet of new office space deliveries in the first half of 2015 exceeded the historical first-half average of 21 million square feet, reflecting a relatively healthy office market and broader economy.

“We’re at a supply/demand balance — a really sweet spot in the market cycle for the office market,” said Walter Page, CoStar Group, Inc. director of U.S. research, office, joined by Senior Manager, Market Analytics Aaron Jodka and Managing Director Hans Nordby for CoStar’s State of the U.S. Office Market Midyear 2015 Review and Forecast.

An all-time high of 63% of the 2,000 U.S. office submarkets tracked by CoStar now show improving vacancies, with 48% of the metro markets now showing lower vacancy than at the peak of the market during 2006-07. Vacancies are now dropping across the board, even among 3-Star office properties, a sign that recovery is accelerating in the lower end of the office quality spectrum.

That said, tenants continue to demand higher-quality space. Year-over-year demand growth remains weak at 0.6% for 3-Star buildings, compared to 2.4% for 4- and 5-Star buildings, with tenants willing to pay a 41% rent premium for newer, higher-end buildings over lesser 3-Star assets.

“Tenants want newer, nicer space and they’re willing to pay for it,” Jodka said.

Source: CoStar Randyl Drummer July 22, 2015

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