Demand for U.S. Office Space to Remain Strong for Two Years

magnifying glassFueled by falling vacancy rates and rising rents in an increasing number of submarkets, demand for U.S. office space is expected to remain at post-recession highs through 2016, a new CoStar report says.

Also contributing to the rosy forecast is the U.S. office space market’s strong performance in 2014, when net absorption rose 42% from the previous year and a particularly strong fourth quarter saw net absorption reach more than 30 million square feet, according to a CoStar Portfolio Strategy analyst reporting in CoStar’s State of The U.S. Office Market 2014 Review and Forecast.

Net absorption of U.S. office space jumped from 64 million square feet in 2013 to 91 million square feet in 2014, CoStar said.  The amount of U.S. office space absorbed in 2014 almost doubled the level of new U.S. office space added to the market, the report noted.

Over the next two years, CoStar predicts annual absorption through 2016 to remain close to 2014 levels, hovering in the 90 million square-foot range.  With new development supported by increasing rents and tightening vacancy rates, the level of construction deliveries should increase over the period.

The robust demand for U.S. office space indicates occupiers are slowly moving away from the trend of shrinking square foot-per-employee office footprints, CoStar said.  In addition, the analysis said the shadow supply of empty office space remaining from the Great Recession is thinning as growth continues at a “very strong clip.”

The U.S. office space vacancy rate dropped 70 basis points from 12% to 11.3% in the year just ended, representing the biggest decrease since the recession ended, according to the analysis.  Vacancy rates for medical office properties were holding steady at a historically solid 9.6%, but all other vacancies were down across the board across markets, submarkets and building types and quality levels, CoStar said in the report.

Many markets are slipping below the vacancy average for U.S. office space, with nearly every metro registering year-over-year drop.  The single exception to this is the Washington, D.C. market, where vacancies rose minimally, primarily due to strong constructions activity.

One Costar analyst called the declining vacancies in office submarkets a “feel-good story across the country.”  Newer properties have enjoyed a stronger recovery, with vacancies for 2008 and newer buildings plummeting from a high of 45% in 2008 to nearly 10% in the last quarter 2014.  Older buildings from the 1980s, which are often located in less desirable outer-ring suburban submarkets, haven’t recovered at all as tenants tend to prefer Central Business Districts (CBDs) or the closer-in suburban markets, a CoStar analyst said.

The report also took note of the rising demand for high-quality space, with newer 4 and 5 Star space experiencing double the rate of absorption of lower-quality space.  High-quality space increased 2% from 2013 to 2014, in comparison to 0.9% for 1-, 2- and 3-star space, according to the report.

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