Second Quarter 2016 – National Office Market

Ken Ward Economy

U.S.’s Vacancy Decreases to 10.1%
Net Absorption Positive 37,476,761 SF in the Quarter

The U.S. Office market ended the second quarter 2016 with a vacancy rate of 10.1%. The vacancy rate was down over the previous quarter, with net absorption totaling positive 37,476,761 square feet in the second quarter. Vacant sublease space decreased in the quarter, ending the quarter at 41,918,623 square feet. Rental rates ended the second quarter at $23.56, an increase over the previous quarter. A total of 313 buildings delivered to the market in the quarter totaling 19,113,316 square feet, with 142,630,639 square feet still under construction at the end of the quarter.

Absorption
Net absorption for the overall U.S. office market was positive 37,476,761 square feet in the second quarter 2016. That compares to positive 15,196,564 square feet in the first quarter 2016, positive 37,914,176 square feet in the fourth quarter 2015, and positive 32,480,764 square feet in the third quarter 2015.

Tenants moving out of large blocks of space in 2016 include: Navistar, Inc. moving out of 346,495 square feet in the Chicago market at 2601 Navistar Drive, and Fiserv moving out of 220,674 square feet at 4411E Jones Bridge Road in the Atlanta market.

Ch2m Hill Alaska, Inc. moving out of 91,188 square feet at 949 E 36th Ave; Verizon Wireless moving out of 88,655 square feet at Stonebridge I; and American InterContinental University moving out of 76,402 square feet at Embassy Row – Bldg 500.

Tenants moving into large blocks of space in 2016 include: Charleston School of Law moving into 53,936 square feet at 385 Meeting St in the Charleston/N Charleston market, and Firefly Digital moving into 7,684 square feet at 125 S Buchanan St in the Lafayette market.

The Class-A office market recorded net absorption of positive 10,964,561 square feet in the second quarter 2016, compared to positive 9,508,240 square feet in the first quarter 2016, positive 19,398,295 in the fourth quarter 2015, and positive 17,421,302 in the third quarter 2015.

The Class-B office market recorded net absorption of positive 17,774,533 square feet in the second quarter 2016, compared to positive 5,662,261 square feet in the first quarter 2016, positive 14,905,757 in the fourth quarter 2015, and positive 11,852,393 in the third quarter 2015.

The Class-C office market recorded net absorption of positive 8,737,667 square feet in the second quarter 2016 compared to positive 26,063 square feet in the first quarter 2016, positive 3,610,124 in the fourth quarter 2015, and positive 3,207,069 in the third quarter 2015.

Net absorption for U.S.’s central business district was positive 6,937,949 square feet in the second quarter 2016. That compares to negative (477,005) square feet in the first quarter 2016, positive 4,244,946 in the fourth quarter 2015, and positive 817,046 in the third quarter 2015.

Net absorption for the suburban markets was positive 30,538,812 square feet in the second quarter 2016. That compares to positive 15,673,569 square feet in first quarter 2016, positive 33,669,230 in the fourth quarter 2015, and positive 31,663,718 in the third quarter 2015.

Vacancy
The office vacancy rate in the U.S. market area decreased to 10.1% at the end of the second quarter 2016. The vacancy rate was 10.3% at the end of the first quarter 2016, 10.3% at the end of the fourth quarter 2015, and 10.5% at the end of the third quarter 2015.

Class-A projects reported a vacancy rate of 12.0% at the end of the second quarter 2016, 12.0% at the end of the first quarter 2016, 11.9% at the end of the fourth quarter 2015, and 12.0% at the end of the third quarter 2015.

Class-B projects reported a vacancy rate of 10.4% at the end of the second quarter 2016, 10.7% at the end of the first quarter 2016, 10.7% at the end of the fourth quarter 2015, and 11.0% at the end of the third quarter 2015.

Class-C projects reported a vacancy rate of 6.7% at the end of the second quarter 2016, 7.1% at the end of first quarter 2016, 7.1% at the end of the fourth quarter 2015, and 7.3% at the end of the third quarter 2015.

The overall vacancy rate in U.S.’s central business district at the end of the second quarter 2016 decreased to 9.8%. The vacancy rate was 9.9% at the end of the first quarter 2016, 9.9% at the end of the fourth quarter 2015, and 10.0% at the end of the third quarter 2015.

The vacancy rate in the suburban markets decreased to 10.2% in the second quarter 2016. The vacancy rate was 10.4% at the end of the first quarter 2016, 10.4% at the end of the fourth quarter 2015, and 10.6% at the end of the third quarter 2015.

Largest Lease Signings
The largest lease signings occurring in 2016 included: the 486,400 square foot lease signed by McDonalds Corporation at Randolph West in the Chicago market; the 401,681 square foot lease signed by Cardinal Health at Nationwide Building A in the Columbus market; and the 376,765 square foot lease signed by NYU Langone Medical Center at 222 E 41st St in the New York City market.

Rental Rates
The average quoted asking rental rate for available office space, all classes, was $23.56 per square foot per year at the end of the second quarter 2016 in the U.S. market area. This represented a 0.5% increase in quoted rental rates from the end of the first quarter 2016, when rents were reported at $23.44 per square foot.

The average quoted rate within the Class-A sector was $29.62 at the end of the second quarter 2016, while Class-B rates stood at $21.03, and Class-C rates at $17.17. At the end of the first quarter 2016, Class-A rates were $29.52 per square foot, Class-B rates were $20.86, and Class-C rates were $17.03.

The average quoted asking rental rate in U.S.’s CBD was $30.36 at the end of the second quarter 2016, and $22.08 in the suburban markets. In the first quarter 2016, quoted rates were $29.86 in the CBD and $22.03 in the suburbs.

Deliveries and Construction
During the second quarter 2016, 313 buildings totaling 19,113,316 square feet were completed in the U.S. market area. This compares to 404 buildings totaling 19,176,474 square feet that were completed in the first quarter 2016, 408 buildings totaling 26,131,109 square feet completed in the fourth quarter 2015, and 20,126,893 square feet in 386 buildings completed in the third quarter 2015.

There were 142,630,639 square feet of office space under construction at the end of the second quarter 2016. Some of the notable 2016 deliveries include: 10 Hudson Yards, a 1,725,250 square foot facility that delivered in second quarter 2016 and is now 94% occupied, and 2101 Citywest Blvd–Phillips 66, a 1,100,000 square foot facility in the Houston market and is now 100% occupied.

The largest projects underway at the end of second quarter 2016 were 30 Hudson Yards, a 2,600,000 square foot building with 100% of its space pre-leased in the New York City market, and Capital One Campus – Building 3, a 975,000 square foot building in the Washington market that is 100% pre-leased.

Inventory
Total office inventory in the U.S. market area amounted to 10,709,634,776 square feet in 518,661 buildings as of the end of the second quarter 2016. The Class-A office sector consisted of 3,386,499,800 square feet in 17,861 projects. There were 198,172 Class-B buildings totaling 4,950,437,584 square feet, and the Class-C sector consisted of 2,372,697,392 square feet in 302,628 buildings. Within the Office market there were 23,336 owner-occupied buildings accounting for 985,186,261 square feet of office space.

Sales Activity
Tallying office building sales of 15,000 square feet or larger, U.S. office sales figures fell during the first quarter 2016 in terms of dollar volume compared to the fourth quarter of 2015.

In the first quarter, 764 office transactions closed with a total volume of $18,695,936,263. The 764 buildings totaled 80,260,439 square feet and the average price per square foot equated to $232.94 per square foot. That compares to 1,028 transactions totaling $30,288,361,532 in the fourth quarter 2015. The total square footage in the fourth quarter was 118,138,108 square feet for an average price per square foot of $256.38.

Total office building sales activity in 2016 was down compared to 2015. In the first three months of 2016, the market saw 764 office sales transactions with a total volume of $18,695,936,263. The price per square foot averaged $232.94. In the same first three months of 2015, the market posted 783 transactions with a total volume of $22,507,798,518. The price per square foot averaged $285.21.

Cap rates have been higher in 2016, averaging 7.37% compared to the same period in 2015 when they averaged 7.33%.

One of the largest transactions that has occurred within the last 4 quarters in the U.S. market is the sale of 400 S Hope Street in the Los Angeles market. This 701,535 square foot building sold for $313,636,000, or $447.07 per square foot. The property sold on 5/20/2016, at a 4.9% cap rate.