Why There is a Resurgence in Office Leasing

Herndon, VA—-The U.S. office market posted solid net absorption levels in the second and third quarters of 2018 of 18 million and 11 million square feet, respectively, says the NAIOP Office Space Demand Forecast, Fourth Quarter 2018. This level of new leasing is more than likely due to higher-than-expected economic growth and the subsequent demand brought about by jobs created in the office-using sectors.

“The economy has been very strong, growing at annualized rates above 3% for much of 2018 and many office using sectors, such as professional and business services, have seen employment growth at rates as much as 50% higher than the general rate of job growth,” says Joshua A. Harris, Academic Director and Clinical Assistant Professor of Real Estate at the Schack Institute of Real Estate. “Furthermore, co-working firms are also aggressively leasing space and starting to really drive down vacancy is some submarkets,” he tells GlobeSt.com.

There are limitations, though, to this growth. The growing lack of qualified employees to hire is a major factor. Another consideration: long-term growth will be determined by how the business sector reacts to rising wages and interest rates.

“In short, there are too many open jobs and not enough qualified, unemployed persons. In fact, for the first time in history, the US has more open positions than unemployed persons per data from the Bureau of Labor Statistics,” Harris says. “Further, issues such as the opioid epidemic have become so strong in many region of the country that labor force participation has declined for some demographics, such as younger men; this has led to an even greater shortage of qualified, employable people seeking work.”

The Tech Sector

Much of the office leasing is coming from technology and media companies. While Amazon got lots of press for deciding where to locate its second headquarters, firms like Google and Facebook (as well as many smaller enterprises) kept adding more and more square footage to their portfolios with much less fanfare. Many professional service firms (law, accounting, architecture, real estate, etc.) have also leased new space; however, they are going denser and taking less space per employee in many transactions. Creative space and co-working ventures are also becoming major users of office space in large markets and are now starting to lease in secondary/tertiary cities as well, Harris says.

The current macroeconomic expansion will most likely continue into the new year and beyond next summer making it the longest sustained economic growth period in US history.

“We think the economy will remain stable and growing for 2019, thus office net absorption should continue,” explains Harris. “Further, since many businesses have expanded sales without adding much office space, there comes a breaking point where the firm must expand facilities to keep growing. We think this explains some of the higher rates of net absorption and this trend can easily continue well into 2019,” says Harris.