Economy Watch: US Office Sector Enjoys Strong Second Quarter

The property type's performance rebounded in the second quarter, according to a recent Cushman & Wakefield report, with office space absorption hitting its highest level since the third quarter of 2016.
Ken McCarthy, Chief Economist, Cushman & Wakefield
Ken McCarthy, Chief Economist, Cushman & Wakefield

The U.S. office sector, which has been somewhat sluggish lately, rebounded in the second quarter in terms of net occupancy growth, according to Cushman & Wakefield’s latest report, which was released on Monday. Nationally, rents continued to reach new highs, but rising construction levels slowed the appreciation rate in most markets.

During the second quarter, office space absorption nationwide increased to 12.8 million square feet, up from 6.3 million square feet in the first quarter and the highest level since the third quarter of 2016. In the first half of 2017, a total of 19.1 million square feet was absorbed, roughly 60 percent of the pace of the first half of 2016. Of the 85 markets tracked by Cushman & Wakefield, 66 reported positive net absorption of office space, while 19 reported declines during the second quarter.

Construction reaches new heights

Construction is also ramping up. In the second quarter, 16.1 million square feet of new office space was completed across the U.S., the largest amount since the second quarter of 2009. Cushman & Wakefield estimates that 2017 will see more than 71 million square feet of new office space delivered, the most in a single year since 2008.

“In historic terms, the U.S. office sector is generally not overbuilding office space,” said Ken McCarthy, Cushman & Wakefield principal economist and author of the report.

Despite the stronger absorption figures this quarter, U.S. office vacancy rates remain flat at 13.3 percent. It’s also notable (and not unrelated), the company said, that office rents are growing at a slower rate. U.S. office rents for all office product types were $30.36 in the second quarter of 2017, up 4.4 percent compared to the same quarter a year ago. Although this rental appreciation remains healthy, it’s slower than the 6.1 percent experienced in mid-2016.