Industrial Insights: Lee National Office Brief – Q1 2017

Market Reports


The US office market showed signs of fatigue in the first quarter of 2017. Vacancy was unchanged, rent growth slowed, deliveries were flat and net absorption, while still positive, declined substantially. Sublease inventory also moved higher. Altogether, it has experts wondering whether the long steady recovery in the office sector is showing signs of fatigue. Major markets including New York City, Los Angeles, and even tech-darling San Francisco posted signifi cant negative net absorption in Q1, as did Atlanta, Houston, and Hartford.

The US office market lost some momentum in the last two-quarters and needs some good news in Q2 to get back on track. US employment growth has been sporadic of late and that has experts wondering if the market expansion can be sustained going forward. Job growth in office-using sectors drives net absorption and the twelve-month rolling average of jobs created each month has declined. After two good months to start the year, March job growth fell significantly to just 98,000, well below the threshold needed to absorb new entrants into the workforce. Wage growth has improved somewhat over the past year, but the increase in inflation, touted by our central bankers, is neutralizing those gains.

Rent growth will continue, but probably at a more tepid pace going forward. Tenants will keep looking for new ways to do more with less by leveraging communication technologies and preference for open floor plans preferred by their employees. They will trade higher rental rates for space efficiency. Owners of older properties not in proximity to preferred amenities and public transportation will be under pressure to upgrade their buildings or be forced to lower rents and boost concessions.

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