In a surprise move, Seattle’s office market has leapfrogged past New York to claim the top prize in Marcus & Millichap’s new 2008 National Office Property Index (NOPI).
The index ranks 43 office markets based on a series of 12-month, forward-looking supply-and-demand indicators. Hessam Nadji, managing director of research services for Marcus & Millichap, is quick to point out that a lower ranking does not necessarily indicate a decline in a market’s fundamentals.
Perhaps not surprisingly, America’s coastal markets occupy nine of the index’s top 10 slots. But a perennial favorite, Washington, D.C., dropped from second in 2007 to sixth, due mainly to rising construction activity.
Thanks to continued growth in the technology sector, Seattle is giving rival northern California a run for its money when it comes to influence in the new information age. Above-average job growth and rent gains in 2008, however, likely will not keep pace with developers’ plans to deliver more new space to the market this year than in the previous four years combined.
New York falls to second place, but still tallies the lowest vacancy rate in the nation. Citywide vacancy is expected to creep up 30 basis points to 5.7% this year. Leasing volume was about 25% less in 2007 from 2006 and new construction activity will dip from 3.4 million sq. ft. in 2007 to around 3 million sq. ft. in 2008. The largest completion will be the Durst Organization’s 2.1 million sq. ft. Bank of America Tower at One Bryant Park.
Boston rose two spots to claim third in the index, largely on the back of a burgeoning biotech industry and expected strong rent growth. Local payrolls are expected to grow by 22,000, an increase over 20,800 new jobs added in 2007. Developers are ramping up 1.6 million sq. ft. of space in 2008, which is more than twice the volume delivered last year.
San Francisco made the largest jump up the index, moving north 12 places to fourth on the list. The city’s information sector is expected to add 800 new jobs this year, and supply/demand fundamentals make San Francisco one of the tightest market sin the country with a forecasted vacancy rate of only 9.6% this year.
Los Angeles slipped two spots to fifth thanks to lower employment growth, but its office market still remains tight. Downtown is the city’s newest shining star thanks to the $2 billion Grand Avenue mixed-use development and L.A. Live entertainment complex. But vacancies are expected to rise for the first time in the past five years and there is a worrisome 7.5 million sq. ft. of new office development in the pre-planning phase.
Here is how the index’s top-10 shakes out:
New York City
Marcus & Millichap expects developers to deliver 68 million sq. ft. of office space this year, which is a 19% increase over 2007. But overbuilding fears are tempered thanks to a 45% less space in the pre-planning stage compared to a year ago.
Office vacancy nationwide is expected to increase to 13.4% from 12.6% in 2007. Asking and effective rents should rise by only 5% after growing by 10% last year.