Commercial Investment Real Estate Winter 2020 | Page 14

BY THE NUMBERS WITH
By Victor Calanog, PhD, CRE
SLOW AND STEADY
The office sector keeps growing, albeit modestly, which could be
encouraging amid demographic and technological changes.
R
ecent historical trends for office
fundamentals have been relatively
moribund. Vacancies stayed flat in
3Q2019, at 16.8 percent, while the national
vacancy rate has been creeping upward since
mid-2017. It is hard to foresee a situation
where vacancies will drop in an accelerat-
ed — or even sustained — fashion over the
next few years. Economic and demographic
change, technological improvements allow-
ing people to work remotely, and shifts in
usage intensity of office space all contribute
to the dampening of demand for this proper-
ty type that led to a markedly slow recovery
since the recession ended mid-2009.
Net absorption came in at 6.8 million
sf in the third quarter, in line with quarterly
patterns over the previous two years. This
comes over a base of new completions that
clocked in at 7 million sf. Comparatively
speaking, this is lower than last quarter’s
figure of 9.6 million sf, but higher than
the 5.1 million sf added in 1Q2019, which
was the lowest figure for new deliveries of
single- and multitenant market rate office
space in six years. This quarter’s figure falls
below the quarterly average of 12.2 million
sf added each quarter of 2018, which is
consistent with the overall lack of develop-
er enthusiasm for this property type. Office
buildings are still being built, but they are
concentrated in owner-occupied proper-
ties — often commissioned by tech firms in
tech-heavy metros.
DEVELOPERS’ RATIONAL EXPECTATIONS
With vacancies hovering at just 80 basis
points below its cyclical peak of 17.6 percent
in late 2010, there really isn’t much to stimu-
late building. Growth in asking and effective
rents has been similarly muted, registering
at 0.6 percent and 0.7 percent in 3Q2019.
12
Net Absorption
Vacancy Rate
14 17.5%
12 17.2%
10 16.9%
8 16.6%
6 16.3%
4 16.0%
2 15.7%
0
3Q2014
3Q2015
3Q2016
COMMERCIAL INVESTMENT REAL ESTATE MAGAZINE
3Q2017
3Q2018
3Q2019
15.4%
Office Net Absorption and Vacancy
Developers are looking at other property
types — like multifamily — and devoting re-
sources there.
On a year-over-year basis, asking and
effective rents increased by 2.6 percent and
2.7 percent, respectively, which is in line with
2018 calendar year figures, and well below
the 3.4 percent and 3.6 percent growth rates
that the sector posted in 2015, a year that may
well mark this property type’s cyclical peak in
terms of rent growth.
With vacancies mostly flat and rent
growth in the low to mid-2 percent range, it
is no wonder that there hasn’t been much of
a building boom for office properties over the
last nine years.
The office sector has been struggling
with longer term trends that are prompting
employers to rethink their need for office
space (and what type they need). The rise
of industries driven by technology and so-
cial media suggest that traditional office
space formats, which tended to require more
space, need to be reevaluated — perhaps less
space for actual office equipment and more
space for amenities that younger employees
find desirable. The development of technol-
ogy that allows workers to do their jobs re-
motely also bolsters the argument that per-
haps employers don’t need to lease as much
office space. Companies like WeWork posi-
tion themselves at the forefront of “the new
office space,” catering to the gig economy as
it evolves. Beyond WeWork’s IPO struggles,
a paper Reis published recently examines
the effect of WeWork on nearby properties
in New York City, to consider whether the
coworking phenomenon has a measurable
effect on rents and vacancies of nearby office
WINTER 2020