By Victor Calanog and Barbara Byrne Denham
Victor Calanog is chief economist
and senior vice president for research
at Reis Inc. ( www.reis.com). He writes
a monthly column on property types
for Scotsman Guide. Calanog and his
team of economists are responsible
for data models, forecasting, valuation
and portfolio services for clients in
commercial real estate. Reach him
Barbara Byrne Denham is an economist in the research and economics
department at Reis Inc. She previously
served as chief economist at Eastern
Consolidated and is a Ph. D. candidate
at New York University, where she
has studied economics, monetary
theory and game theory. Reach her
Source: Reis Inc.
Quarterly Trends in U.S. Office Net Absorption and Employment
The nation’s office market continues to hum along
Judging by recent data, the pace of growth in the office market has not changed much in 2017. Overall, the office
market has grown at a very steady rate throughout this expansion.
In the first quarter of the year, rents climbed 0.5 percent, the same average quarterly-growth rate as in 2016.
Office-employment growth has held steady as well, growing 0.5 percent in the past first quarter and 2 percent on a
year-over-year basis as of this past May.
Indeed, companies have leased far
fewer square feet per employee than
they have in previous expansions, but
office leasing has been steady relative
to job growth. One also could argue
that this current pace is healthier and
less likely to lead to a major correction like the one seen in 2008-2010 following the overexuberant leasing of
Another positive story is the general
consistency in office-market growth in
most metros across the U.S. While 11
metros posted an office-rent decline
in the past first quarter, the declines
were very low, in the -0.1 percent to
-0.3 percent range. Likewise, 18 metros recorded a decline in office jobs
in the past first quarter, but only two
saw a job loss of more than 1 percent
(Knoxville, Tennessee, and Greenville,
Moreover, the office market is not facing as much new supply as the apartment market is facing. Our current
estimates show that of the 82 office markets we track, only 30 are expected to add more supply than is expected
to be absorbed — to the extent that vacancy rates will increase more than 0.3 percent. And only 12 will see a
vacancy-rate increase of more than 1 percent.
A number of the markets with significant new supply are healthy markets, such as Austin, Texas; Seattle; San Jose,
California; Nashville, Tennessee; and Raleigh-Durham and Charlotte, North Carolina — all of them saw rents this
past first quarter grow in the range of 0.6 percent to 1 percent.
Other markets facing significant new construction include surprises such as Lexington, Kentucky, and Oklahoma
City. Office-rent increases in these metros were low, 0.4 percent and 0 percent, respectively, in the past first
quarter. Job growth, however, was robust, with office jobs growing by 3. 3 percent in Lexington and 1 percent in
Oklahoma City in the past first quarter. These are markets to keep an eye on.
Finally, the two markets that are most sought after, San Francisco and New York City, also are expected to add
significant new construction. New York City has the lower vacancy rate, 8. 8 percent, but New York is expected to
add 1.9 million square feet of space this year along with 10 million square feet in 2018-2019. This added supply will
subdue rent growth over the next few years to a rate that is on par with the national growth rate.
San Francisco is expected to add 2.2 million square feet of new office space this year along with 2.7 million square
feet in 2018-2019. Already, San Francisco has lost office jobs in 2017 and rent growth this past first quarter was
muted at 0.2 percent. This also is a market to watch.
To be sure, there has not been any point in this expansion where the numbers started to accelerate, nor do we
anticipate any acceleration in the next few years. Still, the steady rate of growth in both office jobs and rents
should continue this year and into the next. When the correction does come, it will not be severe like the last
correction was. n