CHICAGO--(BUSINESS WIRE)--Office markets across the United States continue to perform strongly in the third quarter, with stable leasing volumes, solid absorption, rising asking rents and an increase in new construction, according to exclusive research by global commercial real estate services firm Cushman & Wakefield.
The tech and financial services sectors continued to dominate leasing, with tech companies accounting for approximately 27% of large leases in the quarter and financial services companies representing 17% of the top leases. Tech-driven markets remain the tightest major markets in the U.S., led by San Francisco with a vacancy rate of 6.8%; Puget Sound, Wash. (7.0%); Midtown South Manhattan (7.4 %); Raleigh/Durham, N.C. (7.4%); and Charlotte, N.C. (7.5%). With the exception of Midtown South, each experienced a substantial decline in vacancy rate in the third quarter compared to the second.
The pace of new leasing decreased slightly in the third quarter to 71.8 million square feet (msf), the slowest pace in nearly two years. New leasing in 2018 now totals 226.2 msf, down from 241.4 msf in the same period last year. Bolstered largely by the tech sector, 20 key markets across the West dominated the demand for space, with leasing in those areas totaling 85.0 msf in the first three quarters of the year and accounting for 37.6% of new leasing nationally. Markets with the largest leasing volume in the first nine months of 2018 included Silicon Valley (19.5 msf), Midtown Manhattan (17.2 msf) and Chicago (9.5 msf).
“The U.S. office market continues to be in good health,” said Revathi Greenwood, Cushman & Wakefield Head of Americas Research. “While we see some indicators decelerating, demand remains robust, especially in the West and in the tech sector. We predict this momentum will carry over into 2019.”
Office space continued to be absorbed at a solid pace throughout the quarter. Leasing activity remained steady, and new construction deliveries slowed slightly. The national vacancy rate dipped to 13.3%, a number representing a slight decline from the previous quarter (13.4%) but a slight increase from a year ago (13.2%). Net absorption – a key measure of demand for office space – also dipped in the third quarter to 8.3 msf, down from 15.2 msf in the second quarter. In the first three quarters, 31.1 msf of space was absorbed in the U.S., down from 35.4 msf in the first three quarters of 2017. However, absorption was positive for the 32nd consecutive quarter, indicating that demand for office space has been growing for eight straight years. The West region also accounted for 4.9 msf of absorption in the third quarter and 16.9 msf – or nearly 55% of all absorption – in the first three quarters.
Most markets experienced rising rents in Q3, with average asking rents increasing 1.2% over the previous quarter to a record $31.29 per square foot (psf). A total of 63 of the 87 markets tracked by Cushman & Wakefield saw rents increase in the third quarter compared to the second, marking the 23rd consecutive quarter that rent increases exceeded decreases. Major markets with the fastest rent growth over the past year included Orange County, Calif. (+17.2%); San Francisco, North Bay (+14.5%); Midtown South Manhattan (+10.4%); Portland (+9.9%); and Charlotte, N.C. (+9.7%).
For the first time since 2001, a market other than Midtown Manhattan had the highest asking rent in the nation. Midtown South, which has become the tech center of Manhattan, saw average asking rents of $76.42 psf, slightly higher than $76.12 psf in Midtown. The next three most expensive markets were San Francisco at $74.72 psf; Downtown Manhattan at $63.72 psf; and San Mateo, Calif., at $57.98. Asking rents exceeded $50 psf in only one other market: Washington, DC, at $54.41.
And while the volume of new space completed in the third quarter slowed to 9.7 msf – roughly half the 18.1 msf delivered in the previous quarter – the amount of space under construction continues to rise. Cushman & Wakefield is tracking approximately 114.0 msf of space currently under construction, up from 107.6 msf in the second quarter and the largest volume the firm has ever recorded. Midtown Manhattan tops the list, with 15.9 msf under construction, followed by Silicon Valley at 5.3 msf. Relative to inventory, the markets with the most space under construction are San Mateo, Calif. (8.8%); Brooklyn (8.7%); Austin (6.9%); Seattle (6.9%); and Midtown Manhattan (6.6%).
“Even with the increase in supply, office markets remain healthy,” said Ken McCarthy, Principal Economist and Americas Head of Applied Research at Cushman & Wakefield. “Most of the new construction is taking place in tech-driven markets or in markets where demand growth has been strong. This growth is helping meet occupiers’ demands for modern workplaces and heightened efficiency, and is reshaping skylines across the country.”
About Cushman & Wakefield
Cushman & Wakefield (NYSE: CWK) is a leading global real estate services firm that delivers exceptional value by putting ideas into action for real estate occupiers and owners. Cushman & Wakefield is among the largest real estate services firms with 48,000 employees in approximately 400 offices and 70 countries. In 2017, the firm had revenue of $6.9 billion across core services of property, facilities and project management, leasing, capital markets, valuation and other services. To learn more, visit www.cushmanwakefield.com or follow @CushWake on Twitter.
Source: Cushman & Wakefield