Economy Watch: Office Absorption Posts Strong ’17

Vacancy declined in a variety of markets, and top metros posted significant gains in rental rates, Transwestern reports.

 

Dropboxs record-setting lease at Kilroy Realty Corp.s The Exchange in San Francisco was a highlight of the 2017 office market. Kilroy Realty Corp./Rios Clementi Hale Studios
Dropbox’s record-setting lease at Kilroy Realty Corp.’s The Exchange in San Francisco was a highlight of the U.S. office market last year. (Kilroy Realty Corp./Rios Clementi Hale Studios)

A diverse group of office markets enjoyed strong absorption in 2017, including Dallas/Fort Worth, San Jose/Silicon Valley, Seattle, northern Virginia and Austin, according to Transwestern. The absorption in these metros contributed to a decline in overall vacancy, as did a deceleration in new construction starts during the fourth quarter, the firm notes in a new report.

Dallas led absorption in 2017 with nearly 5.3 million square feet, but most markets contributed to the consistent downward trend. Miami, for example, posted a 10-year low in overall vacancy during 2017, with an average 150,000 square feet of positive absorption each quarter. The strength of the U.S. office market isn’t confined to a few specific metros or regions.

Office market highlights last year included Dropbox’s 736,000-square-foot lease in San Francisco’s Mission Bay, a record for the city. Eight Manhattan transactions exceeded 100,000 square feet during the fourth quarter alone, leading to a total of 850,405 square feet of positive absorption. Atlanta reported more than 600,000 square feet absorption in the fourth quarter, erasing earlier losses and boosting its 2018 total to 575,000 square feet.

Transwestern also reported healthy rent growth in the fourth quarter of 2017,  with the top 10 markets posting increases between 5 percent and 9 percent. Boston led the nation in rent growth for the quarter, at 15.1 percent. Overall, the average asking rate for U.S. office product ended the year at $25.51 per square foot, reflecting 3.4 percent annual growth, Transwestern reported.