The Next Office Cycle Will Be Defined by Scarcity, Not Oversupply
After years of uncertainty in the office sector, shrinking construction pipelines, improving leasing activity, and the ongoing preference for high-quality space are leading to a more selective market.
Recent reports from Colliers, Cushman & Wakefield, Lee & Associates, JLL and Plante Moran suggest that the next phase of office could be defined by more competition for buildings that meet tenant expectations.
The Current Situation
Supply: Construction continues to decline, with new starts limited mostly to projects in select markets with significant preleasing. As a result, the construction pipeline is low by historical standards and is starting to push up rent growth while increasing occupancy. Meanwhile, available sublease inventory has fallen from its cyclical peak.
Demand: The U.S. market is on track to halt its absorption slide, with total leasing volume continuing to improve. However, leasing volumes remain depressed in many markets. Net absorption has been affected partly by a dwindling construction pipeline and partly by inventory being removed from the market for other uses. As a result, tenants are competing for a shrinking supply of top-tier space, resulting in falling vacancies.
The Outlook
Economic: Investors are expecting a hike in the federal funds interest rate; as such, cost-of-capital reductions will be a key driver of recovery in the development pipeline.
Rent growth: Rent growth, especially for high-end Class A spaces, will still be aggressive as tenants increasingly compete for limited inventory. Construction: Completions are forecast to increase over the next several months, but preleasing could curtail the available square footage. At the same time, the growing demand for high-quality space could bring more office developers back into the market.
