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Year-Over-Year Office Absorption Drops To 5-Year Low, And Other Worrisome Q1 Stats

Office demand slowed in Q1 as net absorption fell 39% year-to-year, the lowest amount of space absorbed nationally within the past five years. 

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"We may have reached an inflection point in the office market [where] the absorption appears to have slowed compared to earlier in the cycle as we see an uptick in new construction," Cushman & Wakefield principal economist Ken McCarthy said. 

Though this is a marked slowdown on an annual basis, absorption remained flat quarter-to-quarter with the 6.8M SF soaked up in Q1 mirroring the rate in Q4. The sector also continued its record-breaking streak of positive net absorption for the 26th consecutive quarter, Cushman & Wakefield reports. 

The softer annual absorption is significant, though, and a result of myriad factors, not least of which is slowing job growth coupled with large amounts of new supply both in the pipeline and coming online, McCarthy said. 

In March the Labor Department reported job gains that missed expectations. Employers added 98,000 new payroll spots in March, less than half of the 219,000 new jobs added in February. This decline was somewhat expected by economists due to last month's uncharacteristically warm weather, and McCarthy said taking into account the large payroll gains experienced in January and February, payrolls will balance out to about 180,000 new jobs added each month of the quarter — in line with last year's national monthly average. 

Vacancy remained flat from Q4 to Q1 at 13.2% and McCarthy said the sector is likely to see a gradual increase in vacancy as a large wave of new supply is expected to hit concentrated markets this year.

"What we saw in both Q4 and Q1 was the amount of completed office space in the U.S. has exceeded absorption, and that's why the vacancy rate flattened out and increased," McCarthy said. "The pipeline of new construction is still very high, so we think we're probably unlikely to see any further significant declines; [vacancy] may creep up."

Three markets that are bucking the national trend of rising vacancy are Nashville, Raleigh/Durham and Seattle, each of which is sporting vacancy rates of less than 7.8%, driven by continued growth in the tech sector.

National asking rents in both suburban markets and central business districts averaged about $29.96/SF, up 1.7% from Q4. Midtown Manhattan continues to lead the way for CBDs with the highest office rents, averaging about $78.83/SF, with San Francisco ($69.66/SF) and San Mateo ($58.74/SF) close on its heels. 

"I think the office market continues to improve but has probably reached an inflection point where we're not going to see any significant declines in vacancy from here on out," McCarthy said. "That will probably lead to somewhat slower rent growth going forward."

CORRECTION, APRIL 11, 1:35 P.M. ET: A previous version of this story incorrectly listed the average CBD rent for San Francisco and San Mateo. The story has been updated.