With U.S. monthly job growth vacillating between highs and lows, what does the office space demand forecast look like for the remainder of the year? According to Dr. Hany Guirguis of Manhattan College, and Dr. Joshua Harries of the University of Central Florida, the 2016 national office market forecast approximates absorption at 34.6 million square feet. While this may sound like a lot, it shows a decrease from 2015 where the national absorption of office space was 62.1 million square feet.
Investor sentiment is that the office market may have peaked due to lower GDP expectations where Gross Domestic Product (GDP) growth slowed to 0.5% in Q1 2016 with the forecast calling for it to remain low at 1% to 2% annualized growth, as well as declining corporate profits that have been falling since Q4 2015, and restrained office job growth due to nearing what economists consider “full employment”. Given these factors, commercial real estate investment strategies could be impacted by weaker office absorption.
However, looking past volatile trends, the job growth in the U.S. remains robust and points to slow but steady growth that is supportive of healthy leasing fundamentals. Despite the drop in tenancy in the second half of 2016, according to Cushman & Wakefield, rents jumped to their highest growth rate in seven years. This is due in part to new high-priced space coming to market, while popular submarkets and secondary markets continue to tighten. Since tenant demand kept pace with new construction, office rents increased by 5.8% in Q2 to $29 PSF and new construction modestly expanded with 13M SF added to the national inventory.
While it is normal for commercial real estate market progress to ride the economic tides, the overall U.S. economic condition is more tenuous in mid-2016 that it has been in recent years. Even with this, office markets do not appear to be overbuilt nationwide. Although signs point to the economy approaching a shift, the forecast is not reflecting another recession or significant downturn but rather a flattening that could cause office demand to level off.
Meissner Jacquét Commercial Real Estate Services has mastered the components of asset management that directly affect an assets’ underlying value through our working knowledge of investment objectives and valuation, risk analysis, and leasing oversight. Securing tenancy in today’s competitive environment involves much more than responding to requests for information and negotiation. Contact Allison MacDonald or Brent Williams to learn how Meissner Jacquét’s leasing oversight services ensure that prospective tenants are attracted and retained through established leasing and marketing programs.
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NAIOP, Office Space Demand Forecast, Second Quarter 2016
NAIOP, Has the Office Sector Peaked?