CALABASAS, CA—The rising tide that has buoyed hotel, industrial and retail as these sectors recover from the downturn is now doing the same for office, Marcus & Millichap says in its 2014 National Office Report. “Continued economic strength has begun to lift office performance, staging the sector for dramatic gains in 2014,” according to the report from Marcus & Millichap Research Services.
Although the slow-but-steady employment growth over the past few years has been if anything even slower to translate into absorption, “much of the extra space held by companies is rapidly filling up,” the report states. Accordingly, MMI says, “many markets may reach a tipping point in 2014 that will rapidly drop vacancies—particularly with construction remaining limited.”
While there is more building in the office sector than there was in the depths of the downturn, MMI says demand for space is stil well ahead of new supply. “Tightened space options and healthy 2.8% office-using job growth will support a surge in forecast tenant demand to 135 million square feet, eclipsing the 56 million square feet of new space slated to deliver this year,” the report states. That’s the case even as the firm notes a 28% decrease in the size of tenants’ office footprints, due to “cost containment and space efficiency efforts.”
The recovery has lifted the office sector as a whole, but not all office markets have benefited equally. Analayzing its 2014 National Office Property Index, MMI notes that robust technology, energy and trade drivers characterize the markets that occupy the top spots of that index. “Continued expansion in these industries has rippled to greater improvement in other sectors, such as legal and financial services, and tourism,” acording to MMI.
Winner and still champ in the index is San Francisco, thanks to lage-block leasing by tech and social media tenants. Number two in the index, San Jose, repeaed the benfits of similar leasing activity patterns; the largest city in Silicon Valley rose by four slots in this year’s index.
Tourism and professional and business services lifted Los Angeles and San Diego three and two rungs, respectively, to the number-five and number-seven spots, repectively, while eight-place Orange County rose on the strength of “long-awaited vacancy and rent gains.” Last year’s second-ranked market, New York City, slipped to third place this year, slipped one notch, on acount of Silicon Valley rent growth and market momentum, but Boston’s seven-rung slide to number 10 was more preciptious, predicated on a softer forecast for office-using jobs. Seattle edged up one notch to number four, fueled by software and high-tech firm expansions.
Farther down the West Coast from Seattle, “peripheral tenant demand spurred by Nike and Intel lifted Portland, OR one rung to number six. “Broad-based growth in energy, technology and tourism nudged Denver (#9) up one spot, while tourism and top-ranked growth in office-using jobs advanced Miami (#11) two rungs,” MMI’s report states. Salt Lake City’s fundamentals and rent growth catalyzed a nine-rung surge to number 12.
On the investment sales front, MMI sees plenty of opportunities this year, but not neessarily in CBDs. “Although cap rates for assets in secondary and tertiary markets compressed over the past 12 months, they still provide an 70- to 160-basis point yield premium compared to primary markets,”according to MMI’s report.
Furthermore, pricing on suburban office assets remains 25% below peak, while in CBDs it’s running 4% above the peak of the last cycle. “Suburban properties also represent a 46% discount to CBD product,” according to MMI. “These metrics and the cap rate differentials will result in a growing array of acquisition strategies.”