Another Solid Quarter for Office as Fundamentals Hold Firm

by | 01 November 2017

The Q3 2017 U.S. Top Office Metros Snapshot report shows that the major office markets remained steady during the third quarter, with rents still rising in two markets and holding firm in the remaining eight.

Office vacancy rates are mostly stable, and only three markets experienced a rise in vacancy. Demand is increasingly bifurcated with some traditional office tenants in cost-containment mode, reducing their office footprint in favor of space efficiency. Conversely, the technology sector is still growing at a fast rate and continues to lease large blocks of office space.

Key takeaways from this report include:

  • Major office markets in the U.S. continued to show solid performance in Q3 2017. Rents held steady in eight of the 10 leading markets and rose in two. Only three markets had a rise in vacancy. However, expansion has largely slowed and been replaced by stability.
  • A bifurcation in demand is emerging. Traditional office tenants from the professional and business services sector are increasingly in cost-containment mode. Some occupiers are reducing their office footprints in pursuit of space efficiency, with law firms being a prime example.
  • At the same time, the tech sector continues to expand at a torrid pace. Dropbox signed San Francisco’s largest ever office lease and Amazon is still eating up space in multiple locations. These are just the leading examples. Additionally, creative office space providers—most notably WeWork—are increasing their presence in several markets with Boston a leading example.
  • Manhattan, the San Francisco Bay Area and Seattle continue to lead the way. All have vacancy rates well below 10% and saw positive absorption in the third quarter. Rents are reaching new highs in San Francisco’s Financial District. Leasing activity in Manhattan is particularly strong and at the second highest year-to-date level seen in the past 10 years.
  • Pre-leasing of high-end new office towers continues in downtown Chicago. Fulton Market has established itself as a credible and lower-cost option for tenants seeking creative space in a desirable neighborhood.
  • Houston was battered by Hurricane Harvey in the third quarter. Unlike housing and infrastructure, the office inventory emerged relatively unscathed. However, both the office market and the city will face significant challenges.
  • Two markets merit a note of caution—Los Angeles and Washington D.C. Both have a sizeable volume of new supply that is seeing little leasing traction, in both recently completed developments and projects underway.

For more details on the latest office trends in these top metro markets, download the Q3 2017 U.S. Top Office Metros Snapshot.

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