Exclusive: Top 10 Office Metros Battle New Supply, Corporate Downsizing
The top 10 office markets fared well in the second quarter, thanks to robust leasing activity that led to strong absorption and moderate rent gains, according to Colliers International’s latest Top Office Metros Report.
Six of the 10 largest office markets in the country, as tracked by Colliers, experienced positive net absorption in Q2. Still, rising supply and corporate downsizing are putting upward pressure on vacancy rates. Four markets enjoyed a jump in rents, while rates in the other six metros remained flat.
"The strength of the office market continues to be driven by the FIRE (finance, insurance and real estate) and TAMI (technology, advertising, media and information) sectors as well as the renewed trend of headquarter relocations to hip urban centers ... Even greater attention is being paid to attracting talent. Those CBDs characterized by flexible lifestyle, access to transportation, quality education and work-life balance continue to show sustained strength," Colliers International Eastern Region President Joe Harbert said.
"However, there are concerns over the impact of new supply. With tenants moving into new spaces, owners will be faced with a challenge of how to attract tenants to potentially obsolete Class-A product. This is further exacerbated by corporate downsizing. In addition, it remains to be seen if the positive post-election economic surge and associated job growth can continue to fuel office-leasing demand."
Next is a quick snapshot detailing the performance of the top 10 office markets in Q2.
Absorption: 618K SF
Average Rent: $73.24/SF
Vacancy Rate: 6.2%
Manhattan’s office market was on stable footing in Q2, with positive absorption, flat rents and a vacancy rate that fell to 6.2%. During the three-month period, roughly 8.6M SF in leases were signed, bringing the total leases inked in the first half of the year to 17.8M SF — on par with last year’s numbers. Finance, insurance and real estate companies continued to dominate Manhattan’s office market in Q2. Among the top leases signed was BlackRock’s 847K SF pre-lease at 50 Hudson Yards. JP Morgan Chase expanded its space at 5 Manhattan West by 305K SF during the quarter.
Absorption: -278K SF
Average Rent: $47.51/SF
Vacancy Rate: 13.4%
Negative absorption and a jump in vacancies to 13.4% signaled cooling in the D.C. office market in Q2. Construction activity jumped, with roughly half a million square feet breaking ground during the period — a level of activity that is more than three times higher than it was in the District three years ago. The largest lease during the quarter was a renewal by the Department of Homeland Security for 119K SF. Colliers reports this was the only lease that exceeded 100K SF signed during the quarter, though the massive 287K SF One Freedom Plaza project at 1301 Pennsylvania Ave. NW did break ground. That space is already 70% pre-leased to law firm Kirkland & Ellis.
Absorption: -484K SF
Average Rent: $38.52/SF
Vacancy Rate: 14%
Tenant move-outs hit the Chicago office market pretty hard in the second quarter, resulting in negative absorption rates and a vacancy rate that rose 1.8% during the past 12 months to 12.7%. But Colliers said these figures are not too disheartening, as the 484K SF of negative space absorbed during the quarter only accounts for 0.3% of the market’s inventory. In an ongoing trend, firms that are leasing new space are downsizing, Colliers reports. Deloitte, CNA Financial and Mayer Brown will take over a combined 863K SF in Chicago’s West Loop, though Deloitte’s space will be 200K SF smaller than its former office. Another big deal worth noting is Blackstone’s move to reposition and rework its 1.45M SF Willis Tower.
Absorption: -833K SF
Average Rent: $35.02/SF
Vacancy Rate: 20.1%
Houston’s commercial real estate market has suffered many blows these past few years due to headwinds in the energy sector. This past quarter was no exception. Vacancies in Houston’s office market jumped above 20% with more than 800K SF of negative absorption accounted for during the quarter. Though a massive exodus of energy firms has exacerbated challenges in Houston’s office market, there remains some demand from firms weathering the storm. In Q2, three of the largest leases signed were for core Houston submarkets, which included a lease extension for 524K SF at Post Central in West Loop/Galleria signed by Apache Corp.
Los Angeles County
Absorption: 305K SF
Average Rent: $44.15/SF
Vacancy Rate: 15.4%
Los Angeles’ office market was static last quarter. Neither vacancies nor rents changed notably since Q1, though absorption did recover from its decline in Q1 to a positive 305K SF. West LA remained the most active submarket in terms of leasing activity, with 1.4M SF leased in the quarter. Asking rents in West LA jumped to $53.50/SF, a 40% premium on rents in the county, though Colliers predicts heavy construction and new supply may put added pressure on vacancies in West LA in the future.
Absorption: 512K SF
Average Rent: $28.20/SF
Vacancy Rate: 13.2%
Despite posting positive absorption that reached an 18-month high in Q2, Atlanta’s strong leasing activity is being counteracted by new supply that continues to boost vacancy rates. Eleven buildings, or 1.5M SF of new supply, came online in Atlanta last quarter. Three Alliance Center in Buckhead accounted for 507K SF of that supply; it was 61% leased as of Q2. Of the 3.3M SF under construction, most of it is concentrated within Central Perimeter and Midtown, Colliers reports.
San Francisco - Bay Area
Absorption: 60K SF
Average Rent: $74.81/SF
Vacancy Rate: 6.1%
Market indicators in the San Francisco-Bay Area office market remained strong in Q2. The market experienced the lowest vacancy rate and highest rental rate jump of all 10 major metros tracked by Colliers. Tenant demand remained robust, with 2M SF leased during the period, dominated by tech firms. Strong demand and solid leasing activity are supporting new supply in San Francisco. During the quarter more than 4M SF broke ground in the Financial District, 55% of which is still available. In Silicon Valley, the majority of the 170K SF under construction is build-to-suit projects for Palo Alto Networks, AMD Corp., Apple and Google.
Absorption: 670K SF
Average Rent: $30.51/SF
Vacancy Rate: 12.6%
Asking rents in the Dallas-Fort Worth metro broke records last quarter, exceeding $25/SF for the first time, according to Colliers’ data. As for submarket performance, the Upper Tollway/Plano area remains hot with 638K SF in net absorption in Q2. Far North Dallas recorded a drop in vacancies to 12.6%; the submarket received a slew of pre-lease commitments in Q2 that drove absorption, with Toyota occupying 300K SF of its new 1.7M SF headquarters during the quarter. Uptown/Turtle Creek and Preston Center account for the highest rents in the metro for Class-A space, boasting $40/SF in rents.
Absorption: 197K SF
Average Rent: $56.13/SF
Vacancy Rate: 10.6%
Of all 10 metros, Boston’s $56.13/SF in asking rents was the third-highest for the quarter, behind San Francisco and Manhattan. In addition to strong rent growth, positive absorption and a moderate increase in vacancy rates (1.6%) made up Q2 for the market. Colliers also noted a shift in corporate preferences in favor of traditional supply rather than millennial-driven deals downtown, as demand last quarter was driven by Class-A office activity in Boston’s Financial District, where companies signed approximately 260K SF worth of leases.
Absorption: 821K SF
Average Rent: $38.94/SF
Vacancy Rate: 7.7%
Seattle’s office market was solid in Q2, even with an influx of new supply on the horizon. Roughly 821K SF of office space was absorbed during the quarter and vacancies remained flat, Colliers reports. Amazon continues to spur a lot of activity in its home market. Commercial real estate brokers are waiting with bated breath to see how the $13.7B Amazon-Whole Foods deal will impact the market. In the meantime, the e-commerce behemoth is behind several Q2 deals, including two of the largest leases signed during the quarter — the 440K SF Troy Black North building at South Lake Union and 330K SF at Midtown 21.