U.S. office markets reported net absorption of 6.5 million square feet (msf) in the second quarter, as demand moderated, though rents increased slightly, according to Cushman & Wakefield.
Demand continued to rise in the second quarter, but the 6.5 msf absorbed was a slowdown from the previous quarter’s 10.2 msf of absorption. It represented the least amount of space absorbed since the second quarter of 2012.
“U.S. office markets were driven by two major factors in the second quarter of 2019 – continuing growth in the technology sector and a rising volume of new construction deliveries,” said Revathi Greenwood, Cushman & Wakefield Americas Head of Research. “The technology sector’s growth offset softness elsewhere and kept absorption of space positive, albeit at a more modest pace than in previous quarters.”
On balance U.S. absorption was positive because of strong performances in the Northern California markets, where Oakland, San Mateo and San Jose all recorded healthy absorption. In fact, markets that Cushman & Wakefield has identified as tech centers in our Tech Cities 2.0 report accounted for a net positive absorption of 4.7 msf, or nearly all the positive absorption during the quarter. Across the U.S., the slowdown in absorption was widespread, though. A total of 35 markets recorded negative absorption, the largest number of such markets since 2010. Markets that saw large negative absorption included Manhattan (-835,760) and Philadelphia (-842,000).
Other office demand metrics also moderated, particularly leasing. Total leasing volume of 87.1 msf was down -9.0% from the first quarter, largely due to a 10.0% decline in new leasing. Total leasing volume in the quarter was the slowest since the end of 2016. In the first half of 2019, U.S. total leasing volume was down -4.6% from the first half of 2018 as approximately 50 of the 87 markets experienced slower leasing volume.
The moderation of demand growth occurred as the volume of new supply increased slightly. A total of 14.4 msf of office space was completed in the second quarter, up from 8.7 msf in the first quarter. Cushman & Wakefield currently estimates that a total of 64.6 msf of office space will be completed in 2019, the largest amount of square footage delivered to the market since 2008.
The combination of a slight slowdown in absorption of space and a slight increase in the amount of space delivered to markets across the U.S. in Q2 2019, was not enough to change the national vacancy rate, which remained at 13.0% for the second consecutive quarter. This marks the 15th consecutive quarter that the vacancy rate has remained between 13.0% and 13.3%.
Cushman & Wakefield is tracking approximately 120 msf of office space under construction, down from 122.5 msf in the first quarter. This represents 2.2% of total office inventory, down from 2.3% in Q1. The last time total construction represented 2.2% or more of total inventory was nearly two decades ago in 2001.
Although the vacancy rate has been stable at the national level, there is still a wide variation across the nation. The tightest major market in the nation is San Francisco with a vacancy rate of 5.5%, its lowest vacancy rate since 2000. The highest vacancy rate in the nation remains Fairfield County, Conn., at 26.8%. Overall, 42 markets saw vacancy rates increase in the second quarter from the first quarter, the largest number of increases since 2010.
While vacancy has been flat, it has been low enough to keep upward pressure on rents. In the second quarter, average asking rent in the U.S. rose 1.2% over the quarter to a record high of $32.13. Since the expansion began in 2010, average asking rents in the U.S. have increased by slightly more than 30%. The market with the highest rent was Midtown South in Manhattan with an average asking rent of $82.32, followed by San Francisco at $79.07. Midtown Manhattan ($76.56); Downtown Manhattan ($63.40); and San Mateo County, Calif., ($62.97) rounded out the top five.
Markets experiencing the fastest rent growth are a who’s who of tech centric markets. Compared to a year ago, rents rose fastest in Midtown South Manhattan (+15.8%), followed by Charlotte (+13.1%), Seattle (+11.9%), San Jose (+11.8%), and San Francisco (+9.4%).
“While demand moderated in the second quarter, we still see positive momentum in the U.S. economy leading to a healthy second half of 2019 for the office sector,” said Kenneth McCarthy, Cushman & Wakefield Principal Economist and Applied Research Lead. “Overall, fundamentals remain healthy. What’s more, many markets with negative absorption in the quarter are in high-growth corridors that, historically, are among the most resilient in the nation.”