Have Office Markets Plateaued? All Signs Point To Yes
Office real estate will experience a slowdown this year, with some experts projecting the market has reached its plateau. A labor shortage coupled with millions of square feet in new supply expected to come online this year will take its toll on the sector, as outlined below.
Though office-using employment remains healthy thanks to strong demand from tech companies, the pullback in office-using jobs and more than 50M SF of projected office supply scheduled to hit this year (the most since 2009), is expected to push up vacancy rates. CBRE expects rent growth to slow, with rents increasing by 1.5% over the course of this year, down quite a bit from 4.5% growth in 2015.
Another culprit for this sector’s slowdown is the shift in office dynamics and tenant needs, such as the growing trend in favor of open-plan office space and co-working offices, which often require less space per employee.
Suburban office markets are expected to beat downtown office performance this year, depending on the markets’ live/work/play drivers. CBRE expects suburban market rent growth to surpass 2% while vacancies may increase by a mere 10 basis points to 14.5%. This is a huge shift from past trends where downtown markets typically led the way in office growth. Demand in downtown metros will lag, with CBRE foreseeing vacancies jumping by 30 bps to 10.9%.
CMBS delinquencies for the month of February were led by office loans. Though this has little to do with fundamentals, office building owners are increasingly more than 60 days past due on payments. The office sector’s unpaid debt rose 54 bps to 7.65%, offsetting improvements made by the other four property sectors, Trepp reports.
“On our end, occupancy for offices behind CMBS loans have started to plateau,” Trepp analyst Sean Barrie said. “Over the last 12 months, the delinquency rate for the office sector has risen more than any other major property type.”
Despite last month’s increase in unemployment to 4.8%, the labor market remains tight and has led to a desperate search for qualified talent. As such, CBRE anticipates net office-using job gains will drop to 273,400, down from the 2010-2016 average levels of 418,100 office-using jobs.
