US Office Supply/Demand Remains Balanced

IRVINE, CA-The US office market is taking a very strong position among the Americas, and recovery is expected to increase through 2015, according to research executives at Cushman & Wakefield, who recently held a global office forecast webinar here. The US office market is in the acceleration phase of the real estate cycle, and it has plenty of company, the firm reports.

“The global economy is in much better shape now than it was at the beginning of the year,” said Ken McCarthy, chief economist for C&W. At that time, fiscal-cliff issues had not been resolved, the Eurozone was in recession, and China and Asia-Pacific were experiencing a slowdown. “We entered 2013 with a lot of uncertainty, but we're exiting in much better shape.”

The Eurozone is now facing growth in the GDP, as is the British economy—particularly Dublin and London, McCarthy said. In the US, we've survived the discord involving the budget brinkmanship and the partial government shutdown, and we are looking at one more deadline to pass the budget, which is expected to pass without much drama.

“As the uncertainty about government policy is reduced, the private sector will exert stronger growth,” said McCarthy. Improvements in the housing sector will lead to improving confidence, strong business investment and hiring, as well as a much more self-sustaining recovery. “Next year, we're looking at 3% growth, and this will be accelerating in 2015.”

The European market is set up for even stronger growth—7% to 8% GDP—and the Asia-Pacific economies will grow by 6% to 7%, McCarthy said. Modest growth is expected in Europe in 2014, but growth will be strong in China and much of Africa. Next year and in 2015, growth in the US is expected to flow over into Mexico, Canada and Brazil—particularly with the World Cup there next year and infrastructure spending leading into 2016.

“We're in a period of transition to stronger growth,” said McCarthy. “We think the growth will accelerate in 2014 and get even stronger in 2015.”

This positive trend is placing the US office market in a very strong position in terms of balanced supply and demand, said Maria Sicola, executive managing director, head of Americas research, for C&W. “The two sectors that are the strongest are technology and energy. Demand in New York, San Francisco and Boston will be steady, and rents will continue to increase.”

By contrast, supply is expected to increase in Canada, Mexico and Brazil, and rents should remain flat throughout 2014 with recovery beginning in those markets in 2015, Sicola added. “Brazil is in the midst of a market correction, with a slowdown in GDP. When we look at rental growth over the long-term horizon, we're not expecting strong rental growth in Brazil until 2016.”

In Europe, economic recovery is looking to be strong, but a bit slower in terms of real estate following suit, as real estate always follows the general economy. A focus on workplace strategy and a move toward efficiency and space utilization is expected, and upward pressure on rents—prime rents, in particular—is anticipated in core markets—namely, London, Stockholm and Dublin—due to lack of supply.

In Asia, there is significant office development in the pipeline, although demand there has also weakened, said Sicola. “We're not seeing significant rental growth in that area.” But by 2015, several markets are anticipated to be in the acceleration phase of the real estate cycle, including North America, Western Europe, Africa, Central and Eastern Europe the Middle East and Asia-Pacific.

Looking specifically at the Americas office market, Sicola said Boston, San Francisco and New York have a fair amount of construction in the pipeline. “The result of this is that we will continue to see stronger absorption through the forecast horizon, which will cause upward pressure on rents.” Other US markets where supply is coming online include Seattle; Washington, DC; and Dallas, with decreasing amounts of construction in Atlanta and Chicago and none in Philadelphia, Los Angeles or Houston.

“The most significant rental growth is expected in Dallas, Houston, New York, San Francisco, Boston and Seattle,” said Sicola. Where you see strong rental growth, the markets will have a strong landlord shift. By 2016, we're likely to have more markets in the Americas entering into that accelerating phase, and there will be a shift from a tenant-favorable market to a landlord-favorable market by then.”