Reaction to Global Uncertainty Gives CRE Some Pause

In the first half of 2016, Austin had 653,800 square feet absorbed.

AUSTIN, TX—Tenant demand for US office space slowed in the first half of the year as businesses recalibrated and reacted to global economic uncertainty. Despite the deceleration, vacancy remained steady and rents jumped to the strongest growth rate in seven years, according to Cushman & Wakefield’s latest report. The US office sector absorbed 14.7 million square feet of space in the second quarter of 2016, up 24.9% from the levels observed in the prior quarter but down 36% from a year ago. In the first half of 2016, net absorption was off by 34% from the strong levels registered in the first half of 2015. Midtown Manhattan had the largest amount of space absorbed at 2.3 million square feet, followed by Chicago at 1.3 million square feet, Phoenix and Philadelphia, both at 1 million square feet. The remainder of the top seven included Dallas/Fort Worth with 860,600 square feet, Detroit with 675,000 square feet and Austin, TX at 653,800 square feet. “US businesses have had many curveballs thrown at them this year–concerns over the health of China’s economy, equity market volatility, weak US GDP growth, now Brexit–many reasons to at least tap the brakes on expansion plans,” says Kevin Thorpe , Cushman & Wakefield’s chief economist. “Moreover, at this maturing stage in the cycle, it is not uncommon to see job growth and absorption levels decelerate as the economy nears full employment. But overall, the office leasing fundamentals are holding up extremely well, and the secondary markets are really starting to hit their stride.” US office rents increased 5.8% in the second quarter compared to a year ago to $29.00. Since reaching a mid-2011 low point, average asking rents have increased by 18%. Of the 87 markets tracked by Cushman & Wakefield, asking rents increased in 67, declined in 19 and were unchanged in one market. Despite the deceleration, tenant demand for office space kept pace with new construction and the construction pipeline continued to expand modestly. Locally, Adam Kruger , principal at Kruger Carson PLLC , tells GlobeSt.com: “In and around the Austin area, we are still seeing a high velocity of transactions with sellers and landlords wielding tremendous stroke. Purchase and sale agreements, and leases, are being signed at a very fast clip–approximately half the time that it took in the preceding 36 months. Sellers and landlords are dictating terms in many cases, sometimes to an unreasonable extent. In such an environment, many more brokers than usual are worried about deals falling through as a result of standard legal review. To be clear, attorney comments, as long as they are reasonable and timely, will not kill a deal that is otherwise healthy.” Kruger also says more tenants and buyers are getting comfortable with less-than-reasonable terms, which is creating a new normal. This swinging of the pendulum will inevitably swing back to a more reasonable and middle-of-the-road position, he says. “But for now, real estate lawyers are, by necessity, getting deeper into the weeds with clients to help them understand the legal risks associated with the deals they are making,” Kruger continues. Kruger Carson PLLC is a full-service commercial real estate and business law firm with locations in Austin and San Antonio, TX.