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Intrinsically tied to the labor market, the recovery has finally hit the office sector as office-using jobs are on the rise. “2015 is shaping up to be the best year for demand for office space since 2007, before the recession,” said Ryan Severino in REIS’ Q3 2015 Preliminary Office Trends report.
During Q3 2015, vacancy declined 10 basis points to 16.5%, keeping the rate at its lowest level since Q2 2009.
“Vacancy compression is poised on the precipice of accelerating in the next year or so,” said Severino. Specifically, REIS predicts vacancy will decline by 10-20 basis points during the remainder of 2015.
Net absorption reflects the growing demand for office space, increasing by 9.865 million sq ft in Q3.
Even more notable is the fact that year-to-date in 2015 net absorption totals 25.304 million sq ft, representing a 26% increase over the Q3 2014 year-to-date figure. Severiono calls this rift in numbers a “harbinger for what is likely to come over the next few years—more demand for office space to accommodate all of the new office-using employees.”
New construction stood at 7.674 million sq ft for Q3, a slight decline from Q2. Speculative new construction is “slowly returning to the market,” specifically in well-performing markets and in markets with “obsolete” existing inventory, but Severino notes that the mere existence of spec projects “provides another sign of the ongoing recovery.”
Asking and effective rents grew for the twentieth consecutive quarter to 3.3% and 3.5% respectively year-over-year. Severino points out that the effective rent growth of 3.5% is on par with the apartment market, (the sector with the lowest vacancy rate) and that this number is strong for a sector experiencing an elevated vacancy rate, like office. However, he admits that this figure is being inflated by a small number of very strong markets like San Francisco, Washington D.C. and New York.
142,000 new jobs were added in September 2015 marking the “67th consecutive month of private-sector job growth,” according to the Bureau of Labor Statistics. The unemployment rate remained at 5.1% at the end of Q3.
Interestingly, job growth of small businesses employing fewer than 50 people is outpacing larger firms by nearly five to one, according to Emerging Trends in Real Estate® 2016, co-published by PwC US and the Urban Land Institute (ULI). The same report listed Atlanta as number 5 of the top 5 markets to watch saying the city “enjoys strong growth in key sectors of the economy without the typical concern of oversupply. The lower cost of doing business is attracting corporate relocations which contribute to market growth.”
In Atlanta, the new Home Depot technology center just opened in Marietta. Construction of a new FBI field office is set to begin in Q1 2016. And, Dallas-based Stream Realty Partners has agreed to purchase a portfolio of retail, industrial and office properties containing over 2 million sq ft reports The Atlanta Business Chronicle. The off-market deal includes The Meadows Office Complex in Alpharetta. Atlanta is also believed to be a front runner in the national competition to land GE Headquarters relocation, according to CoStar.
“Although gains from quarter to quarter in the office market have only been incremental up to this juncture, they are starting to add up to something more substantial,” Severino concludes.
Bull Realty, Inc., Research