NEW YORK CITY—Office rents nationwide increased last year at the fastest pace since the depths of the downturn, Cushman & Wakefield said Thursday afternoon. The year-over-year gain of 4.9% during the fourth quarter was the best since rent growth peaked in 2008, according to C&W.
While the top-dollar office submarkets have gone from strength to strength in recent years, the recovery has begun expanding outward in a big way. “Secondary and tertiary markets really came on strong in 2015 —that was the news for the office sector,” says Kevin Thorpe, C&W’s chief economist. “Up until last year, it was still mostly the gateway cities driving the demand metrics. Gateway cities are still performing well, but the fourth quarter data shows that seven of the top 10 absorption cities were non-gateway markets.”
Thanks to increased demand for space, “markets like Phoenix, East Bay and Sacramento are surging,” Thorpe adds. “On a risk-adjusted basis, the secondary markets should appear increasingly compelling to both foreign and domestic investors.”
The nation’s best rent growth last year was in Silicon Valley, with San Jose up 20.3% Y-O-Y, according to C&W. Next up was Lower Manhattan with 16.7%; Seattle, with 16.4%; the Midtown South submarket of Manhattan, 14.7%; San Diego, 14.1%; Austin, 13.9%; Dallas, 13.2%; San Mateo County, CA, 12.1%; San Francisco, 11.9%; and Bellevue, WA, 11.0%. Nationally, rents increased in 70 of the 87 markets tracked by C&W.
Net absorption nationwide reached 81.7 million square feet in ’15, the highest 12-month tally since 2006. That being said, the nationwide vacancy rate at 13.9% is still 100 basis points higher than pre-crisis levels.
Helping office owners’ efforts to bring vacancies down has been the lagging pace of new deliveries. “”Although construction is ramping up in certain markets, particularly in tech-fueled cities, in general the supply pipeline continues to lag in this cycle,” Thorpe says. “Since 2011, absorption has been nearly 75% higher than the new construction levels. As a result, rents are jumping in many cities. Twelve markets hit double-digits in rental appreciation in the fourth quarter, and many more are on their way.”