U.S. Office Vacancy Rose In Q1 For The First Time In Seven Years

After a seven-year stretch of shrinkage in the national vacancy rate, the U.S. office market experienced a rare uptick in vacancy during the first quarter of 2017.

Vacancy increased 10 basis points to 13% in Q1, according to CBRE, but the upward trend is expected to be more than just a blip. CBRE predicts that the national vacancy rate will rise to 13.1% by the end of 2017 and 13.3% by the end of 2018.

"We are expecting vacancy will continue to rise over the next couple of years," CBRE Americas head of office research Andrea Cross said. "We don’t think it's something to be concerned about. We're expecting quite modest increases." 

Cross attributes the rise to a surge in deliveries. Roughly 11.9M SF of office space delivered across the U.S. in Q1 alone, the second-highest quarter of deliveries since the Great Recession. 

"Absorption remains positive and job growth remains healthy," Cross said. "It's really this new supply coming online in leading markets that increased the vacancy rate." 

Office building deliveries are expected to reach their peak during 2017, with an anticipated 65.6M SF coming online this year. It will then slow down significantly, with 39.8M SF expected to deliver in 2018, according to CBRE.

The areas hit hardest by office vacancy tend to be suburban markets with outdated office parks that have suffered from tenants moving toward amenity-rich urban locations.

Cross identified Washington, D.C., as one office market that has been slower to recover than most other major cities. She attributed this to the shrinking federal footprint, combined with a flight to quality that has left many second-generation buildings vacant.

"D.C. has been struggling a bit relative to some of these other markets" like Manhattan, San Jose and Nashville, Cross said.