Analysts at CBRE are expecting office rates to increase by a significant amount in 2014 due to higher demand and constrained supply forced by a lack of new construction. More office hiring will also be a factor as the economy improves, particularly in areas with strong energy and technology sectors like New York City and San Francisco. Cushman & Wakefield’s latest Global Office Forecast also indicates that demand will increase among foreign companies looking to expand in the U.S. Even so, more efficient use will play a role and submarkets will see more attention as rental rates rise. For more on this continue reading the following article from National Real Estate Investor.
In terms of supply and demand, the U.S. office market will hit its sweet spot in 2014. A strengthening economic rebound, coupled with still-constrained construction, will result in increased absorption and higher rents, according to recent market reports.
The fourth quarter showed the continued rebound of the office market. Average rents increased in 11 of the 13 major national markets, led by San Francisco and Boston, according to a report released by Los Angeles-based CBRE Group Inc. The demand is explained by the lack of new space along with more office hiring, said Brook Scott, CBRE’s head of research for the Americas. “As economic activity improves, investors have had an opportunity to increase rents in most markets,” Scott said in the report.
Office experts at Cushman & Wakefield said in a recent 2014-15 Global Office Forecast webinar that the U.S. compares very favorably to the rest of the world regarding office demand and projected rent growth. The states will see GDP growth of 3.1 percent, the experts predicted.
“This time last year, there was some worries about the budget, and though it’s not resolved the worries are pretty much over—we expect the budget will pass without significant drama,” said Ken McCarthy, chief economist for Cushman. “After that uncertainty is reduced, the private sector should embrace strong growth, with the housing sector expected to lead, followed by consumer confidence and more business hiring. We should be a more self-sustaining economy by this time next year.”
As expected, technology and energy tenants led the increase in U.S. demand, said Maria Sicola, executive managing director for Cushman, during the webinar. “We expect a strong increase in rents in the United States next year,” Sicola said. “Boston, New York City and San Francisco lead the demand, and though there’s construction, it should be absorbed. For example, there’s 10 million sq. ft. planned for 2014 in New York City, but about half of that is preleased.” The rest of the world won’t see strong office rent acceleration in 2015, she said. There’s too much supply planned in Canada, Mexico and Brazil, especially Sao Paolo and Rio de Janeiro, to be absorbed until 2016. Demand has also weakened in Asia, Sicola said, though there is some rental growth expected in Tokyo and Manila.
Two office use trends, the reduction of per-employee space usage and the expansion of new submarkets, will continue into 2014, said Rick Cleveland, Cushman’s research director for corporate investment and occupiers services during the webinar. The new submarkets have been the most surprising, with large demand created in areas such as Midtown South in New York City, the Seaport district in Boston and South of Market in San Francisco. “This emergence of new submarkets in core cities are offering a 24/7 live-work environment with favorable amenities close by, these are places where companies are attracting their new talent,” he says.
Corporations will still be under a tremendous pressure to reduce costs, and real estate is one of the major departments looked at, Cleveland says. “In a survey we recently completed of global office space users, the average per-person allocation in 2010 was 225 sq. ft., but by the end of this year, a majority of respondents expect to get that number down to an average 150 sq. ft.,” Cleveland says. “About half of the respondents expect to get to 100 sq. ft. per employee by 2018. This will have a lot of implications on the demand for office.”
This article was republished with permission from National Real Estate Investor.