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The Strengths And Weaknesses Of 10 Major U.S. Office Markets

U.S. office real estate is faring well all things considered.  

The country’s 10 leading office metros remained strong in Q3 and fundamentals were solid in all but two markets. The sector is facing some headwinds as companies, mostly law firms and professional services firms, grow increasingly conservative in their real estate footprint to cut costs. Robust supply levels are also putting pressure on fundamentals.

The Strengths And Weaknesses Of 10 Major U.S. Office Markets
Rendering of Brookfield's Manhattan West project on the Far West Side of Manhattan

On the investment side, U.S. office real estate deal volume has cooled. Real estate investment has grown increasingly risky,in part due to high property values and rising interest rates. Office transactions have slowed as a result, down 13.3% year-to-date as of Q3 according to JLL. On the bright side, suburban markets have experienced renewed investment activity and accounted for the largest share of overall investment since 2009. 

Using Colliers International market research, Bisnow highlighted third-quarter strengths and weaknesses within all 10 major markets.

1. Manhattan, New York

STRENGTH: Manhattan continues to lead the pack with 6.2% vacancy, the lowest rate of all 10 markets. Leasing activity was strong during the quarter, jumping 10% to 9.5M SF, and net absorption hovered around 1.5M SF — more than double net absorption in Q2 2017. One major deal that remains the talk of the town is BlackRock’s 850K SF new headquarters in Related Cos.’ 50 Hudson Yards. Other deals include New York Presbyterian’s 471K SF lease at 237 Park Ave. and Amazon’s 360K SF lease at Brookfield’s Five Manhattan West.

WEAKNESS: About 12.6M SF of new office supply under construction could moderately impact New York fundamentals, though 60% is already pre-leased.  

2. Washington, D.C.

STRENGTH: Asking rents remained stable during the quarter at $47.90/SF. 

WEAKNESS: Roughly 6.6M SF of new product is putting pressure on fundamentals in the nation’s capital. That influx in construction, coupled with a slowdown in leasing activity and federal downsizing in D.C.’s core submarkets, has investors and operators proceeding with caution. Vacancies rose 120 basis points in Q3 to 14.6%, and the accelerated pace of construction in the market is making it difficult for contractors to keep up with new projects.  

3. Chicago, Illinois

333 South Wabash, Chicago
333 South Wabash

STRENGTH: A jump in asking rents and drop in vacancies defined Chicago’s Q3 performance. Average rents increased 2% to $39.20/SF and vacancies fell to 11.9%. The largest lease signed during the quarter was inked by financial services company Northern Trust for 462K SF at 333 South Wabash. 

WEAKNESS: Though fundamentals were strong in Q3, a slowdown in leasing activity due to the newly completed office towers in West Loop led to a decline in activity. Net absorption fell to 376K SF, according to Colliers. 

4. Houston, Texas

STRENGTH: Despite the destruction inflicted on Houston by Hurricane Harvey, the city’s office inventory was barely impacted — only 7% of that stock took a hit. Rents remained steady at $34.84/SF. Investment in the market has skyrocketed compared to 2016, up 430% as buyers re-enter the market. 

WEAKNESS: Office occupiers have not made a complete comeback just yet. Leasing activity was slow during the quarter and net absorption remained in the red at -265K SF. The metro has 5.5M SF of sublease space available, with 13 locations averaging more than 150K SF.

5. Los Angeles County, California

STRENGTH: Los Angeles boasted positive absorption of 877K SF in Q3, and asking rents that rose 3% to $45.50/SF on average. Tightening in the market after several major move-outs earlier in the year, namely Warner Music and Nestlé, caused vacancies to drop 1% to 12.3% during the quarter. 

WEAKNESS: Like Washington, D.C., Los Angeles will be hit with an influx in new supply that is expected to impact fundamentals down the road. Roughly 2.1M SF of new product was delivered this year so far, most of which was concentrated in Downtown and West LA. Colliers reports another 1.7M SF is under construction. 

6. Atlanta, Georgia

STRENGTH: Atlanta’s office market remained stable in Q3, with average asking rents holding steady at $28.15/SF. New construction in the metro also paused after roughly 1.5M SF of new product was delivered in Q2. 

WEAKNESS: A slowdown in leasing activity turned net absorption negative in Q3, to -161K SF. Vacancy rates also increased by 20 basis points to 13.4% and a ramp-up in construction activity in Q4 is expected to put added pressure on market fundamentals. Law firm Eversheds Sutherland signed the largest lease during the quarter, renewing its 999 Peachtree office lease in Midtown, but the firm also reduced its square footage by 20% to 189K SF

7. San Francisco Bay Area, California

The Strengths And Weaknesses Of 10 Major U.S. Office Markets
Partial rendering of Kilroy Realty's The Exchange on 16th in San Francisco

STRENGTH: It comes as no surprise that the San Francisco Bay Area office market benefited from robust leasing activity spurred by tech companies in Q3. Cloud storage provider Dropbox Inc. signed the largest lease ever in San Francisco last month — inking a deal for a 15-year lease with Kilroy Realty Corp. for 736K SF at The Exchange on 16th. Vacancy rates and asking rents remained stable at 6.5% and $82.30/SF, respectively. The market boasts the highest rents in all 10 markets tracked by Colliers. 

WEAKNESS: Roughly 6.4M SF is under construction in the tech hub, though more than half of it is pre-leased. Colliers does not foresee any supply-demand headwinds for the market. 

8. Dallas, Texas

STRENGTH: Fundamentals remained strong in Dallas last quarter. Rents jumped 1.6% to $30.50/SF and vacancies tightened to 12.1% — a 50 basis point drop. 

WEAKNESS: A moderate slowdown in leasing activity has some professionals worried corporate relocations, such as Toyota’s 2.1M SF headquarters and JP Morgan’s new 1M SF office complex, may taper off moving forward.

9. Boston, Massachusetts

STRENGTH: Boston experienced renewed interest from tech companies like WeWork in Q3. The co-working giant plans to expand its presence in the market by opening a 60K SF location at One Beacon Street in Beacon Hill in 2018. 

WEAKNESS: Despite increased demand from tech firms, vacancies in Boston increased by 20 basis points to 10.8% and rents remained flat at $56.10/SF. Negative net absorption also plagued the market, though it fell 37K SF to -160K SF compared to Q2 2017’s -197K SF.

10. Seattle, Washington

STRENGTH: Seattle remained strong in Q3. Vacancy rates remained tight at 7.6%, and average asking rents clocked $38.75/SF. New supply was a concern earlier in the year, but that product continued to be leased up during the quarter, assuaging industry concerns about a supply-demand imbalance in the market. Amazon grabbed some more action in its hometown, pre-leasing 727K SF at the Rainer Square tower.

WEAKNESS: If leasing activity does not keep pace with previous quarters, the 2.8M SF of new supply underway could cause some headwinds, though Colliers reports 72% of that supply is pre-leased.