Cushman & Wakefield: U.S. Office Market’s Momentum Continued in Q2

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Gains in Non-CBD Leasing, Delivery of New, Modern Space are Key Trends

Maria Sicola

“We expect to see vacancy rates continue to decrease for the remainder of the year, and average asking rents continue to improve as a result of the strong demand for high-quality space.” -Maria T. Sicola, Cushman & Wakefield Research for the Americas

The U.S. office market continued its healthy pace in the second quarter of 2015, according to commercial real estate services firm Cushman & Wakefield. “The early positive momentum generated in the first quarter continued,” said Maria T. Sicola, the firm’s head of Research for the Americas. “That momentum can be seen in terms of absorption and rental rate growth.”

Year-over-year, total leasing activity was actually down slightly, by 3.5 percent from 2014’s watershed performance, but the non-CBD markets were up slightly over the same period. The most improved markets were Northern Virginia, up 138 percent, with activity driven by government-related tenants and private sector tenants that have once again become active; and Central New Jersey, up 100 percent, driven by the pharmaceutical and communications sectors.

“With mergers and consolidations completed, the pharmaceutical sector in Central New Jersey is seeing renewed growth,” said Sicola. “Those mergers and consolidations had resulted in some layoffs, and entrepreneurial former employees have sparked a wave of new start-ups.”

Absorption is also healthier in the non-CBD markets, driven by the occupancy of newly delivered office product. California’s Silicon Valley topped the list of non-CBD markets, with technology-based tenants particularly on the rise in the cities of Mountain View, Sunnyvale and Santa Clara. And although second quarter CBD market absorption was off from the level of a year ago, “it’s important to note that 70 percent of the markets we track have experienced increased occupancy levels this year,” said Sicola. “Financial services downsizing in Downtown New York and the downturn in Houston’s energy sector have negatively impacted overall CBD absorption, which has otherwise been strong.”

Overall, vacancy rates in both the CBD and non-CBD markets continued to decline in the second quarter, according to Cushman & Wakefield Research. That decline has been slow but steady, reaching their lowest levels since the recession year of 2008, currently 11.8 percent and 16.1 percent respectively.

Occupancy levels are currently approaching 70 percent in newly constructed properties as companies continue to seek modern, state-of-the-art space. Nearly 11 million square feet of space has been completed nationally to date in 2015, with an additional 23.2 million square feet in the pipeline for the remainder of 2015.

Driven by the market’s continuing momentum, overall asking rents continued to climb in the second quarter, up 4.5 percent in the CBDs and 2.3 percent in the non-CBD markets. Major CBD markets experiencing the greatest increases include San Francisco (14 percent); Portland, Ore. (13.2 percent); and Dallas (11.7 percent). “Those increases are attributable to the fact that those markets have significantly tightened,” said Sicola.

“Several markets are expected to see some large-scale occupancies in the second half of 2015,” she said. “As a result, we expect to see vacancy rates continue to decrease for the remainder of the year. We also expect to see average asking rents continue to improve as a result of the strong demand for high-quality space.”

Lowest CBD Office Vacancy Rates

1. Midtown South New York        6.2%
2. San Francisco                7.4%
3. Midtown New York            8.9%
4. Boston, MA                 9.7%
5. Portland, OR                9.7%

NATIONAL AVERAGE                 11.8%

Lowest Non-CBD Office Vacancy Rates

1. San Francisco                4.4%
2. Silicon Valley, Calif.            8.3%
3. SF Peninsula                     9.4%
4 San Diego, CA                     11.7%
5. Ft. Lauderdale, FL                 12.0%

NATIONAL AVERAGE                 16.1%

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About Cushman & Wakefield Research for the Americas

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Evelyn Weiss Francisco
@CarylComm
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