Strong Demand for U.S. Office Space Expected through 2016

research-information-graphic-phlDemand for U.S. office space is predicted to continue at post-recession highs for two years, thanks to declining vacancy rates and rising rents in an increasing number of submarkets, a new report from the CoStar group says.

A CoStar Portfolio Strategy analyst, reporting in CoStar’s State of The U.S. Office Market 2014 Review and Forecast, also attributed the positive outlook to the U.S. office space market’s stellar performance in 2014.  Net absorption in 2014 increased 42% from 2013 levels, with the fourth quarter alone seeing net absorption of more than 30 million square feet, according to the report.

In the U.S. market, net absorption of office space went from 64 million square feet in 2013 to 91 million square feet in 2014, CoStar noted.  The level of U.S. office space absorbed in 2014 was twice the level of new U.S. office space brought to the market, CoStar said.

CoStar expects annual absorption to remain near the 90 million square-foot mark through 2016.  Construction deliveries are anticipated to rise over the two-year period as increasing rents and tightening vacancy rates encourage new development.

The healthy demand for U.S. office space clearly demonstrates occupiers are no longer following the trend of shrinking square foot-per-employee office footprints, CoStar reported.  The analysis also said the shadow supply of empty office space that has been lingering since the Great Recession is now thinning with growth continuing at a “very strong clip.”

The vacancy rate for U.S. office space plummeted 70 basis points from 12% to 11.3% in the year just ended, representing the single largest drop since the end of the recession, CoStar noted.  Vacancies were down across the board across markets, submarkets and building types and quality levels, with the one exception being vacancy rates for medical office properties, which remained at their historically solid 9.6% levels, CoStar added.

With almost every metro market posting year-over-year declines in vacancy rates, many markets are dropping below the national average for office space vacancies, CoStar said.  The single exception in this area is the Washington, D.C. market, where vacancies increased slightly, mostly because of strong constructions activity.

The drop in vacancies in office submarkets is a “feel-good story across the country,” a CoStar analyst reported.  Newer properties have recovered more strongly as vacancies for 2008 and newer buildings fell from a high of 45% in 2008 to almost 10% in the last quarter of 2014.  Meanwhile, older buildings from the 1980s haven’t recovered at all, CoStar noted.  More and more tenants are opting for buildings in Central Business Districts (CBDs) or the closer-in suburban markets, but the older 1980s buildings often can be found in less desirable outer-ring suburban submarkets, CoStar said.

The analysis also noted that demand for high-quality space is on the rise.  Newer 4 and 5 Star space saw double the rate of absorption than did lower-quality space.  High-quality space rose 2% from 2013 to 2014, compared to 0.9% for 1-, 2- and 3-star space, the report explained.

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