Office market reaches recovery ‘sweet spot’

10/27/2014

Office market reaches recovery ‘sweet spot’

WASHINGTON – Oct. 24, 2014 – The stars are aligning for the office sector: Falling vacancies, rising net absorption, a controlled supply of new office space, rising rents. Investors are seeing higher property incomes on their office property investments, according to CoStar's Third Quarter 2014 Office Review and Outlook.

CoStar notes the sector has reached its "sweet spot in the market cycle."

About 57 million square feet of net office space was absorbed from the beginning of the year through the third quarter – an increase from 43 million square feet a year ago. Suburban office markets are seeing strong leasing activity that should help the sector be on target for a 74 million to 80 million square feet of net absorption by the end of this year, says Walter Page, director of office research for CoStar Portfolio Strategy.

What's more, the office vacancy rate has dropped to 11.6 percent from 12.1 percent a year ago. Thirty-five percent of U.S. markets are seeing vacancy rates that are tighter than they were during the 2006-2007 peak.

Also, average rents have risen 3.6 percent year-over-year, a rise from the 2.5 percent increase reported in the third quarter of 2013 from year-over-year.

"If we look at the map in terms of which markets are doing well in office-using employment, it is full summer across most of the country," says Hans Nordby, managing director of CoStar Portfolio Strategy. "This is the prettiest picture you're likely to see in this economic cycle. If you're waiting for 'as good as it gets,' it's probably today in terms of year-over-year office employment growth being so pervasive."

Energy and technology tenants are driving a big surge in the office recovery in large markets like San Francisco, Houston, and Boston. But medical office and educational facilities are also increasing in demand, CoStar notes in its report.

"The tipping point of the recovery is here," says Page. "As an investor, the last one-third of the recovery is where it's at – occupancy growth continues, rent growth is pretty strong and NOIs [or net operating incomes] are catching up to that growth, so you have a broader base on which to build. It's a great time to take occupancy risk."

Source: "As Good as it Gets? Office Market Moving into Sweet Spot in Recovery," CoStar Group (Oct. 22, 2014)

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