- U.S. office occupancy increased again in Q3 and ongoing, stable demand suggests potential upside in the near term.
- The technology sector is the leading driver of demand growth.
- The main risk to U.S. office market fundamentals over the next several quarters is increasing supply that may outstrip demand.
Q3 2019 was the 40th consecutive quarter of U.S. office-using employment growth and 30th consecutive quarter of positive U.S. office absorption. The pace of this record-long expansion remains remarkably steady. Year-over-year office-using employment growth in Q3 mirrored the three-year average of 1.8%. Net absorption of 14.4 million sq. ft. in Q3 was 8% above the three-year quarterly average of 13.3 million sq. ft.
This consistent demand should provide near-term upside for office occupancy. Historically, it takes roughly six to 12 months before a change in office-using employment growth affects total office occupancy, as evidenced in Figure 1. As such, we expect that continued office-using employment growth this year will continue to support office occupancies.
Figure 1: Remarkably Stable Office-Using Employment Growth Supports Office Occupancy
Source: CBRE Econometric Advisors, Q3 2019.
Strong demand in Q3 resulted in vibrant leasing velocity and a 10-basis-point drop in the U.S. office vacancy rate to 12.1%, down by 50 basis points from a year ago. Average rents jumped 4.6% from a year ago to $34.53 per sq. ft.
Demand for U.S. office space has been bolstered by the ever-growing technology sector, which accounted for 22.1% of all U.S. office leasing over the past year. The top five metros for leasing by tech companies in Q3 were Manhattan, San Francisco, Dallas/Ft. Worth, Seattle and Chicago.
The main risk to the U.S. office market over the next several quarters is any increase in supply that outstrips demand.
Figure 2: U.S. Office Leasing Activity (Annual through Q3 2019)
Source: CBRE Research. Data is based upon one-year sum of lease transactions as of Q3 2019 and compared with the same in Q3 2018. Does not include transactions that are confidential or in the Retail, Telecommunications, or Other industries.