Q2 National Office Sector Report from Savills Studley

Savills Studley Research has released its National Office Sector Report for the second quarter of the year, which found that the national overall office availability rate ticked down to 16.4% after three consecutive quarters at 16.5%. While availability inches lower, Savills Studley found that the US national overall rental rate rose for the 15th consecutive quarter, rising by 1.2% from the prior quarter.

"Availability has barely budged so far in 2015 as new construction expands in more markets and leasing slows. Deal volume in the first half of 2015 has fallen by more than 15% compared to the first half of 2014 in most major markets, with very sharp decreases in Boston, Manhattan, Atlanta and Dallas." said Keith DeCoster, Savills Studley Research.

An excerpt from the report follows:

Slow Start to 2015
Weaker demand in markets such as Houston and Washington, DC is to be expected considering the pullback in the oil and gas industry and constrained government spending. More surprising is the decreased demand in markets that registered strong leasing in 2014, such as Atlanta, Boston, Chicago and Dallas/Fort Worth. Some drop-off in the fastest-growing markets like Dallas/ Fort Worth was inevitable – there are only so many 500,000-sf tenants looking for space, after all. Despite very strong demand from the biopharmaceutical sector in Cambridge, tenants in the Boston region leased only 21.8 msf in the last four quarters, down by 17.6% from a year ago. As of midyear 2015, deal volume in Downtown Chicago and Manhattan was down by 24.0% and 31.7%, respectively, compared to the first six months of 2014. In contrast to these markets, leasing in Denver, Phoenix, Los Angeles and San Francisco and Silicon Valley shows little sign of cooling.

Multiple Factors Impacting Leasing
Slower leasing so far in 2015 in many markets (a decline of more than 15% in two-thirds of major markets) can be attributed to several factors. For one, the breakneck pace of job creation in high-growth markets such as Atlanta and Dallas/Forth Worth has decelerated just a bit – from 4.0%-5.0% to 3.0%-4.0% (still well above the national average). Also, the surge in 2006 and 2007 leasing created a cyclical peak in 2016 and 2017 rollovers, which was boosted by companies signing early renewals. The very largest of the tenants in this cohort have satisfied their space needs. Additionally, during 2013 and 2014 many of the very best bargains were spoken for. In Lower Manhattan, for example, the sub-$45 Class A space that was still out there a few quarters ago has been snared. As traditional tenants in more markets a bit of a standoff is emerging particularly between landlords and traditional space users unwilling to ante up. Biotech companies in Cambridge may be willing to pay 70 or even $80 but banks and law firms are not. It remains to be seen whether this slowdown in leasing is just a lull, or if the concern expressed by some analysts – that the recovery is getting long in the tooth – is becoming a reality. Of note, Boston, Chicago, Los Angeles and Manhattan (in contrast to San Francisco and Silicon Valley) still depend on traditional space users for most of their leasing. Banks and law firms remain firmly rooted in the reality that their profit margins and revenues are still below pre-recession norms. Consequently, resistance to rental rate escalation in Boston’s Back Bay, Downtown Chicago and Midtown Manhattan still prevails.

To read the full report, click here. For more news and information visit Blumberg Partners.