Solid Growth Prospects on the Horizon For U.S. Office Sector in Year Ahead
Office properties were late to reap the benefits of the economic recovery, but last year’s steady improvement in performance provides momentum into 2016. Growing payrolls pushed more tenants into bigger spaces in 2015 and helped lower the U.S. vacancy rate. Tightening availability placed owners and tenants on more equal footing last year, blunting the edge previously wielded by tenants in lease discussions and supporting a more vigorous pace of rent growth. Last year’s only modest drop in the vacancy rate, however, likely reflects the continuing reduction of the workspace per employee ratio. Since the pre-recession peak, a 5 percent rise in office-using jobs has translated into only a 4.3 percent bump in occupied space. New office construction has lagged throughout the recovery and may not be sufficient to relieve unmet needs of tenants seeking new spaces with modern amenities. Many office users took advantage of lower rents early in the recovery to relocate to buildings with the features and amenities they desire, but they now face constricting availability in suitable properties.
Limited completions will support a slight drop in the vacancy rate during 2016, although challenges in matching tenants to available spaces may intensify. Growth in office-based services will support additional spending on staff expansions that necessitate larger workspaces or opening new locations. Professional and business services employment, encompassing a range of office-intensive fields including law, accounting and engineering, sits at an all-time high and is pressuring existing layouts. Job openings here also remain elevated, signaling potential new hiring in 2016. Thus far in the office market upswing, financial-services payrolls have not regained their previous high, and vacant spaces related to deficits in fields related to residential real estate linger. Nonetheless, the hike in the Fed’s short-term lending rate may improve prospects for interest-rate sensitive financial businesses and create new space requirements.