A rising tide of new office projects may be skewing the national average rental rate upward and obscuring increased leasing challenges for second-generation properties in many markets, Transwestern’s latest U.S. office market report suggests.
Monthly asking rent averaged $26.97 per square foot in the third quarter, representing a 3.4% increase from a year earlier and a five-year gain of 19.7%. Much of that national increase reflects above-market rents at new or renovated projects, where landlords have incurred elevated material and labor costs to complete amenity-rich offerings.
The national vacancy rate has plateaued near 9.8%, equal to the rate one year ago. A dozen of the 49 markets Transwestern tracks showed negative net absorption or an increase in the volume of vacant space for the 12 months ended September. Nationwide, annualized absorption through the third quarter was 57.3 million square feet, or roughly one-third less than the 85.2 million square feet absorbed in 2018.
Office construction is at a cyclical high. Building starts in the 12 months through the third quarter were up 12.1% over the year-ago period, with more than 166 million square feet of projects underway. The sector delivered 18.5 million square feet of new space in the recent quarter, less than the second quarter’s 21.7 million square feet but up 1.3% from a year earlier, while the national economy and average monthly job growth have slowed.
“Developers have responded vigorously to tenant preferences for new construction,” said Jimmy Hinton, Senior Managing Director of Investment & Analytics at Transwestern. “In many markets, new construction is outpacing already moderating tenant demand, creating extra pressure on older-vintage properties. Landlords are increasingly challenged in reconciling capital improvement needs with cycle timing and prospects for suitable investment returns.”
While high-end rents at new properties can increase a market’s average lease rate, new construction drives rent downward when landlords feel pressure to compete for tenants by lowering rates. In Houston, for example, average third quarter asking rent had declined 0.7% from a year earlier.
Stuart Showers, Vice President of Research in Houston, predicts other markets will experience a similar shift in the coming months, and could represent a late-cycle playbook for landlords in other markets, should macro conditions deteriorate.
“The volume of new office construction pushing through Houston has resulted in downward pressure on rental rates, a situation that will manifest throughout second-generation product in a number of the nation’s markets that have high construction activity,” Showers said.
Download the full third quarter 2019 U.S. office market report at: www.twurls.com/us-office-3q19
Related Stories
Market Data | Aug 10, 2020
5 must reads for the AEC industry today: August 10, 2020
Private student housing owners reap the benefits as campus housing de-densifies and race for COVID vaccine boosts real estate in life sciences hubs.
Market Data | Aug 7, 2020
6 must reads for the AEC industry today: August 7, 2020
BD+C's 2020 Color Trends Report and HMC releases COVID-19 Campus Reboot Guide for Prek-12 schools.
Market Data | Aug 6, 2020
6 must reads for the AEC industry today: August 6, 2020
Oklahoma State's new North Academic Building and can smart buildings outsmart coronavirus?
Market Data | Aug 5, 2020
6 must reads for the AEC industry today: August 5, 2020
San Jose's new tallest tower and Virginia is the first state to adopt COVID-19 worker safety rules.
Market Data | Aug 4, 2020
7 must reads for the AEC industry today: August 4, 2020
Construction spending decreases for fourth consecutive month and 100% affordable housing development breaks ground in Mountain View.
Market Data | Aug 3, 2020
Construction spending decreases for fourth consecutive month in June
Association officials warn further contraction is likely unless federal government enacts prompt, major investment in infrastructure as state and local governments face deficits.
Market Data | Aug 3, 2020
6 must reads for the AEC industry today: August 3, 2020
The future is a number game for retail and restaurants and 5 reasons universities are renovating student housing.
Market Data | Jul 31, 2020
5 must reads for the AEC industry today: July 31, 2020
Vegas's newest resort and casino is packed with contactless technology and Mariott, Hilton, and IHG dominate the U.S. hotel construction pipeline.
Market Data | Jul 30, 2020
Marriott, Hilton, and IHG continue to dominate the U.S. hotel construction pipeline at Q2’20 close
Hilton’s Home2 Suites and IHG’s Holiday Inn Express continue to be the most prominent brands in the U.S. pipeline.
Market Data | Jul 30, 2020
7 must reads for the AEC industry today: July 30, 2020
Millennium Tower finally has a fix and construction costs decrease for the first time in 10 years.