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Office Buildings – Analysts’ Views for Q4 2014

Office Buildings

Job growth across the United States has been slowly improving, and vacancy rates in office buildings have been slowly improving as well.  The most recent figures of leasing activity show that the office sector continues to see improvement over the last few quarters.

Office leasing can be a lagging indicator of the economy; the job market often needs to first show improvement before the office sector follows suit.  While generally improving over the last few years, office buildings have recently seen sharp improvements in some markets.  

In Southern California, for example, overall office vacancies fell to 15.7%, the lowest level since 2008, according to Cushman & Wakefield, a large real estate services company.  New leases there also skyrocketed 55% for the three quarters of 2014 as compared to the same period in 2013.

A similar story is seen nationwide.  Although New York and San Francisco were the early stars in the post-recession office sector, the other major metropolitan areas are now catching up.  Vacancy levels nationwide dropped below 16 percent for the first time since 2008, according to a recent report by JLL (Jones Lang Lasalle), a firm specializing in commercial real estate and investment management  According to JLL, 90% of its surveyed markets showed increased occupancy levels, and nearly that much also posted quarterly gains for the second quarter in a row.

"Office space demand is expected to remain strong with continued improvement in the U.S. economy and steady expansion in office-using employment,” said Sarah Rutledge, Director of Research and Analysis at CBRE, a large commercial real estate services and advisory firm.  “Demand growth, coupled with the subdued national development cycle, bodes well for vacancy declines and sturdy rent growth."

Some researchers come up with slightly different figures, and believe that the labor market recovery has not yet produced meaningful vacancy compression.  Even these observers, however, agree that the outlook for the end of 2014 is “optimistic.” 

The JLL report shows most U.S. markets as being in the “rising phase” of its “office clock,” JLL’s attempt to project where markets sit within their real estate cycle.  Nearly all markets currently rest on JLL’s “landlord-favorable” portion of the cycle, and JLL believes that “it is highly likely that rents will continue to rise over the next 12 to 18 months across the vast majority of markets.” 

JLL forecasts rent increases of 13-14% nationally over the next two years or so, driven by premium-priced new developments which, JLL believes, will trickle down to a “reset” in market pricing across the board.   While noting that “there are still structural issues that need to be addressed for a more comprehensive and holistic recovery to take place,” the JLL report continues to say “Our outlook is more optimistic entering the last three months of 2014 than at any other point in the recovery.” 

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