U.S. Office Market Shows Improvement in Third Quarter of 2018

In the third quarter of 2018, the U.S. office market again showed steady improvement, according to Transwestern’s national outlook for the sector. Absorption reached 22.7 million square feet, vacancy remained stable at 10.1 percent, and asking rents increased by 4 percent, annually.

Ryan Tharp, research director in Dallas, said the economy has contributed to the office market’s momentum, despite softer income growth in a tight labor market.

“Real gross domestic product increased at an annualized 3.5 percent, according to first estimates, and personal consumption contributed 2.7 percent to that rate,” Tharp says. “Because inflation has remained in line with the Federal Reserve’s target of 2 percent, consumer and business confidence should keep the office market healthy well into 2019.”

A positive sign is that year-to-date net absorption in the office market was 17.1 percent higher at the end of the third quarter than it was for the same period last year. Dallas-Fort Worth, San Francisco, and Denver, led in absorption by a significant margin for the prior 12 months, with a combined 13.3 million square feet.

Meanwhile, demand and supply are headed for equilibrium as new construction activity peaked in early 2017. In the third quarter, only 146.3 million square feet was under construction nationally.

“It’s encouraging to see that office demand is broad-based across multiple sectors, with the technology and co-working sectors driving demand as we move later in the cycle,” says Michael Soto, research manager in Los Angeles. “If demand continues unabated, rental rate growth should moderate.”

Year-over-year, Minneapolis, San Antonio, and Charlotte, North Carolina, have experienced dramatic rent growth, all coming in at 10 percent or greater. The strong performance of secondary markets demonstrates that the office sector is not being propped up by a few formidable markets.

Download the national office market report here.

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