US Office Fundamentals Remain Strong, Moderate Growth Expected

Cynthia Foster, president, national office services, Colliers International

NEW YORK CITY—Most top US office markets saw their vacancy rate fall and asking rents rise in the fourth quarter of last year, driven in large part by leasing in the tech sector, as well as from corporate relocations. Colliers International   Monday  released its Top Office Markets Snapshot report for the fourth quarter of 2015  and related that office markets across the nation this year likely  will   mirror what most analysts are predicting for the overall economy—moderate growth. “Our research shows that the office market fundamentals remain strong, and there is room for continued momentum from what we’re seeing at this point in the cycle,” says  Cynthia Foster , president, national office services, Colliers International. “With the US economy expected to continue to grow moderately, we anticipate that the rate of growth in the top markets will be at a more moderate pace, as well.” Only three out of the 10 metro markets studied posted negative absorption in the fourth quarter— Manhattan-New York City (526,530 square feet), Washington, DC (53,403 square feet) and Seattle (607,678 square feet). The report notes however, “Even in markets such as Manhattan and Seattle where absorption slipped, leasing was still healthy, though down from very robust activity in the third quarter, in part because declining space availability limits leasing options, which may weigh down leasing volumes near term until new supply is added. Tech continues to drive leasing in several leading markets, though corporate relocations in Chicago , Atlanta  and Dallas , and professional services in most markets, account for a growing share of the growth. Rents  still  a re below their prior peak Class A asking rent in six of the 10 markets, while seven of the 10 are still above their prior trough in vacancy rates, suggesting room for continued gains, the report states. The top five metro markets in average rents in the fourth quarter were: San Francisco , $74.20-a-square-foot; New York City (Manhattan) $71.50-a-square-foot; Boston , $51.61-a-square-foot; Washington, DC , $45.95-a-square-foot and Seattle , $39.85-a-square-foot. Colliers predicts that leasing and investment in commercial real estate in Manhattan will continue to be strong in 2016. “Manhattan is not just one office market, but three distinct markets—Midtown, Midtown South, and Downtown—which have their own trends and fundamentals,” adds  Michael T. Cohen , president, Colliers International tri-state region. “Midtown is experiencing a bit of its own renaissance, Midtown South still remains the tightest market in New York, while Downtown currently offers the best value pricing overall.” Cohen also notes that although overall office asking rents have leveled off, they are still historically strong. In terms of the investment market, foreign buyers are fueling what has been intense demand in New York City. “Investors from around the globe view New York City as a safe haven to position their capital,” Cohen says. “Even with historically low going in cap rates, investors seem to have an insatiable appetite to acquire assets both in Manhattan and even throughout the boroughs.” Key trends in New York City include the diversification of the tenant base in Downtown Manhattan. Specifically the leases by Hugo Boss and Hudson’s Bay, as well as from firms in the legal, media and engineering sectors, are decreasing Downtown’s reliance on the financial services sector. The commercial real estate market in Midtown continues to be strong, the Colliers report notes. Approximately four million square feet of space is currently under construction in Midtown, which will compete with the 19 million square feet being constructed at the neighboring Hudson Yards and Manhattan West in Midtown South.