The tech sector is still driving the office market
When it comes to evaluating the commercial real estate market in terms of risk and return, investors could easily rank the asset classes by most preferred (multifamily, industrial) and least preferred (retail). In fact, the one
asset class that gets the least scrutiny, it seems, is the office market — which tends to be perennially overlooked
because of its slow rent growth and slower occupancy growth.
Nationally, as of this past first quarter, the office vacancy rate was 16. 5 percent, little changed from 17.1 percent in
2014. In the same time frame, the average effective rent has increased 12 percent, for an average of 0.7 percent per
quarter. At $26.67 per square foot, the
average effective rent is only 8. 4 percent
above the previous peak in 2008.
These sluggish national statistics, however, obscure the widening gap between the stronger metros and the
weaker ones. There has always been a
divide between the better metros and
those at the bottom, but it appears
that the gap between the two sets is
widening, and one variable is driving
that wedge: tech-related growth.
First, the bad news: As many as 33 metros posted a year-over-year decline
in office occupancy as of first-quarter
2018. Most of these declines were small,
less than 0.6 percent, but 33 metros is
more than the 2017 quarterly average
of 26 metros showing year-over-year
declines in occupancy.
Similarly, 17 metros saw a decline in
office employment over the past year,
and not surprisingly, many of these 17 metros line up with the ones that recorded an office-occupancy decline.
Now for the good news: Despite the underwhelming occupancy statistics, year-over-year rent growth was either
flat or positive for every metro as of this past first quarter. This may strike many as odd, but it reflects a general
confidence in the economy. More significantly, some 15 metros saw strong office-occupancy growth of 2 percent or
more over the same period. They also posted office-employment growth of 3. 8 percent or more as well as effective
rent growth of 3 percent or more.
What do these and the other markets with the highest office-occupancy growth have in common? Not only
do they have an above-average concentration of tech employment, but healthy growth in tech employment.
In San Francisco, which recorded 3. 4 percent annual growth in office occupancy as of first-quarter 2018, employment growth in computer-systems design — a catch-all term for tech employment — was up year over year by
6. 8 percent as of this past first quarter. In Seattle, it was 5. 3 percent over the same period, and in San Jose, California
— the leading market nationally in office-occupancy growth — tech employment expanded by 3.2 percent.
The same tech-industry sector grew 5 percent in Boston and 3. 6 percent in New York City over the same period.
Boston saw office-occupancy growth of 1.1 percent and effective rent growth of 4.2 percent. New York City
still boasts the lowest office-vacancy rate nationally, at 8. 3 percent. Its office market saw occupancy growth of
0.6 percent and effective rent growth of 1.6 percent. New York is expecting to add close to 5 million square feet
of new office-space completions this year, but much of it is preleased.
In short, there is much to be optimistic about with respect to the office market. The technology sector is still
poised to add more jobs, although it has and may continue to face labor shortages in some markets. And many
mid-tier cities show healthy office-occupancy growth, including Austin, Texas; Memphis, Tennessee; Oklahoma
City; and the North Carolina metros of Charlotte and Raleigh-Durham. These metros also have seen healthy
growth in tech and other office-based industries. When it comes to finding opportunities, don’t get fooled by the
dull national statistics. Look at the metros with expanding tech sectors. It pays to do the research. n
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.
Top Cities for Office-Occupancy Growth
Year over Year as of Q1 2018