Leasing activity eased in the US office market in Q3, with vacancy rates in six of the country's 10 top markets rising. Colliers International president of national office services Cynthia Foster broke down the state of affairs for us.
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1) Absorption Dropped
US GDP rebounded to 2.9% in Q3, marking the strongest quarter in two years, and the economy averaged roughly 183,500 job gains in August and September—that’s down 30% compared to the prior two months, according to Colliers research. Though economists say the strength of the labor market is to blame for the leveling off of payroll increases as employment nears full capacity, the slowdown in hiring has impacted occupancy. Of the top 10 markets highlighted in Colliers' Q3 Top Office Metros Snapshot, half had net absorption declines in Q3 compared to the previous quarter.
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2) Tech Startups Drive Absorption
There's a bright spot: Relatively new tech companies are pushing absorption into the black. Taking into account leasing activity from traditional companies like law firms and investment banks versus new tech companies, Cynthia says the new tech firms definitely account for most of the sector’s positive absorption.
“That’s where we’re seeing the most juice in the major markets—from these tech companies,” Cynthia tells us. “Every single major market that we cover in the US is seeing lease renewals of traditional companies, but for the most part you’re seeing a decrease in the amount of space they're taking on their renewal.”
3) Continued Urbanization
Another theme is the continued demand for urbanization, Cynthia says. She points to General Electric as the poster child for such a trend—the company announced plans in January to leave the suburbs of Fairfield, CT, for a 12-story, 390k SF building overlooking Boston’s Fort Point Channel.
“It’s a traditional company becoming a tech company, and their office HQ is reflecting that,” Cynthia says. “The big new tech firms coming to the East Coast are primarily looking in Manhattan, Brooklyn and other urban locations…it’s been going on for a while. Millennials want to be in the center cities.”
4) Cost-Conscious Traditional Users
Cynthia says she’s noticed traditional firms like JP Morgan and Toyota in Dallas pushing for more efficient operations by making cost-effective consolidations. “Toyota chose a more business-friendly environment, but they chose a legacy development in North Dallas that copies the features of an urban 24-hour city,” she says.
Cynthia also says while rents remained strong in Q3, she's starting to see a leveling off in the amount of growth. "It's hard to maintain that level of growth, and though there's been some construction in these 10 markets, in general the construction has not created a surplus of space but has increased rent."
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