CHICAGO—High-tech users have become the most important driving force in the US office market, and the final quarter of 2017 was no exception. According to global commercial real estate services firm Cushman & Wakefield, metro regions with a strong technology presence were among the year's best performers in leasing activity, vacancy level and absorption.
Nationally, new office leasing rose 9.7% year-over-year to a total of 312 million square feet, and the big core markets led the way. Manhattan came out on top with 30.5 million square feet. Dallas, with 14.6 million square feet, came in second, followed by Chicago at 11.6 million square feet, Houston at 10.4 million square feet, and Los Angeles, also with 10.4 million square feet.
But the true strength of tech was seen elsewhere. In tech-centric San Francisco, new leasing accounted for more than 8.7 million square feet of office space and represented 11.1% of that city's total inventory, the highest of any US market. After San Francisco, the top leasing markets relative to inventory include: San Mateo (11%), Seattle (10.5%), San Jose (10.4%), Nashville (10.3%), San Diego (10.1%), and Austin (9.5%). Nationwide, new leasing accounted for 5.9% of total inventory, up from 5.5% at the end of 2016.
Cities and submarkets with strong technology sectors also saw the lowest major market vacancy rates at the end of 2017. The Midtown South market in Manhattan led with a 6.9% vacancy rate, followed by Seattle (7.3%), Charlotte, (8.0%), and Raleigh/Durham, (8.1%).
Developers seem to have properly gauged demand. They delivered 13.5 million square feet of new space, almost exactly matched by office absorption of 13.8 million square feet. And US vacancy remained flat at 13.2% for the fifth consecutive quarter.
However, many smaller markets saw some improvement in the past few months. In the fourth quarter, the overall vacancy rate declined year-over-year in 52 of the 87 markets tracked by Cushman & Wakefield. In the third quarter, 48 markets recorded year-over-year vacancy decreases.
While new construction activity has been a major factor in many markets over the past two years, the data show that developers may have decided on a more cautious approach. Builders finished about 54 million square feet of new construction in 2017, and the end-of-year pipeline shrank to 102.9 million square feet, the smallest in nearly two years.
“An additional 69.5 million square feet is on track to be delivered in 2018,” Ken McCarthy, principal economist at Cushman & Wakefield, tells GlobeSt.com. “However a sharp drop off in completions is anticipated in 2019, over 30%, marking the first decline in new construction completions since 2011.”
“The cities at the greatest risk of overbuilding – which we define as those with the highest percentage of inventory under construction at the end of last year – include Brooklyn, San Francisco, Austin, San Mateo, Seattle, and Washington, DC,” adds Revathi Greenwood, head of research for the Americas.
Tech-driven West Coast markets also saw the strongest asking rent growth, led by Santa Clara, CA, Orange County, CA, Los Angeles and Oakland/East Bay. Overall average asking rent on available space in all markets, including suburban areas and CBDs, reached a record high of $30.72 per square foot, up 4.2% year-over-year and marking the 26th consecutive quarter that rents have increased – the longest streak over two decades. Asking rents increased in 68 of the 87 tracked markets and declined in only 16.
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Brian J. Rogal
Brian J. Rogal is a Chicago-based freelance writer with years of experience as an investigative reporter and editor, most notably at The Chicago Reporter, where he concentrated on housing issues. He also has written extensively on alternative energy and the payments card industry for national trade publications.
