US Vacancies: A Slow Slide Amid Modest Job Growth

CHICAGO-Continued moderate job growth will mean vacancies continuing to slowly trend downward in 2014 and 2015 across the office, industrial and retail sectors, DTZ Research said Thursday. Partly this is due to the fact that building inventory hasn't changed in most markets over the past few years, with comparatively few new projects under construction even as economic fundamentals have picked up.

For the time being, tenants will have the advantage, by and large. “With regards to office, most US markets will remain affordable throughout the next two years with rental growth in line with inflation,” says John Wickes, Americas head of research at DTZ and co-author of the report. “The most affordable markets will be Dallas, Minneapolis, Phoenix, Seattle and Atlanta.”

That contrasts with New York City and San Francisco, where “occupiers will face rental growth well above inflation,” Wickes says. “Demand from the TMT and professional services sectors have driven the vacancy down to single digits in these markets.”

In both the US and Canada, tenants will seek out the most affordable markets and continue to reduce their costs via efficient internal space build-outs, according to the report. That translates into more space for common work areas and less for individual workers. In the US, the square footage per individual workstation is already low in San Francisco and several other markets, making further reductions unlikely. “New York, on the other hand, should be able to realize more space efficiency across our forecast period,” the report states.

On the investment front, DTZ's Fair Value Index notes that most US markets remain attractive on a relative value basis, thanks in large measure to historically low government bond yields and good pricing across all property types. According to the FVI, the top-ranked markets include San Francisco for office and retail, Houston retail, New York office, Los Angeles retail and Chicago office.

“Despite the prospect of increased lending rates, we believe investment volumes will substantially increase over our forecast period,” predicts Karyn Brooks, SVP of research. “REITs and foreign investment, especially from China, will increase the competition for buildings with credit-worthy tenants in core and secondary markets. Investors will target the highest available yields wherever they can find them, including those beyond the core, tier one, CBD markets.”