The combination of an improving job market, the continued technology boom and a limited pipeline of new supply has allowed landlords to take back control of the U.S. office sector, with just about every major city, and some secondary markets, experiencing sustained rent growth.
Office rents in the major U.S. markets now average $28.37 per sq. ft., a high point not seen since before the recession. That figure might climb by another 4 percent this year, says Alan Pontius, national director for office and industrial with brokerage firm Marcus & Millichap, in large part due to the slow ramp-up in new construction. On a national basis office space absorption has outpaced completions each year for the past five years, Pontius notes.
“This year, we’re forecasting a little shy of 80 million square feet of new additions to the marketplace,” he says. “But at the same time, we should see almost 87 million square feet of positive absorption. It just makes sense that will lead to higher rents.”
Office tenants, seeing their talent pool tighten as unemployment drops below 6.0 percent, are now realizing they need to work harder at attracting the best job candidates than on cutting occupancy expenses, according to Pontius. A global outlook released this month by commercial real estate services firm CBRE singled out five U.S. cities that are likely to see rental growth above 5.5 percent in 2016.
A sub-market of San Francisco’s tech empire, San Jose, with about 101 million sq. ft. of office space, experienced an 11.8 percent increase in average office rents in 2015, Pontius says. He’s predicting the current average rent of $43.18 per sq. ft. for the market, which includes the Apple headquarters in Cupertino, will grow another 7.7 percent this year.
“The region is adding a whopping 6.4 million square feet of new space in 2016, and the vacancy rate is only at 8.1 percent. Plus, we’re forecasting that absorption will go even higher than supply, to 6.6. million square feet this year.”
Vacancy in the greater Boston office market has dropped to 9.9 percent, with annual rent growth topping 30.0 percent in some sub-markets, according to a fourth quarter report from real estate services firm Cushman & Wakefield. The region is set to add only 2.7 million sq. ft. of new space in 2016, according to Pontius, but absorption is expected to take almost double that, at about 4.9 million sq. ft. Tenants are scrambling for any space, even if it’s not yet marketed, with some blocks such as 26 Lansdowne St. and 25 Sidney St. seeing starting rents in the mid-$70s triple-net, according to the Cushman report.
Bio-tech firms and laboratories in the Cambridge sub-market have been driving a lot of the demand, according to Cynthia Foster, president of national office services with real estate services firm Colliers International. As a result, the sub-market posted a 5.1 percent office vacancy rate and 1.8 percent laboratory vacancy rate, the latter of which declined by a full 7 percentage points in the past year. “Some of the tenants are going to start spilling over into other sub0markets in Boston,” Foster says.
Many people currently associate Texas with lost jobs and empty offices due to low oil prices, but Dallas’ economy is highly diversified, as energy and mining make up just slightly more than 1.0 percent of total regional employment. As a result, jobs here are plentiful, and the unemployment rate is at 4.1 percent. Office rents in the Dallas-Ft. Worth are at a high of $24.15 per sq. ft. on average. The region is a major draw for relocations and consolidations, with more than 70 new headquarters locating in Dallas in the past three years, according to Foster says—more than half of them coming from California.
“People look at Dallas like they want to look at New York City, and they perceive Dallas as a soft market—but it’s just not true,” says Spencer Levy, Americas head of research for CBRE. “There might be vacancy of about 16.0 percent, but for the new space, there’s very, very tight demand.”
The lack of large blocks of space is a big story in Philadelphia, as a 2015 year-end CBRE report ranks the city as having only six blocks of 100,000 sq. ft. available, the least of any U.S. market. Vacancy in the city is down to 9.4 percent, average rents have hit a high of $28.16 in the fourth quarter, and the city saw a 33.0 percent increase in leasing activity in the past two years, according to a report from Cushman & Wakefield.
The figures are somewhat skewed, analysts say, because about 500,000 sq. ft. of space was taken off the market while One Franklin Tower undergoes a retrofit into a mixed-use complex. However, experts say the city has grown in popularity because of tech clusters growing around its universities, and one of the best rail services in the country. “Just think, you can live in moderately priced Philadelphia and it’s an hour by train to either the beach or Manhattan,” Foster says.
Columbus is small compared to the other cities in this report, but the city is enjoying good momentum for two reasons—barely any new development, strong demand and one of the lowest unemployment rates in the country at 3.8 percent, Levy says. The entire market only saw about two million sq. ft. of construction, and vacancy is at about 13.0 percent.
“Columbus was the only market to not see a downturn during the recession,” Levy says. “It’s just a very steady market, which is common to markets that host both the state’s capital and its largest university. You can’t just measure an area by its size; there’s a lot more strength to these Midwest cities than might be suggested from just numbers.”
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