LOS ANGELES—The balance of power is shifting in the office sector from CBDs to the suburbs, CBRE Group says. Suburban markets generally are expected to outperform in 2017, a year that will also favor the Sunbelt.

Specifically, while suburban office markets still average higher vacancy rates than downtowns, they're expected to fare better in what CBRE is forecasting as “a moderate slowdown” this year. The firm expects suburban vacancies to rise just 10 basis points to 14.5%, compared to the 30-bp increase that downtown offices are expected to withstand, albeit to 10.9%, “still well below the suburban vacancy rate.” CBD offices are expected to see a further slowdown in rent growth “as higher vacancy shifts bargaining power in the direction of tenants,” while suburbs will see rents grow by more than 2%.

Behind the slowdown in the office market is “a combination of softer tenant demand and an increase in new supply,” according to CBRE's 2017 US Real Estate Market Outlook. “Firms are finding it increasingly difficult to find qualified workers, which is reflected in the low unemployment rate, the near-record number of job openings, a steady increase in the number of 'quits' (an indicator of worker confidence), and real wage growth.”

Given the labor force constraints, CBRE expects '17 to register a lower net gain in office-using jobs: 273,400—down from 2016's anticipated 413,600 and the 2010-2016 annual average of 418,100. Meanwhile, nationally, CBRE expects more than 50 million square feet of office space completions in 2017—the most since 2009.

Although this level of completions will be low compared to previous cycles, CBRE sees “a modest increase in the national vacancy rate” as a result of bringing new product on line at a time of anticipated slower demand. Rents are expected to increase by about 1.5% over the year, continuing to slow from the 2014-2015 rates of 4.0% to 4.5%, the current cycle's fastest rate of growth.

On a regional basis, says Andrea Cross, CBRE's Americas head of office research,“We expect markets in the South and West—including many that have been slower to recover during this cycle, such as Orlando, Tampa and Phoenix—to see the strongest office-using job growth” during the current year. “Many of these markets have little or no new construction supply underway, which will limit options for tenants interested in the most desirable submarkets and the highest-quality buildings, and give owners greater leverage. These markets may offer attractive development and investment opportunities as tight market conditions push rents up further.”

CBRE also sees office tenants' increasingly efficient use of space continuing to broadly affect demand. Many tenants are using their greater space efficiency to trade a larger footprint for higher-quality space, offering employees a more appealing work environment. The firm sees this as increasingly important as the competition for talent intensifies.

“The cutting edge in office environments favors activity-based workplace design—which enables employees to customize their workplace on demand—over one-size-fits-all solutions,” says Julie Whelan, Americas head of occupier research, CBRE. “Additionally, many office workers now expect the workplace to incorporate wellness considerations, such as access to green space.”

In response, more than 90% of corporate real estate executives expect their level of engagement in health and wellness to increase, according to a recent CBRE survey. CBRE expects occupiers to continue to see workspace flexibility through shared-workplace options like co-working, with innovative partnerships among tenants, co-working operators and landlords becoming more commonplace. Technology will also continue to affect not just how occupiers use space, but how also how they manage it.

Instant Insights /

Suburbs, Sunbelt Will Outperform in Office

Related Stories

Recommended For You