Office Recovery Gains Traction, If Not Speed

NEW YORK CITY—A later arrival at the recovery party than industrial or hotels, the office sector now appears to be getting into the swing of things. New reports from Colliers International and Marcus & Millichap both point toa pickup in leasing activity as 2015 has progressed, with a positive outlook for the future.

In its summer office report, MMI notes that net absorption in the office has exceeded 70 million square feet over the past year, resulting in a 30-basis-point decline in the US vacancy rate to 15.3% and supporting “a modest rate” of rent growth. “Further declines in vacancy will occur as tenants require larger spaces to house recently hired workers and office property construction remains muted,” according to MMI.

Just 55 million square feet of space was completed in the past 12 months, representing what MMI calls “a meager 0.8% rise in office inventory,” according to MMI. Colliers notes that large numbers of the 70 metro areas it covers have seen virtually no new supply, but there's more construction on the horizon over the next three years. MMI cites “lender and investor belief in the sustainability of the US economic recovery, as well as more capital sources entering the arena” as factors supporting a ramp-up in new supply in a few select metros.

“The largest US CBDs continue to have solid leasing and absorption given the confirmed economic recovery and despite international upheaval,” says Cynthia Foster, New York City-based president of national office services at Colliers. The report notes that the key office markets—including Manhattan, Los Angeles, Dallas, Seattle, Atlanta and San Jose—are seeing a brisk pace of new leasing from a wide range of tenants in technology, media, consumer products and other sectors. That being said, the report notes that leasing overall remains weak by historical standards.

The report also calls second-quarter results “a tale of two countries,” with the US considerably stronger than its neighbor to the north. “Canada, more so than the US, has been negatively impacted by falling energy prices,” says Foster. “However, we are seeing improvements in segments including housing, construction, auto sales and consumer spending, all of which is helping produce broad-based job growth.”

Helping put the brakes on office recovery in North America is an economy which, although strong compared to other parts of the globe, hasn't yet shifted into high gear. “For a while, it looked like 2015 was going to be the year the US economy broke out of the moderate growth path it has been on for the past few years,” writes Andrew Nelson, Colliers' chief economist. “Although the quarterly numbers have been uneven, GDP has been growing at a roughly 2.5% year-over-year  rate for several years. Even after the bumpy first quarter, hurt by the severe weather and collapse in oil prices, the economy seemed ripe for a bump. But Q2 indicators didn't pop the way many predicted, and now it seems likely the 2.5% pace is going to continue for a while.”