IRVINE, CA—Auction.com today released its rankings of the national office sector's top buy and sell markets based on current and expected fundamentals. San Jose, CA, San Francisco, Seattle, Orange County, CA, and New York City topped Auction.com's list of buy markets, each boasting strong demographics, one or more booming business sectors and improving payroll growth.
Pittsburgh, Fort Worth, Texas, Houston, Memphis, TN, and Cincinnati were identified as the most recommended sell markets based on factors specific to each, including dependence on the energy sector, weak employment growth or lethargic demographics.
“As nationwide office fundamentals continue to recover in 2015 and the tech industry paces the nation's best-performing markets, investors still must take note of the sharp contrasts between the have and have-not markets,” said Auction.com chief economist Peter Muoio. “Investors will find sustained rent growth and strong occupancy on the West Coast and in tech-driven markets that we predict will enjoy continued success. Other markets, meanwhile, face an abundance in supply that is overwhelming demand and weighing on rent, and this could persist.”
For GlobeSt.com's in-depth interview with Auction.com's Peter Muoio about the report's findings, click here.
Auction.com's report notes sharp differences between individual markets and regions despite very little change in fundamentals for the office sector at the national level. The most strength is seen in markets abetted by the technology surge: the West Coast, New York City and Boston. Washington D.C., having navigated through its recent supply and demand mismatch, now offers improved prospects, as do Denver, Atlanta and Phoenix.
“The health of an office market depends on more than what's happening in a particular segment of the economy, although markets with high-tech companies are certainly faring better today than markets that depend on energy companies,” noted Auction.com executive vice president Rick Sharga. “But the economic health of a region — its ability to create good-paying, full-time jobs — is what really drives the underlying fundamentals, and determines whether a market should be in buy or sell territory.”
The Office Sector's Top Five Buy Markets:
San Jose
San Jose's economy continues expanding at a torrid pace, driven primarily by the supercharged growth of the tech industry. Employment is up a substantial 12.4% from its prior cyclical peak and 5.6 percent from a year ago. Payrolls stand at an all-time high on the heels of 15.3% year-over-year growth and unemployment has trended below the national average since 2012, falling into the low 4% range. Though its performance hinges on the health of the technology sector, San Jose remains one of the strongest office markets in the country.
San Francisco
San Francisco's economy is maintaining its profound post-recessionary surge as total employment reached a record high, recently at 4.5% year-over-year growth. The information and business/professional sectors continue posting excellent employment gains at or above the previous record peak in 2000. Unemployment continues tumbling to the mid-3% range — well below the U.S. average. Rents are skyrocketing more than 6% higher than a year ago — and we expect growth to continue to average above 6% annually over the next four years with seven percent NOI growth.
Seattle
Seattle's strong expansion continues with hearty growth. Total employment surged to an all-time high, up 5.9% from its prior cyclical peak. The professional/business services sector has been a key part of this trend, with payrolls at a record high and 5.3% higher from one year ago. Unemployment has hovered well below the national average since 2011 and is 90 bps lower than a year ago. Population growth is still more than double the US average, providing a foundation for economic gains.
Orange County
Orange County's economic recovery has shifted to expansion as total employment recently surpassed its previous cyclical peak. The local job count has reached an all-time high, up 3.8% on the year. Much of this improvement stems from the business/professional services sector, where payrolls have surged 21.2% since bottoming out in 2009. Payrolls in the leisure/hospitality sector have ballooned to north of 11 percent from their pre-recession peak and are up 3.3% from a year ago. These gains allowed the unemployment rate, hovering below the national average since mid-2012, to plummet into the mid-4% range.
New York
New York City's economy continues reaching new heights. Employment in the metro is at an all-time peak, up 2.7% from the year prior. This occurred despite very middling gains in the financial services sector — long the lifeblood of the local economy. Instead, the city's economy has been boosted by robust gains in education, business services and hospitality, all of which boast employment at all-time peaks, and its burgeoning tech sector. New York City's population growth lags slightly behind the national average, though this is to be expected for such a large and mature market, but is growing at a faster pace than in recent decades.
The Office Sector's Top Five Sell Markets:
Pittsburgh
Pittsburgh's economic recovery had been eroding slightly on the heels of the decline in oil prices. Total employment has recently dipped 0.5% from its all-time peak earlier this year. The professional/business services sector, one of Pittsburgh's largest, is caught in the middle of this regression, where employment has been declining consistently since late 2014. Payrolls for this sector have fallen by 2.3% after reaching a record high last year. Unemployment has risen 70 bps from late 2014 to 5.4%, though, as population declined at a faster rate by 0.2% in 2014.
Fort Worth
Fort Worth is beginning to show some cracks from the fall in oil prices. Employment stumbled in two of the first three months of 2015 but is still just off an all-time peak and 2.6 percent higher than a year ago. The recent malaise in the professional/business services sector is concerning: payrolls have fallen in each of the last three months and are now 0.7% below their year-ago level. Fort Worth's office market remained stable in the first quarter, but the drop in the energy sector will likely affect future demand.
Houston
Houston is feeling the pinch from falling oil prices, as payrolls have declined the past two months. Employment, though, is still 2.9% higher than a year ago. The mining sector has seen losses in two of the last three months, though it also remains well above its year-ago level. The large professional/business services sector has also seen a soft start to 2015, with annual growth slowing to 2.4% after measuring nearly 4% through 2014. Low oil prices may drive more job losses in the near-term, but after recalibrating Houston should resume growth, aided by its strong demographics.
Memphis
Memphis' economy continues to struggle, as employment in the metro is still 3.7% below its pre-recession peak. Growth has been slow and inconsistent, with payrolls currently only 1.2% higher than a year ago. Unemployment remains above the national average at 6.5%. The important transportation/utilities sector, outsized due to the presence of FedEx, had been driving gains but softened in early 2015, with two straight large monthly losses. Memphis' office market remains weak, as its poor local economy fails to drive absorption.
Cincinnati
Though Cincinnati's economy is finally shifting into expansion mode and employment is up 1.4% over last year, the city continues to show subpar demographics with population growth measuring below the US rate. Negative absorption has lifted vacancies to just below 21% and effective rent growth remains anemic, averaging just 1.2% growth per year through 2018.
© Touchpoint Markets, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to asset-and-logo-licensing@alm.com. For more inforrmation visit Asset & Logo Licensing.
