Tech and Financial Services Keep US Office Humming
Tech accounted for approximately 23% of all leasing activity in the second quarter and financial services represented roughly 17%.
CHICAGO—The US office market is in the midst of one its longest expansions and, fueled by the tech and financial services sectors, shows no sign of slowing down. Office markets across the US saw steady leasing volumes, healthy absorption, and rising asking rents in the second quarter of the year, according to new research from Cushman & Wakefield.
Tech accounted for approximately 23% of all leasing activity and financial services represented roughly 17%. And it’s the tech-centric metro areas that have the lowest vacancy rates: Midtown South Manhattan (6.7%); San Francisco (7.4%); Raleigh/Durham (7.6%); Puget Sound, WA (8.1%); and Charlotte (8.2%).
Developers and lenders have responded to all this leasing activity by pushing new construction to a level not seen in a decade. Builders completed a total of 18 million square feet of new office space, a substantial increase from the first quarter of 2018, when 10.8 million square feet of new space was delivered. The volume of office space under construction also increased to 107.2 million square feet, up from 105.1 million square feet at the end of the first quarter.
“High-growth markets across the country continue to attract the lion’s share of new development nationally,” says Ken McCarthy, principal economist and Americas head of applied research at C&W. “The 10 markets with the largest new construction pipelines accounted for almost half of new completions nationwide, but job growth in those markets is substantially stronger than the nation as a whole, signaling to us that new construction can be absorbed.”
The national office vacancy ticked up about 10 bps to 13.4%, but demand kept pace, with new leasing activity totaling 72 million square feet in the second quarter, bringing the total for the first half of 2018 to 144.6 million square feet. That’s lower than the first half of 2017, when new leasing hit 164.3 million square feet, but it remains just above the five-year average of 140.2 million square feet. Absorption was also solid, C&W adds, with a total of 12.9 million square feet of office space absorbed during the quarter.
Average asking rents increased 1% over the quarter to a record $30.94, and nearly two-thirds of the markets tracked by C&W saw rents increase in the second quarter. Major markets with the most significant rent growth over the past year included Orange County, CA (+16.2%); Brooklyn (+11.3%); Atlanta (+10.1%); Charlotte, (+8.5%); and Oakland (+8.1%).
Markets in New York City and Northern CA continue to be the country’s most expensive. Midtown Manhattan tops the list at an average asking rent of $77.44 per square foot, followed by San Francisco at $72.30, Midtown South Manhattan at $71.07, Downtown Manhattan at $62.92 and San Mateo County, CA at $58.69.
“Office markets throughout the country are benefitting from a strong economy, as robust job growth drives demand for space,” says Revathi Greenwood, head of Americas research. “And while we at Cushman & Wakefield are confident that job growth will remain at a level sufficient to maintain absorption, the supply of new buildings is rising rapidly — to the highest levels we’ve seen over the last decade. This could create opportunities for tenants in certain US markets, and we’ll be closely tracking those numbers during the last half of the year.”