Office Property Looking Good Across The Country

First quarter office sector studies show that in most of the nation’s office markets, rather than just in the top cities, landlords are gaining the upper hand. About …

First quarter office sector studies show that in most of the nation’s office markets, rather than just in the top cities, landlords are gaining the upper hand.

About 70 percent of U.S. office markets reported occupancy gains during the first quarter, according to commercial real estate services firm Cassidy Turley. The markets absorbed 12 million sq. ft. collectively from January through March 2014, up 63 percent from the first quarter of 2013.

A report by CBRE Group Inc. shows that eight of the 13 major metro markets experienced falling vacancies, starting with Atlanta, Seattle and Miami.

“With relatively little new space coming on the market, landlords are seeing the pendulum of pricing power shift in their direction,” said Art Jones, senior managing economist at CBRE, in a statement.

Kevin Thorpe, chief economist at Cassidy Turley, says consistent business growth has also been a factor, despite the curveballs thrown at the economy so far this year.

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“Even though we had the unusually cold weather, a major slide in the stock market and global uncertainty, the office market is still on the upside,” he notes.

Average asking rents increased 2.1 percent, to $22.30 per sq. ft., compared to a year ago. San Francisco continued to lead the rent-growth pack and the tech-heavy city posted a 25 percent rent increase since first quarter of 2013, followed by New York City at 9.3 percent, and Houston and Phoenix at 8.9 percent.

Growth ahead

Office rents will continue to grow along with GDP and employment, according to the recently released ULI/E&Y Real Estate Consensus Forecast, prepared by the Urban Land Institute Center for Capital Markets and Real Estate. The study, a survey of 39 economists, predicts office rent growth of 3 percent this year, 3.9 percent in 2015 and 3.6 percent in 2016.

North New Jersey led the first quarter in net absorption at 1.8 million sq. ft., followed by Houston at 1.7 million sq. ft., New York City at 1.6 million sq. ft. and Dallas at 1.1 million sq. ft., according to Cassidy Turley. The New Jersey growth can be attributed to the spillover from the tightening supply in New York City, which, at 91.5 percent occupancy, has the lowest vacancy rate of all major markets, according to CBRE.

Thorpe notes that a lack of new development has fueled rent growth. To catch up with demand, more developers are looking into building new skyscrapers or re-starting plans that fell apart during the recession. About 10.5 million sq. ft. of new office space was delivered nationally in the first quarter, with markets such as Houston and San Francisco seeing more than one million sq. ft. added each.

About 65.4 million sq. ft. of new office space is now under construction, up by about 31 percent from a year ago, Thorpe says. Major markets such as San Francisco, New York City, Chicago and the Texas metros are seeing the most growth. In Dallas, for example, Hines just announced plans for a new 23-story office tower in Victory Park, and law firm Gardere Wynne Sewell LLP said it will anchor a 20-story office building at 2021 McKinney Avenue.

“The developers who started construction a year and a half ago, the ones who went first, they were likely somewhat uncomfortable about what could happen,” Thorpe says. “I don’t expect they regret that decision now. I think the growth has been more robust than anticipated. This year’s absorption should be similar to last year’s growth, with even a little more upside, and we’re going to see a total landlord market by December.”

This article was republished with permission from National Real Estate Investor.


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