Most Markets Continue to Enjoy Steady Growth in Demand and Rental Rates, Although Rate of Increases Beginning to Moderate

Source: CoStar News
By: Randyl Drummer
Date Posted: April 21, 2016

The U.S. office market appears to be at the stage in the real estate cycle that analysts often describe as a turning point or tipping point. Overall, the U.S. office market continued to post solid fundamentals during the first quarter, including very strong net absorption, while traces of a slowdown in demand appeared in some markets.

“We are seeing mixed signals in the marketplace, although our expectation is the office market will continue to do fairly well for the next few years,” said CoStar Director of Office Research Walter Page, who presented the First Quarter 2016 State of the U.S. Office Market Review and Forecast findings to CoStar subscribers this week. “The biggest mixed signals are really related to net absorption and sales volumes.”

Total net absorption of 11 million square feet of office space in the first quarter was about the same as first-quarter 2015, a leveling off from the upward trend of recent quarters. On the other hand, net space taken by occupiers over the past four quarters exceeds the similar trailing period ending in 2015’s first quarter by nearly 11% at 98 million square feet, noted Page, who presented the findings this week, along with Hans Nordby, managing director of CoStar Portfolio Strategy, and Aaron Jodka, senior manager, Market Analytics.

“All in all, it’s still a very good picture, but the market is clearly not growing as rapidly as before,” added Page. “Our expectation is that going forward, we’re going to see a continuing decline in net absorption, principally because we’re headed for that demographic cliff of retiring baby boomers.”

Office-using employment, a key metric for office demand, continued to outperform the broader job market, especially in the nation’s tech markets, as well as South Florida, Dallas and other pockets of growth and recovery from the housing bust following the Great Recession. Conditions for office job growth should remain strong for the next two years before gradually slowing through 2020, Nordby said.

Despite signs of slowing, solid absorption and occupancy levels continue to be enabled by the moderate pace of new office construction and deliveries in most markets. The 127 million square feet of office space under construction in the first quarter was up only slightly from the same period last year.

Link to article: Office Market Mixed Signals