How The Top 10 Office Metros Fared In Q4

U.S. office markets exhibited strong rent growth the last three months of 2016, though a cyclical slowdown remains a running theme for the sector this year.

Roughly half of the markets Colliers International tracks experienced a rise in vacancies as leasing activity dropped in Q4, with overall net absorption down year-to-year.

Despite the decline, New York recorded its second-highest leasing activity in a decade, while San Francisco remained the tightest of the top 10 metros, and Seattle's expansion was driven by absorption from tech companies, including Google, Zillow, DocuSign and Pokémon, Colliers president of National Office Services Cynthia Foster said.

"In the fourth quarter of 2016, the largest U.S. office market fundamentals remained solid. The ‘new’ tech firms, 20 years and younger, continued to have a significant positive effect,” Foster said. “The pro-business agenda from the current administration should bode well for future office growth in the financial services sector, a driver across the U.S. top metros."

Here's how the top 10 office metros fared in Q4. 

Manhattan

Inventory: 506M SF

Absorption: -1.7M SF

Average Rents: $73.24/SF

Vacancy Rates: 6.4%

Year-over-year, leasing activity was up 5.5% in Manhattan in 2016, the second-highest total in 10 years. Asking rents edged up for the year, driven by demand in the FIRE (finance, insurance and real estate) sectors, which accounted for 31% of Manhattan’s leasing activity in 2016. On average, vacancy rates remained flat for the year, with 33M SF of new supply in the pipeline for 2017, though only half is under construction currently.

Los Angeles County

Inventory: 200M SF

Absorption: 750k SF

Average Rents: $35.88/SF

Vacancy Rates: 15%

Though there is room for rent growth in the market, this year is not likely to keep pace with growth in 2016. New construction is slowing as well, with roughly 75% of the 2.6M SF under construction expected to hit this year, predominantly in West L.A. cities like Marina Del Rey and Santa Monica.

Washington, DC

Inventory: 177M SF

Absorption: 789k SF

Average Rents: $46.07/SF

Vacancy Rates: 13.4%

The District of Columbia experienced softening continued from Q3. Absorption was slightly negative for the year and average rents remained steady. Colliers expects an increase in lease renewals over relocations as government agencies shrink their footprint amidst a hiring freeze of federal workers.  

Chicago

Inventory: 142M SF

Absorption: 561k SF

Average Rents: $38/SF

Vacancy Rates: 11.4%

Chicago can expect a slowdown in its downtown market this year, as vacancies hit a 16-year low in 2016 — likely the tightest the market will get this cycle. Rents surpassed their all-time highs last year, and that growth is expected to slow in 2017. Unlike the District of Columbia, Chicago will see some major relocations this year from firms within the suburbs and on the outskirts of the city moving into the downtown areas. These relocations include firms like McDonald’s, Wilson Sporting Goods and Kraft Heinz.

Atlanta

Inventory: 99M SF

Absorption: 429k SF

Average Rents: $27.10/SF

Vacancy Rates: 12.7%

Rents were up and vacancy rates declined in Q4 as Atlanta’s office market continued to mend. The second half of last year ended with nearly 1M SF absorbed and construction is projected to slow this year as an expected 1.8M SF in supply hits the market.

San Francisco/Bay Area

Inventory: 93M SF

Absorption: 698k SF

Average Rents: $72.46/SF

Vacancy Rates: 5.6%

San Francisco was the tightest office market of the top 10 metros, with vacancies falling 20 basis points in Q4 to 5.6%. Rents soared to their second-highest average of $72.46/SF, and net absorption — though below the 10-year average — remains strong, dominated by tech companies. Though it closed out 2016 strong, San Francisco is expected to see a mild slowdown this year in leasing activity, with opportunities for construction growing slim. 

Dallas

Inventory: 67M SF

Absorption: 333k SF

Average Rents: $30.12/SF

Vacancy Rates: 13%

Vacancies ticked up in Dallas in Q4 to 13%, up 110 basis points compared to the year-ago quarter. Despite this, rents were on the rise, with Class-A locations breaking the $40/SF barrier. Far North Dallas continues to see the most development, with 5M SF set to come online this year. 

Seattle

Inventory: 71M SF

Absorption: 1.78M SF

Average Rents: $37.03/SF

Vacancy Rates: 8.2%

Amazon moved into its 1M SF new offices in Q4, in addition to leasing a 480k SF office building in South Lake Union, absorbing a large amount of Seattle’s supply. Despite an uptick in rents and tight vacancy, the market is expected to plateau this year.

Boston

Inventory: 66.7M SF

Absorption: 137k SF

Average Rents: $54.30/SF

Vacancy Rates: 11.3%

Boston’s office market performance remain mixed. Though rents held steady last year at around $55/SF, absorption was markedly lower than 2015 levels and vacancies jumped up 230 basis points within a 12-month period — a result of new supply and increased sublease space.

Houston

Inventory: 43M SF

Absorption: 30k SF

Average Rents: $41.42/SF

Vacancy Rates: 16.8%

Houston continued to experience challenges last year. Though absorption rose in Q4, it did little to recover from the negative 542k SF of absorption in Q3. Vacancies shot up 100 basis points last year to 16.8%, and that’s taking into account that no new buildings were delivered in Q4. In Q1 2017, 3M SF of construction is set to come online, which includes a 1.05M SF 48-story tower for Hines Securities Inc.