U.S. Office Market Growth Inventory and Occupancy
By Victor Calanog and Barbara Byrne Denham
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
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
Source: Reis Inc.
Growth in inventory (suburban)
Growth in occupancy (suburban) Growth in occupancy (urban)
Growth in inventory (urban)
2011 2012 2013 2014 2015 2016 2017
Office-market growth isn’t limited to urban centers
Many have written about the recent “urban renaissance,” referring to the idea that most of the economic growth
throughout this last expansion has been concentrated in cities. While it’s true that much of the job growth
during the period has been in more metropolitan areas, most of the office-market growth, as measured by
inventory and occupancy, has occurred in submarkets that are classified as suburban — either within a city’s
boundaries or just outside.
Submarkets such as Santa Clara/Sunnyvale near San Jose, California, and Plano near Dallas have seen office
occupancy rates grow by more than 50 percent since 2010. Urban submarkets with the highest occupancy
growth rates include West Philadelphia ( 52 percent) and Jackson Square in San Francisco ( 48 percent).
The reason why suburban submarkets have seen more occupancy growth than their urban counterparts is because
the suburban inventory is larger than
the urban inventory. The suburban-based office inventory is 65 percent of
the total, while urban-based inventory
is 35 percent of the pie.
That suggests suburban occupancy
growth should be nearly twice that
of urban growth. In fact, occupancy
growth over the last seven years was
proportionate to inventory levels. Of
the 190 million square feet of occupancy growth since 2010, 124 million
square feet ( 65 percent of the growth)
was suburban-based, while 66 million
square feet ( 35 percent) was urban-based. Thus, the two subcategories
have grown at nearly the same rate
relative to their inventory levels.
The rate of occupancy growth by year
has varied, however, in that urban
areas saw sharper growth in some
years and lower growth in others.
The chart on this page shows the
alternating patterns in occupancy growth between urban and suburban areas. The chart also shows growth in
inventory between the two areas.
What is striking in the chart is that office-inventory growth has been muted relative to occupancy growth
throughout this expansion, but office inventory was projected to climb significantly in 2017.
The occupancy growth reflects job-growth trends. Office-employment growth in urban counties grew at the same
pace as in suburban counties. Job growth outside of the office sector, in the metro areas tracked by Reis, also was
equally balanced between urban and suburban counties. Job growth in non-metro areas (or rural regions), we
should note, has trailed metro-job growth by a considerable margin ( 8 percent vs. 15 percent since 2010).
As the chart on this page shows, however, urban office-inventory growth was projected to outpace suburban
office-inventory growth in 2017. This may look surprising, but a breakout of vacancy and rent-growth numbers
over the past seven years shows that vacancy rates for urban areas have generally been lower and have fallen
more significantly than the vacancy rates for suburban submarkets.
Likewise, rent growth in urban areas has consistently been stronger than in suburban areas. Thus, while both
subcategories have performed relatively well over time, urban areas have posted healthier rent-growth rates
than suburban areas have had, which is why developers are planning more inventory growth in urban areas.
Although rent-growth rates decelerated in 2017 in both urban and suburban markets, by historic standards,
the inventory growth has been very low in recent years as vacancy rates remain stubbornly high, despite being
seven years into the expansion. Both the urban and suburban submarkets have been able to absorb the added
office inventory in 2017 and should continue to do so over the next few quarters.
Although many presume that office-market vibrancy is concentrated in urban areas, the numbers clearly show
that the suburban submarkets have grown at a similar pace as their urban counterparts. n