The U.S. commercial office leasing market was lifted by strong job growth and GDP performance, and continued to climb a steady pace in the third quarter of 2018, according to a new report by Colliers.
Demand for office space was elevated with 84% of the markets posting positive net absorption as technology and co-working tenants accounted for a large portion of the growth in leasing.
Overall absorption reached its highest level in two years in the third quarter of 2018.
Commercial office vacancy rates
Commercial office vacancies are at 11.8% on average, a cyclical two-year low. 61% of U.S. office markets have vacancy rates below the national average and 42% had sub-10% vacancy.
The tightest markets,, with less than 8% vacancy, are San Francisco, Raleigh, Kansas City, Orlando and Nashville, while Cincinnati, Washington DC, Chicago, Dallas-Ft. Worth, Indianapolis and Houston were among the highest with more than 15% vacancy.
Overall vacancy rates in downtown remained unchanged at 10.4% and suburban vacancy declined by 30 bps to 12.5% in the third quarter of 2018.
Commercial office rent growth and absorption
U.S. office asking rents increased modestly by 0.3% in the past quarter and 2.75% year-over-year with Class A office leading rent rates in the CBD markets, where rents rose by more than 4% during the same period.
Rent growth remains strongest in tech-driven markets and in lower cost, high-growth markets throughout the country.
Absorption increased 33% to 15.5 million square feet from 12.1 million square feet in the third quarter, bringing the year-to-date level to 35.1 million square feet.
Dallas-Ft. Worth, Philadelphia, Northern New Jersey and Denver posted more than a million square feet of positive net absorption in the third quarter of 2018.
As office leasing costs continue to rise, growth is expanding beyond the large tech markets into areas such as Las Vegas, Tampa Bay, Charlotte, Denver and Philadelphia which all experienced strong demand compared to their inventory size.
Supply-side impact new construction and delivery
The report indicates that new supply may have peaked in 2017. The amount of newly delivered office space fell to its lowest level in four years to 10.7 million square feet from 18 million in Q3.
While the amount of office space under construction rose by 11.4% to 127.4 million square feet, compared with a year ago it remains highly concentrated in six markets where inventory will take time to penetrate since not all is expected to be delivered within the next year.
Tech-centric markets Austin, San Francisco, Nashville, Seattle, and Charlotte remain the focus of new developments.
Despite the positive growth and vacancies remaining at cyclical lows. U.S markets will likely face pressure from rising interests rates and labor shortages caused by to low unemployment, especially in the technology sector creating some uncertainty regarding the future downturn.
The report suggests that low levels of unemployment in core tech markets like San Francisco, San Jose, Austin, Boston and Raleigh is creating incentives for employers who want to balance labor and office costs to look to other cities such as Denver, Charlotte and Philadelphia which increased where office rents are nearly half of New York City or San Francisco.