Office Has Become an Owner's Market

LOS ANGELES—The office sector is looking more like a landlord's market, especially as tenant demand has reached an all-time high, CBRE Research said Monday. With annual tenant demand reaching 52.7 million square feet in 2014, the balance of power has shifted decisively to owners in CBRE's quarterly “Occupiers vs. Owners Market Meter.” Of the 27 markets in the Market Meter, just eight are considered occupier-favorable.

Most strongly tilted toward owners are the CBD and suburban markets of Denver and San Francisco, as well as Midtown South in Manhattan. A more moderate advantage is enjoyed by owners in Manhattan's Midtown and Downtown submarkets, the CBD and suburban Houston markets, the Seattle CBD, suburban Dallas/Fort Worth and Cambridge, MA. In Boston's other suburbs as well as its CBD, the balance is titled slightly in favor of owners, as it is in the CBD and suburban markets of Atlanta, Chicago's CBD, Philadelphia's CBD and suburban Seattle.

Suburban Chicago and Downtown Los Angeles see the balance tilting somewhat in favor of tenants. The tilt becomes stronger in the Washington, DC CBD and suburban Philadelphia, and is most strongly favorable toward tenants in the CBDs of Dallas/Fort Worth and the suburbs of Los Angeles, as well as the DC suburbs of Maryland and Northern Virginia. These tenant-centric markets are characterized by one or more of the following: negative net absorption, flat or increasing vacancy, sluggish leasing activity, flat or declining rents, rent concessions or an imbalance created by a large increase in new supply.

High-tech tenants accounted for 19% of last year's largest lease transactions by square footage across the country, up from 13.6% of 2013's largest deals. CBRE Research says financial services, business services, healthcare/life sciences and creative services rounded out the top five sectors for leasing activity in major markets in '14.

“The short term outlook is for high tech, financial services and government to be the most active industries leasing office space,” says Colin Yasukochi, director of research and analysis for CBRE. “As supply is slow to respond to this growing demand, tenants can expect to see rising occupancy costs, which will compel many to consider ways to achieve more efficient footprints through workplace strategy, or to explore lower cost submarkets.”

Economic growth across the US is expected to further boost office space demand over the next three years and lead to tight market conditions and higher rents in most markets, says CBRE. In the near term, net office absorption is expected to be above its long-term average yet below the robust pace seen in 2014, averaging 42.6 million square feet per year through 2017.

Although multi-tenant completions are expected to rise steadily over the outlook, CBRE reports that they're not expected to surpass their long-term average of 45.3 million square feet until 2019. As a result, vacancy should continue its downward trend in the near term, bottoming out at 12.2% in 2018.

When these factors are taken together, the upward pressure on rents should increase until supply catches up with demand in '18 to '19. Rent growth is expected to average 4.0% per annum over the next five years, with stronger growth in the earlier years of the forecast.