“Suburban locations with urban-like settings providing proximity to shopping and entertainment will be increasingly sought after,” says Pontius.

CALABASAS, CA—The national office market picture is a net positive for the coming year, according to Marcus & Millichap, which has just released its 2018 North American Office Investment forecast. Key factors in this optimistic outlook include strong demand against limited supply and tightening yield spreads in other asset types, both set against the backdrop of a solid economy.

“Corporate tax cuts might play a role in reshaping the economy and could lift the office market moving forward,” says Al Pontius, SVP and national director of the firm’s specialty divisions. “A reduction in the corporate tax rate will provide a windfall to companies, and several organizations have committed to investments into wages, hiring and infrastructure.”

What he calls heightened small business optimism further fuels the fires of a positive outlook, since, he explains, “small business confidence and net absorption go hand-in-hand as firms expand to larger office footprints in anticipation of new hires.” And congressional incentives—in the form of tax cuts—to businesses for relocating their assets back on US soil also bodes well for the market.

So do tighter yield spreads in other investment types. ”Tightening yields in several other property types could entice investors to seek the higher returns offered by office properties,” says Pontius, who reports that office cap rates have remained at a “relatively steady” low-seven-percent for three years. He adds that yield spreads exceed the 10-year Treasury by 350+ bps in many parts of the country.

Another prime factor in the outlook is the moderate nature of construction levels, below the historical average in fact. “Immediately after the recession, there was a wave of absorption in CBDs as firms were attracted by the volume of available space and discounted rents,” Pontius explains. “In addition, the key millennial workforce was moving to the urban core to enjoy a live-work-play lifestyle. Average rents in downtown locations have escalated dramatically over the last nine years, to the point that they now exceed pre-recession levels.”

This not only speaks to demand but also fuels growth in the suburbs, where the availability of larger floor plates at attractive rent levels serve as a lure to potential occupants. “Suburban locations with urban-like settings providing proximity to shopping and entertainment will be increasingly sought after as demand evolves to favor a sense of community and work-life balance,” he says.

As always, there are trends to watch, such as inflationary pressures, the result, he states, of mounting pressure on wages, tax cuts and accelerating household wealth. Nevertheless, “As GDP growth of 2.9% is expected this year, the Fed is becoming more proactive in managing inflation risk.”

The trajectory of interest rates is always a question as well. With a new Fed chief in place, Marcus & Millichap sees a cautious approach to rapid rate hikes. “The Federal Reserve will need to walk a fine line this year,” says Pontius, “they will closely monitor inflationary risk, likely increasing interest rates three or four times, but cannot hit the brakes too hard or they could risk stalling the economy.”

Finally, the report presents the firm’s National Office Product Index, which ranks 46 major US markets based on 12-month forward-looking economic and supply/demand variables. Leading the pack—as it did last year—is the Seattle-Tacoma MSA, buoyed in large part by the tech sector.

Rounding out the top five are Boston (up from last year’s number five spot); San Francisco, which holds steady in position three; Portland, also holding steady at four; and San Jose, which slips back to five from last year’s number one position. This, says Pontius, is due to an elevated vacancy rate in the wake of a 2017 spike in deliveries.