US Office Market Maintains Healthy Tempo to Start 2015

The U.S. office market maintained its healthy tempo through the first quarter of 2015, according to commercial real estate services firm Cushman & Wakefield. “While a slow start for leasing velocity and vacancy rate movement kept those fundamentals in check, early positive momentum can be seen in absorption, rental rates and with growth acceleration in markets beyond gateway and tech-centric cities, noted Cushman & Wakefield’s Maria T. Sicola, head of Research for the Americas.

National office leasing through the first three months of the year registered 12.7 percent below the same period in 2014. Still, 17.8 million square feet in CBD activity remained above historical first quarter averages, led by Midtown N.Y. (4.8 million square feet), Washington, D.C. (1.7 million square feet) and San Francisco (1.4 million square feet). In the suburbs, the Los Angeles Metro (2.8 million square feet), Dallas (2.5 million square feet) and Boston (2.2 million square feet) submarkets led the pack.

The national CBD and non-CBD office vacancy rates remained virtually unchanged during the first quarter, at 11.9 and 16.4 percent, respectively. Yet on a year-over-year basis, CBD vacancy dropped 120 basis points, while non-CBDs dropped 69 basis points. Seven CBD and non-CBD markets now have office vacancies in the single digits, with the lowest recorded in suburban San Francisco – at 4.1 percent.

“The office sector is strong, particularly in our downtown markets as occupiers remain focused on the urban core,” said Cushman & Wakefield’s Maria T. Sicola, head of Research for the Americas. “The suburbs also are improving, although at a more moderate pace.”

New office construction deliveries, totaling 4.2 million square feet, achieved 54 percent occupancy, which helped boost absorption. CBD markets enjoyed occupancy gains of 2.1 million square feet, with Midtown N.Y. accounting for more than half of this total (1.1 million square feet). In the suburbs, where tenants absorbed 3.1 million square feet of space, Silicon Valley led with 707,000 square feet in occupancy gains.

Office market progress nationwide has pushed up asking rents by 6.0 percent year-over-year in the CBDs and 2.5 percent in non-CBD markets. New York City and the West Coast experienced the greatest upticks for downtown markets. Northern California also took the lead for suburban market rent increases, with Houston and Atlanta rounding out the top five.

“Looking ahead, the office development pipeline remains robust,” Sicola said. “We expect an additional 33.0 million square feet to come online and that figure is still only 1.0 percent of total inventory. When we look at that supply component, and we couple that with stronger employment growth in 2015, Cushman & Wakefield believes that will lead to increased market tightness and further upward pressure on rents. For the U.S. as a whole, we anticipate a 120-150 basis point drop in vacancy rates by year end and 4 to 6 percent growth in asking rents.”

Cushman & Wakefield Research for the Americas is recognized worldwide for the originality of its research and the value of its thought leadership. The team performs rigorous, property-oriented research and data-driven analysis on a global basis. Its professionals collect data from publicly available sources, owners, agents and – most importantly – from the firm's brokers, appraisers and property managers.

Lowest CBD Office Vacancy Rates

 1.   Midtown South, N.Y.
 2.   San Francisco
 3.   Midtown, N.Y.
 4.   Portland, Ore.
 5    Boston

    NATIONAL AVERAGE                              11.90%                   -1.20

Lowest Non-CBD Office Vacancy Rates

1.   San Francisco
2.   Silicon Valley, Calif.
3.   San Francisco Peninsula
4.   San Diego
5.   Ft. Lauderdale, Fla. 

NATIONAL AVERAGE                              16.40%           -0.69