CHICAGO—The US office market remained vigorous in 2017 with occupancy staying at peak levels and rents holding firm, according to a new report from Colliers International. The vacancy rate has been quite low for an unusually long stretch of time, and experts say the economy will most likely generate enough demand to sustain that dynamism even longer.

“We are in new territory,” Stephen Newbold, Colliers' national director of office research, tells GlobeSt.com. “Normally, we see dramatic ups and downs,” but by the end of 2017, the vacancy rate had been static for eight successive quarters as supply and demand were in relative balance. It fell 30 bps in the fourth quarter to just 12.0%, or marginally lower than the level seen at the peak of the previous cycle.

As reported in GlobeSt.com, tech-oriented tenants have played a key role. Strip out this sector, Newbold says, and the overall picture would look quite different. Law firms continue to downsize, at least in terms of their office footprints, and while those in finance may be expanding headcounts, many still have empty spaces they can expand into.

Across the top ten office markets, Newbold says, there were 43 tech firm leases in 2017 for more than 100,000 square feet. Of those, 11 were by Amazon, and 21 were in the tech-heavy Bay Area. And tech firms accounted for about 60% of San Francisco's 2017 leasing. Furthermore, in the first few months of 2018, Amazon has signed two more leases for more than 100,000 square feet.

Newbold says that illustrates the staying power of tech. It's a sea change from the tech bubble in the late 1990s and early 2000s, when a bewildering array of start-ups were rich on paper but could not seem to fill up their new office spaces with people doing productive work. Today's generation of companies, however, “are strongly established with proven business models.”

The static vacancy rate also helped slow down rent growth, Colliers finds. In 2017, rental rates increased 1.8%, or one-third of the 5.4% seen in 2016. “We've just reached a point in some of the major markets where it's difficult to raise rents,” Newbold says.

But many secondary markets, especially those with growing tech sectors, have now started to see big jumps in rental rates. Newbold points to Nashville, which has become popular with new college graduates and tech firms. In 2017, rents for its class A downtown offices increased 13.6%, with much of the boost happening in the latter half of the year.

Absorption has also slowed down in much of the nation. Total office absorption fell for a second successive year in 2017, down by 28% to 41.9 million square feet following a 40% fall in 2016.

But tenants in tech-heavy cities continue to absorb space at a fast pace, according to Colliers. Austin, for example, had 492,000 square feet of absorption in 2017, or about 3.7% of its downtown inventory, making it one of the top-performing markets. Its downtown vacancy rate fell to 9.3%, including a drop of 40 bps in the last quarter alone. Other out-performing downtown markets in 2017 included Nashville at 8.3% of inventory, Raleigh-Durham at 6.3%, and Seattle at 3.7%. Almost 40% of US metro office markets have a sub-10% vacancy rate, led by Seattle, where Amazon's series of large fourth quarter move-ins dropped the vacancy rate to 6.4%.

Developers have also moderated the pace of new construction. “While still elevated, the volume of office space under construction fell slightly for the second successive quarter to 107 million square feet,” according to Colliers. “There was 70.5 million square feet of new supply delivered in 2017, likely the peak year for new supply in the current cycle.”

Looking ahead to the rest of 2018, the US office market will likely stay on its steady pace. Colliers says the economy will expand about 2.7%, somewhat below the historical average, but slightly better than the past few years. However, the company does not anticipate that the recent tax bill will bring significant benefits to the office sector. “Many corporations are expected to distribute much of their tax savings to shareholders through dividends and share buy-backs, instead of investing in new facilities.”

Other now-familiar trends will also persist. Tech-centric markets should continue to out-perform, while downsizing in other sectors will keep overall expansion modest. And much of the nation's rental growth will come from the intense demand for top-level class A offices. “Some firms are willing to pay up for the best space,” says Newbold.

Perhaps the biggest change that lies ahead is the rise of co-working, he adds. Companies in this sector, such as WeWork, are in aggressive growth mode. Many other office users are taking advantage of this option and signing up for the short-term leases typically offered by co-working providers.

Newbold believes landlords will have to confront the possibility that many tenants will no longer be willing to commit to long-term leases. “This sector is going to keep evolving.”