Q2 Office Markets Showing Signs Of Cooling

As we progress into the second half of the year, a recent Cushman & Wakefield report says tenant demand is slipping and office markets are slowing down. But the brokerage says despite the drop in tenancy, rents jumped to their highest growth rate in seven years.

“Rents have continued to increase with new expensive space coming to the market and new construction coming in at a higher price point. At the same time, the more popular submarkets have continued to tighten to some extent,” Cushman & Wakefield regional director Robert Sammons tells Bisnow.

The sector absorbed 14.7M SF in Q2, up 24.9% from Q1, but down 36% compared to the same time last year. Vacancy rates for the quarter were down 50 bps compared to the prior year, and down 400 bps from its mid-2000 peak.

Office rents increased by 5.8% in Q2 to $29 PSF, and new construction continued to expand modestly with 13M SF added to the national inventory. Since tenant demand kept pace with the new construction, vacancy declined. 

“The recovery has been going on since 2009 and it’s been somewhat of a slow, gradual recovery. Some markets, like S.F. and NY, have performed incredibly well in past years. But these top-tier markets are becoming more expensive, so there’s been a shift to secondary markets like Nashville, Portland, Austin and Salt Lake City,” Robert tells us.

He says there are several factors working for secondary markets at the moment—they’re in cool 18-hour cities, they typically have working transit and to top it off, the cost of living is lower. “They’re drawing in the population and they’re drawing in the jobs,” he says.

Of the 87 markets Cushman & Wakefield tracks, 67 saw an increase in rents, while 19 saw a decline. The strongest growth in rents occurred in Silicon Valley, where prices rose by 28.4%, and San Mateo with a 17.9% gain.

S.F. rents in particular rose 9.2%, as did the tech market’s vacancy rates by 1.6%.  Cost-conscious tenants have pumped the brakes on the tech capital, heading to secondary markets and driving less activity.

“S.F. certainly has seen a correction to some extent because it’s so tech-heavy, but at the same time, we still see some of the traditional tech firms continuing to expand in the market because that’s where a lot of the talent lies,” Robert says. “This has been a long recovery period going back to the depths of recession, but it’s natural for market progress to ebb and flow. We’re not going into a recession, there’s just a shifting in the market.”