Demand for U.S. office space hit pre-recession peak as Net absorption of U.S. office space hit its second-highest quarterly total since 2006, registering 29 million square feet in the third quarter 2015 as demand for U.S. office space from expanding companies roughly doubled the new office supply brought to the market, according to a new office market report from CoStar.
CoStar’s State of the U.S. Office Market Third Quarter 2015 Review and Forecast also reported that the first three quarters of 2015 saw 68 million square feet of net office absorption, compared to an average of 30 million square feet during the same three quarters of 2005 through 2007, the period considered the peak of the last office boom. At the same time, the U.S. office vacancy rate’s gradual decline continued, dropping to 11% in third-quarter 2015, down another 20 basis points from midyear and a 60 basis point decrease from the third quarter a year ago, the report said.
Another key finding from the report noted that a full 65% of U.S. office submarkets experienced a drop in office vacancies in third-quarter 2015, and 52% of U.S. submarkets have office vacancies that are lower than they were during the 2006-07 peak, with most metros posting string rent growth.
The report also highlighted one significant difference from previous office market cycles: the average vacancy rate for high-quality 4- and 5-Star U.S. office space constructed since 2008 has remained flat, even though the 42 million square feet of new office supply delivered to the market in the first three quarters of 2015 is nearly 40% above the same period in 2005-2007, CoStar said.
“We’re at a rare point. Vacancy in new space has flat-lined since about 2013. What’s interesting about that is the supply pipeline has not caused the rate to spike up nationally, unlike other market cycles,” said Walter Page, CoStar Group, Inc. director of U.S. research, office. “Office tenants clearly want this new space and are willing to pay for it because obviously, they’re leasing it up.”
Demand for 4-and 5-Star U.S. office space increased by 2.5% between third-quarter 2014 and third-quarter 2015. That rate compares with just 1.4% in the overall national office market and is nearly three times the demand growth rate achieved for 1-, 2- and 3-Star properties.
Analysts noted that even with an uptick in rental rates, total occupancy costs as a percentage of company profits stayed at their all-time low, with companies continuing the trend to place more workers into fewer square feet, thereby allowing companies to lease higher-quality space.
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