Suburban Markets Expected to Outperform Downtown Metros as Office Sector Softens

Champaign Williams, National Editor, Bisnow
Though the office sector outlook remains strong, experts forecast a mild slowdown this year. Coming out of 2016’s strong office environment, CBRE head of office research in the Americas Andrea Cross told Bisnow new supply coupled with a tightening labor market will lead to a moderate slowdown in the national office market. Below are four predictions for U.S. Real Estate Market Outlook 2017 report.

1. Tightening Labor Market And Slower Office Job Growth

A slowdown is expected to hit the office market this year as companies continue to scour the tight labor market for qualified workers, who are becoming increasingly harder to find with unemployment hovering around lows of 4.7% as of last month. The labor market is likely to add about 273,400 office-using jobs this year — down from the 2010-2016 average of 418,000 office-using jobs gained each year.

2. New Supply

Though supply isn’t expected to exceed the previous two cycles, there’s about 50M SF of office space completions set to hit this year — the most coming online since 2009. The high supply coupled with expectations of softening demand will further negatively impact market fundamentals, likely increasing vacancy rates 30 basis points to 13.3%. Office markets will also continue to see rent growth deceleration as prices rise 1.5% this year, down from the rent growth rate of 4% or 4.5% in the past two years. Cross told Bisnow nearly 45% of the oncoming supply is concentrated in five markets — Manhattan, San Jose, Seattle, Washington, DC, and Dallas Fort-Worth.

3. Changing Office Tenant Needs
Experts project some of this year's softening will stem from slowing tenant demand amidst changing office dynamics and tenant needs, such as the continued shift in favor of open office space and co-working offices, which often require less space per employee per square foot. The strongest office-using jobs will come out of the South and West, and since a lot of new supply is not expected to come online in those markets this year, they might make a smart bet for investors searching for yields.

 4. Downtown Versus Suburban Markets Suburban office markets are expected to beat downtown office performance this year, depending on the market’s live/work/play drivers. It is expected suburban market rent growth to surpass 2% while vacancies may increase by a mere 10 bps to 14.5%.
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