In this article, we examine the current context of the U.S. office market and highlight the key performance indicators in the third quarter of 2019.

The U.S. office market posted a solid third quarter. Occupancy held firm, rents increased, and net absorption stayed positive. Construction reached a new record high. Any supply concerns remain localized and submarket specific. Suburban markets continue to see the greatest share of capital being placed.

Vacancy Remains at a Record Low

• The U.S. office vacancy rate fell by 10 basis points in Q3 2019 to a record low of 11.4%. Vacancy has now been below its historic average for 19 consecutive quarters.
• Central business district (CBD) vacancy rates were unchanged in Q3 2019 at 10.2%, while suburban levels fell slightly to 12%.
• Major and mid-tier metros with the lowest vacancy rates include Nashville, Orlando, the San Francisco Bay Area and Seattle.

Rents Inch Upwards

• Average Class A office CBD asking rates grew by 1.6% in Q3 2019 to $50.05 per square foot while suburban rents rose marginally to $31.15 per square foot.
• Over the past 12 months, 14 CBD markets saw Class A asking rents rise by more than 5%, led by Tampa Bay, San Francisco and Atlanta.
• In the suburbs, 10 metros saw Class A rents rise by more than 5% over the same time period. Charleston, Silicon Valley and Fort Lauderdale were among the leaders.

Absorption Stays Positive

• U.S. office absorption fell in Q3 2019 to 10.4 million square feet, down from 17.9 million square feet in the prior quarter.
• CBD markets accounted for 2.4 million square feet of the Q3 2019 net absorption total, with eight million square feet occurring in the suburbs.
• Markets with strong positive absorption in Q3 2019 included Dallas, Phoenix and Seattle.

Construction is Still Rising

• The amount of office space under construction in the U.S. stands at a record 150.5 million square feet. Construction peaked at 125.2 million square feet in the prior cycle.
• One-third of space underway is concentrated in three markets: New York, the San Francisco Bay Area and Washington, D.C.
• The fastest growing markets are Austin, Salt Lake City and Nashville.

Uptick in Sales Volumes

• Average capitalization rates (cap rates) stand at 6.7%, unchanged from one year prior. CBD cap rates fell by 10 basis points over the same time period to 5.8%, while suburban cap rates held firm at 6.9%.
• Sales volume in Q3 2019 totaled $33.5 billion, down from $38.9 billion in the prior quarter.
• Investors continue to favor suburban assets, placing $19.3 billion in the third quarter compared with $13.3 billion in CBD locations.

For more insights, stay tuned for our Q3 2019 Top Office Markets Report and our full Q3 2019 Office Market Outlook Report, both 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.