The 2015 Q2 North American Office Market Report presents a comprehensive overview of the office segment of commercial real estate. Produced by the Colliers National Office Services group and covering approximately 70 metro areas, the report demonstrates that the office market in the United States and Canada will continue a steady growth, but will lack in the force and pace of prior cycles. However, positive market trends exist, including strong absorption and declining vacancy rates in all the major U.S. CBDs. Additionally, construction is increasing, but remains below historic highs.
“The largest U.S. CBDs continue to have solid leasing and absorption given the confirmed economic recovery and despite international upheaval,” said Cynthia Foster, President of National Office Services. The top 6 metro areas covered in the report include 49 percent of the total CBD inventory, she adds. “Canada, more so than the U.S., has been negatively impacted by falling energy prices. However, we are seeing improvements in segments including housing, construction, auto sales and consumer spending, all of which is helping produce broad-based job growth.”
Other key findings include:
- Absorption trending up. Absorption is likely to remain positive for the foreseeable future, as job growth demonstrates no signs of faltering in the U.S., especially in office-using segments such as business services, finance and technology. Key office markets -- metros such as Manhattan, Los Angeles, Dallas, Seattle, Atlanta, San Jose, among others -- are bustling with new leasing from a wide range of firms in technology, media, consumer products and more. Even companies that are tightening belts can only cut space so much if staff keeps growing. Canada, on the other hand, saw negative absorption in Q2 as a result of weakness in energy markets. Development has largely been limited to markets where demand is strongest, with large numbers of metros having virtually no new supply, but more construction on the horizon over the next three years.
- Stubbornly high vacancy rates and limited rent growth. Vacancy rates remain higher in the secondary U.S. markets and Canada than we typically see at this point in a cycle, and strong rent growth is limited to the top markets. This is in stark contrast to property segments such as industrial, the other major pro-cyclical sector, which has benefited from increased trade and consumer trends such as online sales that translate into robust demand for warehouses and a wave of logistics development across the country. In strong markets, though, as vacancy rates drop, rents will continue to increase.
- A sharp split between the U.S. and Canada outlooks. In Canada, findings show vacancy rates up, rental rates down and absorption neutral for the second quarter. The negative impact of energy on the Calgary market offsets absorption gains in Vancouver and Toronto. Colliers’ survey of local market experts shows a sharp split between the U.S. and Canadian outlooks. Respondents in the U.S. are strongly positive about the prospects for absorption and rent growth over the rest of the year. Respondents in Canada are consistently negative about the prospect for rent growth and have mixed views on future absorption.
Overall, the office sector has made strides since the recession, and the economy’s current performance is solid. Through seven months in 2015, the economy is on its way to adding 2.5 million jobs, slightly below last year’s 3 million, but still excellent progress that drives all types of commercial real estate demand—office, in particular.