Office, Industrial Continued to Rally in Q4

LOS ANGELES-Nine of the 13 largest office markets across the US showed lower vacancy in the fourth quarter, and 11 of them saw higher average asking rents, according to figures from CBRE. On the industrial side, Q4 also was marked by continued improvement in Q4, with eight of the 12 largest industrial markets experiencing lower vacancy during the quarter. Helping drive absorption in these markets was demand from third-party logistic companies, the food service sector, home construction and manufacturing.

“As economic activity improves, investors have had an opportunity to increase office rents in most markets,” says Brook Scott, CBRE's interim head of research, Americas. The US industrial market, meanwhile, “offers particular opportunity for investors seeking to capitalize on improving international trade and a resilient domestic consumer.”

The steepest decline in office vacancy during Q4 was experienced by downtown Atlanta, where vacancies fell 150 basis points during the quarter and 50 bps across metro Atlanta as a whole. Demand from technology companies fueled 50-bps declines in both metro San Francisco and Seattle, which reported 8.7% and 15.2% vacancy rates, respectively. In the case of Atlanta, as in Phoenix, a lack of new construction combined with more office-using employment fueled the 50-bps drops.

San Francisco, both metro and downtown, led the country with a 3.0% increase in average asking rents. It was followed by Boston with a 2.5% increase, thanks to diminishing space options diminished in both markets. Houston and Washington, DC reported significant deliveries during the quarter, at nearly 0.8 million square feet and 1.5 million square feet, respectively, and these deliveries helped keep asking rent increases below 1% in both markets.

In the industrial sector, the largest availability rate decline was in Dallas, with a 130-bps drop to 10.5%, followed by Atlanta, which declined 70 bps to 15.4%. Driving the demand in Dallas was mainly third party logistic companies and e-commerce related companies, while for Atlanta it was third-party logistic companies, automotive suppliers and housing-related companies.  

CBRE says the market improvements square with recent signs of strengthening industrial production, reflected in higher automotive purchases and overall consumer spending. A recent commentary from Beacon Economics bears this out, noting that “consumer spending has recovered since the fiscal cliff's $200 billion personal tax increase at the start of the year—with auto sales close to their long-term normal 16 million-unit annual sales in the third quarter of 2013.”

Although new construction activity for industrial has been low by historical standards throughout the recovery cycle, improving fundamentals have kicked it up a notch in most of the major markets. In Houston, for example, 3.4 million square feet of new space was delivered in Q4, and an additional 7.8 million square feet is under construction.