United States Office Outlook | Q1 2018
Office market fundamentals continue to shift into more balanced, neutral territory. New deliveries are providing a wider range of options for tenants and greater competition among landlords is pushing up concession packages, even as asking rents continue to climb.
During Q1, net absorption totaled just 3.7 million square feet – the lowest annualized level since 2010. Softness within a handful of markets, including Houston, Silicon Valley and New Jersey, created headwinds and reduced national occupancy growth.
Looking forward, near-peak employment and talent shortages in many markets will lead to a slower pace of net absorption on a national level. But projections for economic growth remain strong, and a handful of major technology sector expansions may fuel more activity over the coming quarters.
U.S. net absorption totaled just 3.7 million square feet in Q1 2018; annualized, this is the slowest rate of expansion since 2010.
CBD Class A vacancy dropped by 20 basis points to 11.9 percent in Q1 2018, while suburban Class A vacancy rose by 20 basis points to 16.6 percent.
Direct asking rents increased by 1.6 percent in Q1, considerably slower than the 3.5 percent increase in TI allowances.
Tenant improvement allowances rose by 3.5 percent during Q1 and are now exceeding $75 per square foot in most primary markets.
Rents rose by 1.6 percent on the back of strong growth in the suburbs as new, top-priced supply hit the market. CBDs are beginning to show signs of stabilization as lower-priced blocks are returned to the sublease market from relocating tenants.
Quarterly net absorption declined to 3.7 m.s.f. after gaining momentum during the second half of 2017. Occupancy growth has been bifurcated by class, with Class A assets recording net absorption of 8.5 m.s.f. during Q1.
Vacancy stayed stable for the second consecutive quarter at 14.8%, but is moving in an upward direction. As completions intensify, we expect further rises in vacancy, particularly in gateway markets where new supply will be most acute.
A small but significant number of large starts propelled construction volumes up to 105.2 m.s.f. in Q1, but a pullback in speculative starts otherwise and a higher level of expected completions will bring volumes down in the coming quarters.
Director, Office Research
Senior Research Analyst