Q3 2019 Office: Solid Fundamentals, Lower Vacancy Rates

Third-quarter office reports from commercial real estate firms were generally bullish on the sector, even while sounding a note of caution.

JLL noted that, as fundamentals remained solid (with expansion into new supply coming from high-growth, tech, creative and life-science tenants), early signs of a slowdown are becoming apparent. Co-working, especially has experienced tapering growth, the JLL analysts noted. NKF researchers agreed, pointing out that WeWork, especially, “has spawned some concern in the commercial real estate industry.” CBRE analysts, on the other hand, pointed to positive absorption, and the fact that the vacancy rate of 12.1% was at its lowest level since Q3 2001. “For the sixth consecutive quarter, overall demand has outpaced new supply,” the CBRE report went on to say.

Cushman & Wakefield pointed to healthy demand metrics, even as office supply continues to increase. “The volume of space under construction represents 2.4% of U.S. inventory — the largest share of new construction since 2000,” C&W analysts added. And, while NKF analysts pointed to a decelerating absorption and tightening market conditions, they pointed out that “overall market conditions suggest the cyclical expansion will continue, at least through the end of 2019.”

As for what is to come, JLL indicated that completions will likely surpass the 60 million-square-foot mark by the end of 2019, which would represent a cyclical record. Cushman & Wakefield, in the meantime, noted that “with U.S. economic growth moderating, there may be some short-term softening in market conditions,” especially in markets that are experiencing more construction. The NKF report also noted that the pipeline needs to be watched: While office space isn’t flooding the market, the figures are “a bit concerning as the U.S. economy decelerates,” the NKF report said.