KEY TAKEAWAYS

  • Absorption Falls but Looks Set to Improve: National office absorption was minimal in Q1 2017. Tenant move-outs, renewals and downsizing continue to be the primary factors, but there is also a supply shortage in some markets. Stronger GDP growth is anticipated for the remainder of the year, which should underpin healthier demand.
  • Vacancy Has Troughed: The U.S. office vacancy rate has been almost flat for more than a year and is now at the same level as seen in the peak of the previous cycle.
  • Rent Growth Is Stalling: Average office asking rates grew by less than 1% in Q1 2017. However, Class A rent appreciation is stronger. Among the major markets, Manhattan and Chicago are outperforming. The strongest growth is centered among a handful of secondary markets.
  • Speculative Space Is on the Way: Office construction remains elevated and deliveries are front-loaded. While pre-commitments still dominate, the share of unleased space is rising. This presents potential negative connotations, particularly for the larger West Coast markets.
  • Buyers Are Still Out There: Office sales volume fell in Q1 2017 but remains healthy. Investor strategies continue to shift toward suburban and second-tier markets that provide higher yields, but there are still buyers for trophy central business district product. There is little upward pressure on capitalization rates, but rising interest rates are a concern.