US Office Absorption Slowed, Average Rents Increased In Q3
The US office market remained strong this past quarter, despite slowing job growth that resulted in a slight drop in absorption. Vacancy rates continued to fall and rents reached an all-time high, Cushman & Wakefield principal economist Ken McCarthy tells Bisnow.
1. Absorption Slows As Job Gains Plateau
The labor market remains strong as job growth continues at a moderate pace, having slowed compared to the strong rate in the prior two years. As a result, the office market has had slowing net absorption totaling 13.2M SF, compared to the 17.9M SF seen in Q2.
“We’re seeing the slowdown but it’s not like things are falling off of a cliff,” Ken says. “Clearly we’re seeing fewer jobs being created, which means less absorption. That’s being reflected very much in the slowdown.”
2. Vacancy Rates Continue To Decline
Though absorption slowed in Q3, it still surpassed the 11.3M SF of new office space completed in the quarter, pushing vacancy rates down. The US office vacancy rate dropped by 13.2% in Q3 compared to a 13.3% drop in Q2, the lowest it’s been since 2008.
“Even though absorption slowed, the amount of space absorbed was still more than the amount of new construction,” Ken says.
3. Average National Asking Rents Up
National weighted asking rents jumped 1.4% from Q2 and 5.5% compared to the year-ago quarter to $29.45, an all-time high according to C&W. Rents have increased by 19.8% since they bottomed out in 2011. Manhattan and San Francisco were the most expensive markets, with average asking rents of $79.91/SF in Midtown Manhattan and $69.21/SF in S.F.
“On the rent front, rents are at an all-time high on a national average,” Ken tells us. “These tech-focused markets have seen an increase in rents over the years—this quarter we've seen six markets that have rents over $50/SF we’ve never seen that before. So on the rent side we continue to see steady improvement.”
4. Emerging Slowdown In Tech-Centered Markets
Last year, 12 tech markets out of 87 total markets tracked by C&W took up 35% of the total absorption of those markets. This year, those same 12 tech markets accounted for 13% of absorption.
“Overall, the tech sector remains very healthy. What I think we want to see is continued growth in tech,” Ken says. “I don’t see anything like a bubble emerging in tech, I think instead what we’re seeing is a leveling off of activity.”
5. Absorption Continues To Surpass Construction
The construction cycle picked up pace in Q3 as absorption slowed. By the end of Q3 there was more than 103M SF of office space under construction. It’s possible that in 2017 new construction could exceed absorption, causing national vacancy rates to bottom out.
“I think next year we’ll probably start to see that happen,” Ken says. “A combo of slower job growth—meaning less absorption—and a pipeline of new construction will start to increase. We’ll likely see that balance of new construction and vacancy rates likely to bottom out at that point.”