Different Perspectives: Here's What 1,500 CBRE Brokers Think About The Current Office Market
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At the start of the year, experts predicted continued strength in office real estate despite political and economic uncertainty. Simultaneously, research revealed potential softening ahead as new supply levels and a slight pullback in demand is expected to lead to an increase in vacancies and a slowdown in rent growth.
All of this and more is discussed in CBRE's recent Office Trends Report, which collected observations and sentiments about the state of the U.S. office market as of May 2017. The report questioned roughly 1,500 CBRE professionals on behalf of U.S. office tenants, landlords and capital markets about the office market. Here are the insights provided by CBRE's Office Advisory & Transaction and Investment professionals in the Americas.
Tenant Perspective: Be Gone Surplus Space, Hello Suburban Markets
Nationwide, experts have observed office users shedding excess and unneeded space in response to economic uncertainty. The name of the game is efficiency — by pursuing cost-saving initiatives, companies are preparing their portfolios for the future, no matter what it may bring.
Another major trend is the growing popularity of suburban markets. Suburban office has seen positive absorption for several years, with vacancy rates hovering near pre-recession lows. In fact, suburban markets accounted for 74% of total net absorption in Q1 — a testament to the health of the industry being stronger than the common perception. As municipalities build more walkable, amenity-rich neighborhoods with strong live/work/play synergy that appeals to young professionals, it is blurring the line between urban metros and suburban markets. The industry has dubbed these markets “hipsturbias” or “urban burbs.” Suburban markets also are seeing demand from tenants that cannot find high-quality large blocks of space in tight urban markets.
Landlord Perspective: New Supply Headaches And Amenity-Rich Upgrades
On a national basis, vacancy rates in the office sector rose modestly in the first quarter, the first increase in seven years, CBRE reports. On a regional basis vacancies tightened, especially in the suburbs.
Landlords have taken to repurposing and upgrading properties in markets where demand and rents have yet to sustain new construction. These facelifts often involve new office design and amenity offerings. Office owners are working to reinvent and differentiate their workplace by promoting healthy environments and pushing for more service-oriented amenities — including cafeterias, coffee bars, bike racks, showers, wellness services, convenience stores, day cares and more.
Experts say parking is a major challenge for landlords as central business districts become increasingly dense and pedestrian-friendly, particularly those underperforming CBDs, which are seeing an influx in migration.
Capital Markets Perspective: Office Prices Up, Cap Rates Flat And Overall Investment Down
Investment in U.S. office real estate slowed in Q1, falling 12.4% annually to $27.7B, which experts attribute to a pullback in entry-level transactions, CBRE reports. Individual asset sales were down during the quarter by 4.7% year-to-year. Continuing the trend in favor of suburban or underdeveloped markets with an excess of space, investor transactions revealed a marked interest in assets in tertiary markets. Deal volume in these markets jumped 7%, CBRE reports, while deals conducted in the six major metros fell 15%. Foreign investment jumped 10% in Q1 to $6.2B, with Singapore, Canada, China and Japan leading the way in international investment in U.S. office assets.
Economists predict the Federal Reserve will boost short-term interest rates by a quarter percentage point to between 1% and 1.25% following the central bankers' two-day meeting on June 13 and June 14.
Office sales prices were up 9% as of February, according to Moody's RCA CPPI index and despite the rising rates, cap rates remained stable in Q1, averaging 6.8%.