Strong demand from office users in Orange County and San Diego is causing rents to rise at a higher rate in those markets than in many others. According to a Q1 report from Cushman & Wakefield (C&W), the U.S. markets with the highest year-over-year office rent increases include Orange County, (+21.1 percent); Charlotte, North Carolina (+10.4 percent); Atlanta (+9.7 percent); San Diego (+8.6 percent); and Portland, Oregon (+7.3 percent).
Midtown Manhattan tops the list of high rent districts with an average per-square-foot price of $77.07, followed by San Francisco at $71.40, Midtown South Manhattan at $69.13, Downtown Manhattan at $59.67, San Mateo, California, at $58.06, and Washington, D.C., at $54.75, the report says.
These markets are going against the national trend. Overall asking rent declined -0.2 percent in the first quarter compared with the fourth quarter of last year, marking the first decline in national asking rent in more than six years, C&W reports. Most markets experienced an increase in rents in the first quarter, but declines in larger markets like Boston, Silicon Valley, Downtown Manhattan and Washington, D.C. pushed down the national average, says Ken McCarthy, principal economist and Americas head of applied research at the firm.
Among major markets, the lowest vacancy rate was recorded in Midtown South Manhattan at 6.5 percent, followed by Seattle, Raleigh/Durham, Charlotte, and San Mateo County, California (each at 8.1 percent). Markets with the highest vacancy rates include Westchester County, New York (24.6 percent); Fairfield County, Connecticut. (24.2 percent); Houston (22 percent); Cincinnati (21.6 percent); and the Los Angeles CBD (21.2 percent).
Office leasing markets across the U.S. remained in balance in the first quarter of 2018, according to the firm. Approximately 8.1 million square feet of space was absorbed off the market, a rate comparable to last year’s first-quarter levels. New leasing volume decreased from 2017 levels, and while vacancy increased slightly over last year’s first quarter rate, so did rents.
New leasing volume in the first quarter of 2018 decreased by 20.7 percent year-over-year to 65.6 million square feet, according to the report. However, despite the decline, the total volume of space absorbed off the market increased slightly. A total of 8.1 million square feet of space was absorbed in the 87 office markets tracked by the firm, compared to 7.1 million square feet a year ago.
“Leasing volumes can shift sharply from quarter to quarter and year to year,” says McCarthy. “And because leasing was unusually strong last year, a decline was not unexpected. New leasing in the first quarter is comparable to levels we’ve seen in other solid leasing years.”
In addition, new construction continued to impact the market throughout the first quarter and offset the amount of space absorbed. A total of 11.8 million square feet of new office space was completed in Q1, leading to a nationwide office vacancy rate increase from 13.1 percent at the end of 2017 to 13.3 percent at the end of March.
Looking forward, office-market trends will depend on job growth and construction deliveries, says Revathi Greenwood, head of Americas research at C&W. “The current pipeline of office space under construction, while high, is down substantially from mid-2017 levels and remains concentrated in a few markets. We believe the pace of job growth will continue to be an important driver of office-leasing fundamentals, and if demand remains as healthy as it’s been thus far in 2018, new construction should be absorbed.”