Office Vacancy Rate unchanged in Q3 to 16.6%

Posted on October 4, 2018

Reis reported that the office vacancy rate was unchanged at 16.6% in Q3, from 16.6% in Q2 2018. This is up from 16.4% in Q3 2017, and down from the cycle peak of 17.6%.

From Reis Economist Barbara Denham:
Defying employment trends, the U.S. office market was flat in the third quarter at 16.6%. Once again, leasing activity remains tepid compared to previous expansions. Net absorption, or occupancy growth, was 3.54 million square feet, up from 3.48 million square feet last quarter, but down from an average of 5.9 million square feet absorbed per quarter in 2017. New completions fell to 5.93 million square feet, down from an average of 11.2 million square feet added per quarter in 2017.

Rent growth had accelerated a bit earlier in the year but fell to 0.4% in the third quarter, down from 0.7% in the second quarter. Both the average asking rent and average effective rent (that nets out landlord concessions) grew at the same rate in the quarter as they did in the prior six quarters. This suggests that landlord concessions have seen little change over the last year. One year ago, the average asking and effective rent growth was also 0.4%. At $33.20 per square foot (asking) and $26.94 per square foot (effective), the average rents have increased 2.5% and 2.6%, respectively, since the third quarter of 2017.

The sluggishness in the office market is nothing new, but the deceleration contrasts an otherwise healthy economy as office employment growth has picked up in 2018 from rates seen in 2017 (1.8% in 2018 vs. 1.6% in 2017). The recent higher rent growth had suggested that landlords were gaining confidence in leasing conditions, but net absorption has persistently trailed new completions over the last seven quarters as tenants have been hesitant to take on added space which has kept a lid on rent growth.

The office market statistics still reflect the gap between the haves and the have-nots: larger markets in the West, South Atlantic and larger Northeast cities with healthy occupancy and rent growth offset by tepid growth or declines in smaller, suburban markets in the Midwest or in less densely populated areas. However, the numbers show that the gap is narrowing.