Thursday, July 05, 2018

Reis: Office Vacancy Rate increased in Q2 to 16.6%

by Bill McBride on 7/05/2018 10:59:00 AM

Reis released their Q2 2018 Office Vacancy survey this morning. Reis reported that the office vacancy rate increased to 16.6% in Q2, from 16.5% in Q1 2018. This is up from 16.4% in Q2 2017, and down from the cycle peak of 17.6%.

From Reis Economist Barbara Denham:

Showing mixed signs of the current state of the office market, the office vacancy rate increased for the second straight quarter to 16.6%. Heading into the ninth year of the recovery, the office market has never seen the robust leasing activity of previous expansions, maintaining a steady but low level of absorption despite healthy office job growth. Net absorption, or occupancy growth, trailed previous quarters at 2.817 million square feet, down from an average of 5.78 million square feet absorbed per quarter in 2017. New completions fell to 8.07 million square feet, down from an average of 10.9 million square feet added per quarter in 2017.

Rent growth, in contrast, was healthier in the last two quarters than in the previous seven as a number of metros had rent growth of 1% or more in the quarter and 4% for the year. The national average asking rent increased 0.7% in the second quarter as did the effective rent which nets out landlord concessions. At $33.07 per square foot (asking) and $26.83 per square foot (effective), the average rents have increased 2.5% and 2.6%, respectively, since the second quarter of 2017.
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In short, the office market statistics reflect the net growth between the haves and the have-nots: larger markets in the West, South Atlantic, Texas, Boston and New York with healthy occupancy and rent growth offset by tepid growth or declines in smaller, suburban markets mostly in less densely populated areas. Much of the growth can be attributed to gains in technology: 9.6% of the added office jobs this year were in the Computer Systems Design industry that should continue to fuel office gains in most of these cities.

The next big question is: What city will Amazon select for its HQ2? The answer to this could come before Reis releases its third quarter statistics. That news will certainly generate considerable discussion not only about the “winning” city but on the reasons why the others lost out.
Office Vacancy Rate Click on graph for larger image.

This graph shows the office vacancy rate starting in 1980 (prior to 1999 the data is annual).

Reis reported the vacancy rate was at 16.6% in Q2.  The office vacancy rate had been mostly moving sideways at an elevated level, but has increased recently.

Office vacancy data courtesy of Reis.