United States Office Outlook | Q2 2018
The U.S. office market maintained steady growth in Q2, with sustained occupancy and rent growth and a healthy supply pipeline that will provide further options for tenants. Although the pace of occupancy gains (12 million square feet year-to-date) slowed from peak levels and rising concession packages put pressure on net effective rents in select markets, solid macroeconomic and employment growth have bolstered both leasing demand and investment sales activity in the office sector.
Vacancy rose by 10bp to 14.9% in Q2 on the back of rising deliveries, with new space hitting the market roughly twice as fast as occupancy growth. Demand from cost-conscious tenants is keeping sublease vacancy – a leading indicator for changing market conditions – in check, and we expect supply-and-demand dynamics to shift gradually rather than abruptly in the coming quarters.
Economic growth, robust job creation and positive consumer, employee and business sentiment will ensure that demand for space healthy over the near term. Occupiers in particular will find themselves with improving leverage and a wider variety of space options at a more attractive range of price points.
At current rates of growth, net absorption at year-end 2018 will be roughly 1/3 lower than in 2017.
Delivery volumes will spike through year-end and into early 2019, then slow sharply by 2020.
Continued absorption of Class A space is keeping vacancy for quality assets stable.
Net effective rents in gateway U.S. cities are facing increased pressure due to rising concession packages.
Rents rose by 0.1% during the first quarter as an increasing amount of commodity space in CBDs is being given back from relocating tenants.
Absorption continues to be positive, but the nearly 12 m.s.f. of growth seen so far this year is still below previous years.
Vacancy is rising steadily, up 10bp during Q1 to 14.9%. As new space hits the market, vacancy will continue to increase incrementally.
Construction volumes are stable on the back of a slew of starts, but are likely to decline as market conditions shift.
Senior Director, Office Research
Manager, Office Research