After a long economic recovery, the office market is poised for a moderate slowdown this year as cyclical factors push up vacancy rates despite strong job gains and an unemployment rate that remains below 5%.
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Online real estate marketplace Ten-X reports the sector's fundamentals appear to be stalling. One culprit is the drop in office-using jobs expected this year — the labor market is likely to add about 273,400 office jobs this year, down from the average of 418,000 gained each year from 2010 to 2016, according to CBRE. The decline, coupled with large supply completions expected to hit this year, have made for a challenging office environment.
“While [the sector] faces long-term challenges as technology increases the viability of nontraditional working arrangements, the resilient economy makes it likely that the current malaise is only temporary,” Ten-X chief economist Peter Muoio (below) said.
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Ten-X research found Portland, Oakland, Palm Beach, Orange County and Miami would make the best bets for investors looking to jump into office markets. The regions are concentrated within the West Coast and Florida and each has exhibited healthy economic growth and strong demographics that are fueling demand in the office property market.
On the other end of the spectrum, fundamentals in the following markets may lead investors to get out of the game before their profits take a hit. The top sell markets, according to Ten-X, include Houston, Cleveland, and suburban areas within Maryland, Memphis and Milwaukee. Lack of job growth and anemic demand has significantly slowed absorption in these markets, weakening their local economies.
It’s important to note the country’s healthy economic expansion will moderately improve fundamentals for the sector, as a strong economy translates to more job gains and increased office absorption.
“Overall demand should increase as employers continue to add jobs over the next two years, which bodes well for investors’ long-term prospects in most areas of the country,” Muoio said.
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