Orange County Partnership - News

U.S. Office Markets Showing Some Improvement

Second quarter job growth and a rise in tour activity signal that the U.S. office market may be moving toward stabilization, according to brokerage firm Transwestern’s most recent report. Despite the overall vacancy rate inching up to 12.6% and more than half of tracked markets increasing sublease inventory, the average asking rent increased to $25.39-per-square-foot in the second quarter, reflecting annual growth of 1.9%.


“Second quarter results indicate the office market is moving in the right direction, and if COVID-19 infections caused by the Delta variant are kept under control, we expect the third and fourth quarters to improve as tenants begin making space decisions,” said Elizabeth Norton, senior managing director of research services at Transwestern. “Landlords have held rental rates relatively steady and used concessions to attract tenants; how and when these concessions dissipate is heavily dependent on local market supply and demand, potential health and safety restrictions, and overall economic conditions during the second half of the year.”


Nationally, net absorption registered negative 22.9 million square feet, a 57.4% improvement from the previous quarter’s negative 53.8 million square feet. Further, 75% of tracked markets experienced net absorption above their average quarterly net absorption over the past year. Notably, over the 12-month period, three markets—Raleigh-Durham, Nashville and Tampa—posted positive net absorption.


Despite supply chain disruptions on the construction industry, 24.4 million square feet of construction projects were delivered during the second quarter, the highest since the first quarter of 2020. Austin and Charlotte have particularly high under construction square footage as a percent of total stock to meet growing interest in these markets. Future vacancies will be contingent on how demand meets supply and at what rate demand absorbs vacant space.


Commercial brokerage firm Colliers in its recently released Capital Markets report for the second quarter, noted that office investors continue to seek safety in term and credit. Life science is an ever-growing investment focus, and office fundamentals appear to be through the worst of the pandemic slow-down. A post-Labor Day return for many companies bodes well for future investment activity.


Signs of recovery are emerging in the office market, the report stated, Workers are returning to the office, with many employers expecting their teams back post-Labor Day. Negative absorption in the second quarter was not as severe as in the first quarter, and one-third of markets posted positive absorption. Growth markets such as Charlotte, NC, Nashville, TN, and Austin, TX, led the charge. Tech companies have taken on additional space, and tenant activity has increased across the country. Meanwhile, asking rents have by and large held firm.


Of the major asset types, office is rebounding at the slowest pace. Investors are still favoring long-term leased and credit assets. Recent top deals include assets occupied by Amazon, Fannie Mae, and NetApp. Life science also remains popular, with Alexandria selling a stake in a Merck-leased asset in South San Francisco and BioMed acquiring an under-construction office asset in Boston with plans to convert it to lab space, the Colliers report noted. LinkedIn acquired its headquarters in Sunnyvale, CA, signifying its need for physical space. Deals like these have propped up valuations, preventing aggregate pricing from falling despite the softened fundamentals.


Manhattan, the nation’s largest office market, is waking back up. June volume roughly doubled its annual volume through May. This is important, as Manhattan is considered an indicator of national investor sentiment. Expect sales in this key NYC market, along with value-add deals, to boost activity in the second half of the year, Colliers predicted.