SEATTLE—Office-market fundamentals in the nation's 10 major metro areas generally remained solid during the second quarter, Colliers International said Wednesday. At the same time, the firm points to a leveling off of rent growth and to a pair of key factors that suggest upward pressure on vacancy rates: tenant downsizing and new supply.

“In Q2 2017, absorption rose in six of the 10 markets and fell in four,” according to Colliers. “Taking into account new supply, vacancy rose in four markets, fell in three and remained unchanged in three,” about the same ratio seen in Q1.

Those three markets where vacancies were unchanged—the San Francisco Bay Area, Manhattan and Seattle—all have vacancy rates below 10% and in fact are the only ones among the top 10 where this is the case. Two of those markets are running neck and neck on vacancies: San Francisco's 6.1% the lowest among the top 10, with Manhattan not far behind at 6.2%. That's in contrast to vacancy rates north of 15% in Los Angeles and Houston, and vacancies not far below 15% in Atlanta, Chicago and Washington, DC.

Manhattan now has 14.7 million square feet of office space under construction or undergoing major renovations, with half of that total pre-leased. Seven million-plus of available space would be a concern in most markets, but in Manhattan it's the proverbial drop in the bucket, representing less than 1.5% of inventory, especially in view of the market's shortage of large blocks of space available for lease.

Concerns over the impact of new supply in San Francisco and Seattle are receding, especially in the latter, where there are pre-commitments in place on three-quarters of the 5.9 million square feet of space being added to the metro area's inventory. At the same time, though, if there's less worry about overbuilding in those two major West Coast markets, then concerns are coming to the fore in Los Angeles and DC.

For L.A., Colliers says, there are a combined 4.1 million square feet of construction underway in new projects and major renovations across Downtown and West L.A. That space is coming on line within a fairly compressed time frame, i.e. over the next 12 months. “The degree to which this space leases up quickly could impact rents,” according to Colliers' Q2 office snapshot.

Construction activity in DC is more than three times higher than three years ago, according to Colliers, and shows no signs of easing. æDevelopers appear to be betting on tenants' continued preference for new high-end space and are willing to risk short-term vacancy to capture these occupiers,” the report states. “Unless there is an unforeseen surge in demand, this is likely to come at a cost in terms of generous incentives that could exert downward pressure on rents for second-generation class A space.”

As with DC, rents in Manhattan, Chicago, L.A., Seattle and Dallas remained basically flat during Q2. Among the four markets where rents increased from the previous quarter, only Atlanta saw improvement in all three of the major metrics: net absorption and vacancy as well as rent growth.

Instant Insights /

Office Holds Firm As Rents Peak

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