Office Market Shows Long-term Potential

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Q3 2016 U.S. and Atlanta Market Update

Like a promising high-school football recruit, the office market simply hasn’t reached its full potential during this recovery “season.” Nationally, Q3 2016 performance was a little lackluster. However, in the long-run, the sector is poised for success. “The longer-term view shows the office market gaining momentum, so again, the job growth numbers give hope that this quarter's weakness is an anomaly and not the beginning of a trend,” reported REIS. It may not have been the best quarter for the office sector but the game isn’t over.

Despite having fallen for eight previous quarters, the national vacancy rate was unchanged at 16%. For the second consecutive quarter, new supply exceeded net absorption this quarter, which was slightly concerning and unexpected. While not playing as significant of a role as Q2, office conversions in Q3 were 800,000 SF, which is what kept the vacancy rate from rising.

Due in part to low construction, net absorption was 4.77 million SF during Q3, the lowest level since Q2 of 2014. The decline in net absorption could also be a delayed response to job growth deceleration in Q1, according to REIS. New construction totaled 6.4 million SF in the quarter.

One of the indicators that the office market is recovering is that the rolling 12-month total is increasing over time. Over the last 12 months, new construction totaled 34.34 million SF. It is still doubtful that new construction will reach the levels of past recoveries.

In Q3, asking and effective rents growth are down to 0.3% and 0.4%, respectively from 0.6% growth (for both) in Q2, which was the twenty-third consecutive quarter of asking and effective rent growth. The 12-month changes for asking and effective rent growth both also slowed slightly compared to the last two quarters. However, REIS predicts that “As demand continues to exceed new construction, vacancy should decline and rent growth will likely pick up as a result.”

The best news for the office sector is how well the job market is doing. Job growth accelerated over the summer months, especially in metro markets, according to REIS’ Q3 Office Trends report, which predicts that the “pick-up in employment growth” will result in higher net absorption at the close of 2016 and into Q1 2017. The average national monthly job growth from June through August was 232,000, and of that, 75% was in the REIS 82 metros. More than 2.3 million jobs have been created over the last year, and the monthly average year-to-date through July was 186,000, according to the Yardi Matrix U.S. Multifamily Fall 2016 Outlook. In September, 156,000 jobs were created and the unemployment rate was “little changed” at 5.0%, according to the U.S. Bureau of Labor Statistics.

For the Atlanta office market in general, Q3 vacancy increased 20 basis points to 19.0%. Year-over-year, this is a 70 basis point decrease in vacancy, echoing the national trend of long-term numbers outweighing Q3 performance. The city ranked 5th for 12-month asking and effective rents, which grew 4.6% and 4.7% respectively. In Atlanta, average effective rent for office was up 70 basis points in Q3 to $18.85 per SF, reported REIS. The average quoted asking rental rate in Atlanta’s CBD was $23.10 at the end of the Q3 2016, and $21.64 in the suburban markets, reported CoStar. However, the highest average asking rental rates continue to be seen in Buckhead, Midtown and Central Perimeter submarkets.

Bull Realty, Inc., Research

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