Climbing a Wall of Worry…

The US office market climbed a wall of worry in the first quarter of 2016, racking up solid—though not spectacular—gains despite sagging corporate profits and the shaky global economy.

• Tenants absorbed 6.5 million square feet, about one-third of the 18.0 million-square-foot average in each of the prior two quarters. The market was slow to take off in several recent years, however, with first-quarter totals subdued in 2013 and again last year.
• Space under construction ended the quarter at 91.9 million square feet, up from 76.5 million square feet a year ago. Manhattan led all markets with 11.4 million square feet in the pipeline, including five of the nation’s six largest projects.

• The vacancy rate dropped another 10 basis points to end the quarter at 13.7%, down from 14.4% a year ago. Three of the five markets posting the largest year-over-year vacancy declines were adjacent to more expensive markets: Fairfield County, Connecticut, and Westchester County, New York, outside of Manhattan; and Oakland-East Bay, adjacent to San Francisco and Silicon Valley.
• The average asking rent across the U.S. ended the quarter at $29.13/SF full service, jumping 0.6% from the prior quarter and 4.2% from the year-ago quarter. In Silicon Valley, average rent increased 15.8% over the past four quarters, followed by Nashville, Los Angeles and Portland, all with double-digit gains. The average rent in CBD markets increased by 3.4% year-over-year, while the average suburban rent gained 4.6%—a sign of the recovery underway in the nation’s suburbs.

Many expect this expansion cycle to continue, but at a subdued pace… completion of Q2 will be telling as to whether or not the market is following the trend of 2015, or moving in another direction.