by Brianna Crandall — January 26, 2018 — Technology drove office leasing growth to a strong conclusion in the fourth quarter (Q4) of 2017, according to global commercial real estate services firm Cushman & Wakefield. Of the 87 office markets tracked by Cushman & Wakefield, those with a strong technology presence were among the year’s best performers in leasing activity, vacancy level and absorption.
New office leasing
Nationally, new office leasing rose 9.7% year-over-year to a total of 312 million square feet (msf), led by geographically large markets like Manhattan (30.5 msf), Dallas (14.6 msf), Chicago (11.6 msf), Houston (10.4 msf), and Los Angeles (10.4 msf).
Ken McCarthy, principal economist at Cushman & Wakefield, remarked:
In comparatively smaller cities like San Francisco — where new leasing accounted for more than 8.7 msf of office space and represented 11.1% of that city’s total inventory, the highest of any US market — tech remains king. The preliminary top leasing markets are a veritable who’s who of technology centers.
After San Francisco, the top leasing markets relative to inventory include: San Mateo (11.0%), Seattle (10.5%), San Jose (10.4%), Nashville (10.3%), San Diego (10.1%), and Austin (9.5%). Nationwide, new leasing accounted for 5.9% of total inventory, up from 5.5% at the end of 2016.
Cities with strong technology sectors also saw the lowest major market vacancy rates at the end of 2017. The Midtown South market in Manhattan led with a 6.9% vacancy rate, followed by Seattle (7.3%), Charlotte, NC (8.0%), and Raleigh/Durham, NC (8.1%). Conversely, metro areas with the highest vacancy rates included Fairfield County, CT (23.1%); Northern Virginia (21.6%), Los Angeles CBD (21.2%), and Houston (20.2%).
Nationally, vacancy remained flat at 13.2% for the fifth consecutive quarter, as new construction deliveries of 13.5 msf were almost exactly matched by office absorption of 13.8 msf. However, there are signs of improvement at the local level, according to McCarthy. In Q4 2017, the overall vacancy rate declined year-over-year in 52 of the 87 markets the firm tracked — an improvement over Q3 2017, when 48 markets recorded year-over-year vacancy decreases.
New construction activity
While new construction activity has been a major factor in many markets over the past two years, data for Q4 2017 suggests that the construction pipeline may be diminishing. Approximately 54 msf of new construction was completed last year, with the end-of-year pipeline declining to 102.9 msf, the smallest in nearly two years. An additional 69.5 msf is on track to be delivered in 2018, marking the first decline in new construction completions since 2011.
Revathi Greenwood, head of Americas Research, pointed out:
The cities in which new construction is likely to have the greatest impact are those with the largest volume of new construction relative to inventory. The cities at the greatest risk of overbuilding — which we define as those with the highest percentage of inventory under construction at the end of last year — include Brooklyn, San Francisco, Austin, San Mateo, Seattle, and Washington, DC.
Asking rent growth
Tech-driven West Coast markets also saw the strongest asking rent growth, led by California’s Santa Clara, Orange County, Los Angeles and Oakland/East Bay. Overall average asking rent on available space in all markets (including suburban areas and central business districts) reached a record high of $30.72 per square foot (psf), up 4.2% year-over-year and marking the 26th consecutive quarter that rents have increased — the longest streak of rising rents over two decades. Asking rents increased in 68 of the 87 markets tracked by Cushman & Wakefield and declined in only 16.
Midtown Manhattan remains the most expensive market at $76.94 psf, followed by San Francisco at $71.02, Midtown South Manhattan at $68.87, Downtown Manhattan at $60.23 and San Mateo at $57.15. The end of 2017 was the first time on record that asking rents topped $60 in four markets, McCarthy noted.
For more information, visit Cushman & Wakefield’s Research and Insights Web page.