A rising tide of new office projects may be skewing the national average rental rate upward and obscuring increased leasing challenges for second-generation properties in many markets, Transwestern’s latest U.S. office market report suggests.
Monthly asking rent averaged $26.97 per square foot in the third quarter, representing a 3.4% increase from a year earlier and a five-year gain of 19.7%. Much of that national increase reflects above-market rents at new or renovated projects, where landlords have incurred elevated material and labor costs to complete amenity-rich offerings.
The national vacancy rate has plateaued near 9.8%, equal to the rate one year ago. A dozen of the 49 markets Transwestern tracks showed negative net absorption or an increase in the volume of vacant space for the 12 months ended September. Nationwide, annualized absorption through the third quarter was 57.3 million square feet, or roughly one-third less than the 85.2 million square feet absorbed in 2018.
Office construction is at a cyclical high. Building starts in the 12 months through the third quarter were up 12.1% over the year-ago period, with more than 166 million square feet of projects underway. The sector delivered 18.5 million square feet of new space in the recent quarter, less than the second quarter’s 21.7 million square feet but up 1.3% from a year earlier, while the national economy and average monthly job growth have slowed.
“Developers have responded vigorously to tenant preferences for new construction,” said Jimmy Hinton, Senior Managing Director of Investment & Analytics at Transwestern. “In many markets, new construction is outpacing already moderating tenant demand, creating extra pressure on older-vintage properties. Landlords are increasingly challenged in reconciling capital improvement needs with cycle timing and prospects for suitable investment returns.”
While high-end rents at new properties can increase a market’s average lease rate, new construction drives rent downward when landlords feel pressure to compete for tenants by lowering rates. In Houston, for example, average third quarter asking rent had declined 0.7% from a year earlier.
Stuart Showers, Vice President of Research in Houston, predicts other markets will experience a similar shift in the coming months, and could represent a late-cycle playbook for landlords in other markets, should macro conditions deteriorate.
“The volume of new office construction pushing through Houston has resulted in downward pressure on rental rates, a situation that will manifest throughout second-generation product in a number of the nation’s markets that have high construction activity,” Showers said.
Download the full third quarter 2019 U.S. office market report at: www.twurls.com/us-office-3q19
Related Stories
Market Data | Oct 31, 2016
Nonresidential fixed investment expands again during solid third quarter
The acceleration in real GDP growth was driven by a combination of factors, including an upturn in exports, a smaller decrease in state and local government spending and an upturn in federal government spending, says ABC Chief Economist Anirban Basu.
Market Data | Oct 28, 2016
U.S. construction solid and stable in Q3 of 2016; Presidential election seen as influence on industry for 2017
Rider Levett Bucknall’s Third Quarter 2016 USA Construction Cost Report puts the complete spectrum of construction sectors and markets in perspective as it assesses the current state of the industry.
Industry Research | Oct 25, 2016
New HOK/CoreNet Global report explores impact of coworking on corporate real rstate
“Although coworking space makes up less than one percent of the world’s office space, it represents an important workforce trend and highlights the strong desire of today’s employees to have workplace choices, community and flexibility,” says Kay Sargent, Director of WorkPlace at HOK.
Market Data | Oct 24, 2016
New construction starts in 2017 to increase 5% to $713 billion
Dodge Outlook Report predicts moderate growth for most project types – single family housing, commercial and institutional building, and public works, while multifamily housing levels off and electric utilities/gas plants decline.
High-rise Construction | Oct 21, 2016
The world’s 100 tallest buildings: Which architects have designed the most?
Two firms stand well above the others when it comes to the number of tall buildings they have designed.
Market Data | Oct 19, 2016
Architecture Billings Index slips consecutive months for first time since 2012
“This recent backslide should act as a warning signal,” said AIA Chief Economist, Kermit Baker.
Market Data | Oct 11, 2016
Building design revenue topped $28 billion in 2015
Growing profitability at architecture firms has led to reinvestment and expansion
Market Data | Oct 4, 2016
Nonresidential spending slips in August
Public sector spending is declining faster than the private sector.
Industry Research | Oct 3, 2016
Structure Tone survey shows cost is still a major barrier to building green
Climate change, resilience and wellness are also growing concerns.
Industry Research | Sep 27, 2016
Sterling Risk Sentiment Index indicates risk exposure perception remains stable in construction industry
Nearly half (45%) of those polled say election year uncertainty has a negative effect on risk perception in the construction market.
