Wednesday, November 04, 2015

Office Landlords Gain Leverage With Tenants, Says Cushman & Wakefield

Source: Cushman & Wakefield

Demand for office space decelerated slightly in the third quarter of 2015, but remained high enough to result in one of the strongest quarters of the current expansion, according to Cushman & Wakefield’s latest U.S. Office Snapshot report.

The U.S. office market absorbed 17.3 million square feet of office space during the third quarter, which was down 10 percent from the level recorded in the second quarter.

Still, demand remained strong enough to offset the limited amount of new office product deliveries, which in turn helped the vacancy rate inch downward from 14.4 percent in the second quarter to 14.2 percent in the third quarter.

“As vacancy dips below equilibrium in most markets, the construction pipeline is ramping up,” notes the report. Approximately 95.1 million square feet of new office space was under construction at the end of September.

Office Rents on the Rise

The weighted average rental growth rate increased in the third quarter, posting a year-over-year jump of 4.7 percent. About 90 percent of all U.S. markets are experiencing positive rental growth, and more than 40 percent have seen year-over-year growth above 5 percent, according to Cushman & Wakefield.

Meanwhile, Real Capital Analytics (RCA) reports that office investment sales from January to August totaled $94.6 billion, up 27.6 percent from the same period a year ago.

Private capital sources remain the dominant buyers when it comes to market share. Meanwhile, foreign investment in U.S. real estate is setting records, up 73 percent from 2014, which was also a record-setting year.

Office sales activity in central business districts is strong, up 13 percent year-to-date from 2014, and suburban office transactions have risen 43 percent, according to RCA.

Navigating Headwinds

Although the global economy faces challenges, Cushman & Wakefield emphasizes that it isn’t the main cause of a deceleration in U.S. GDP, which rose at annualized rate of 1.5 percent in the third quarter, down from 3.9 percent in the second quarter, based on an advance estimate provided by the Bureau of Economic Analysis.

During the third quarter, inventories surged, which businesses are still working through. However, most other economic data looks encouraging, Cushman & Wakefield reports.

Consumer confidence climbed in September to its highest level since the beginning of the year, auto sales are soaring and housing is contributing more to economic growth.

“In other words, the American consumer is taking the global turmoil in stride, and spending remains solid,” according to the Cushman & Wakefield report. “Office-using job growth has slowed in recent months, but job openings remain in record territory.”

Of the 5.4 million job openings nationwide available in August, nearly 25 percent were in office-using industries. Since job openings are an indicator of job creation, this statistic is a good sign for future office space demand, points out Cushman & Wakefield.

Near-Term Outlook

The U.S. economic expansion, now in its sixth year, is forecast to continue through 2015. It’s worth noting that the Federal Reserve earlier this fall delayed a decision on whether to raise interest rates for the first time in almost a decade amid growing uncertainty about the overall health of the global economy, and China in particular.

“Economic growth is the most important factor in determining the trajectory of the office sector,” according to Cushman & Wakefield. “Job growth indicators (in the United States) remain robust for office-using industries, and strong leasing activity combined with lagging new construction will keep upward pressure on rental rates.”

Haisten Willis/ReBusiness Online