In this article, we examine the current context of the U.S. office market and highlight the key performance indicators in the second quarter of 2019.
The U.S. office market posted a solid second quarter. Occupancy and rents held firm at cycle highs and net absorption and sales volume bounced back. Demand remains largely dominated by tech and coworking firms. Tenants continue to focus on leasing the best space in order to attract and retain talent. Class A space accounted for 90% of second-quarter absorption. Construction has reached a record high. Any supply concerns remain localized and submarket specific. Sales volume increased and suburban markets continued to see the greatest share of capital being placed.
Vacancy Remains at a Record Low
- The U.S. office vacancy rate was unchanged in Q2 2019 at its record low of 11.5%. Vacancy has now been below its historic average for 18 consecutive quarters.
- Central business district (CBD) vacancy rates were unchanged in Q2 2019 at 10.2%, while suburban levels fell slightly to 12.3%.
- Major and mid-tier metros with the lowest vacancy rates include Kansas City, Nashville, San Francisco and Nashville.
Rents are Holding Firm
- Average Class A office asking rates remained largely unchanged in Q2 2019 at $49.13 per square foot in CBD markets and $30.78 per square foot in the suburbs.
- Over the past 12 months, 18 CBD markets saw Class A asking rents rise by more than 5%, led by Silicon Valley, Seattle, Atlanta and several Florida markets.
- In the suburbs, 12 metros saw Class A rents rise by more than 5% over the same time period. Fort Lauderdale, Columbia and the San Francisco Bay Area (Bay Area) were among the leaders.
Absorption Bounces Back
- U.S. office absorption increased in Q2 2019 to 17.9 million square feet, up from 6.3 million square feet in the prior quarter.
- CBD markets accounted for 6.1 million square feet of the Q2 2019 net absorption total, with 11.8 million square feet occurring in the suburbs.
- Office absorption is up by 37% on a year-over-year basis and 90% of markets recorded positive absorption in Q2 2019.
Construction is Still Rising
- The amount of office space under construction in the U.S. stands at 144.9 million square feet. This is the highest total on record. Construction peaked at 125.2 million square feet in the prior cycle.
- More than one-third of space underway is concentrated in three markets: New York, the Bay Area and Washington, D.C. The main supply concerns among the major markets are in The District of Columbia, Downtown Los Angeles and Midtown Atlanta.
- The fastest growing markets are Salt Lake City, Nashville, the Bay Area and Seattle.
Uptick in Sales Volumes
- Average capitalization rates (cap rates) stand at 6.6%, down by 20 basis points from one year prior. CBD cap rates fell by 10 basis points over the same time period to 5.3%, while there was a 10-basis-point increase in suburban cap rates to 7%.
- Sales volume in Q2 2019 totaled $38.9 billion, up from $26 billion in the prior quarter.
- Investors continue to favor suburban assets, placing $23.6 billion in the second quarter compared with $15.3 billion in CBD locations.
For more insights, check out our Q2 2019 Top Office Markets Report and stay tuned for our Q2 2019 Office Market Outlook Report, to be published soon.
About the author:
Stephen is the National Director of Office Research for Colliers International, where he focuses on analyzing office property trends, compiling Colliers’ thought leadership and delivering timely market projections to provide clients with a leading edge in our industry.