Wednesday, December 26, 2018

US Office Market May Soften in 2019 as Economy Slows

U.S. office demand may soften in the coming year as job growth slows and buildings now under construction open to tenants, pushing vacancy rates higher and reducing rent increases, according to analysts and economists for commercial property brokerages.

Leasing and sales that have remained robust and steady since reaching peak post-recession levels in 2015 may slow over the next two years along with price appreciation and rent growth. Commercial real estate industry companies are closely watching the two business sectors that have driven office demand for the past three years, technology and shared-office companies, to see how they will fare as some analysts expect economic conditions to weaken next year.

“We’re at an inflection point where office markets will be slowing. Although leasing picked up at midyear as economic growth and employment picked up, we’re expecting that to reverse in the new year, with slower job growth, which will reduce leasing.”

Shared office space provider WeWork and its many rivals have rapidly leased space for several years during the height of the economic expansion, but commercial real estate analysts and executives have said they are concerned that demand will ease when the inevitable downturn finally arrives.

“Tech has been strained in market downturns, but it has still remained very profitable. But coworking is untested in a downturn and as a concept, it still has yet to make money and show that it’s profitable, so there are questions about how that will trend as we go into a downturn.”

WeWork has consistently said it was born in the wake of the Great Recession, and that the platform is even more desirable in a challenging economy as companies strive to become more efficient with their use of office space.

"We don't look forward to a dip, but we also know that day will come. We don't have undue anxiety about that," said Dave McLaughlin, who heads up a region that includes Toronto, during a real estate conference in that city in September.

The consensus among some analysts is the overall office market, however, should weather the next downturn because construction has mostly remained in line with demand. Two-thirds of all construction is in New York City, San Francisco and eight other large cities where tech companies and other large corporations are still demanding space.

San Francisco, for example, still has a single-digit vacancy rate and increasing rents despite having 17 million square feet of new office construction under way. Major tech firms are pre-leasing entire buildings in the city before they break ground, and tech centers like Austin and Seattle also have low vacancy rates despite high construction levels.

Investors have expressed concern about the technology sector because of volatility in the stock market and slowing startup activity, but some analysts say those concerns are overblown.

“Tech markets will avoid falling off a cliff in 2019,” said CoStar Analytics consultant Robin Trantham during CoStar’s annual predictions and trends webcast. “We’re predicting tech is not in as much trouble as some might think.”

Google, Amazon, Apple and Facebook continue to invest in equipment and software development, hire new employees and lease space at very high rates.

Coworking and flexible office space, if it continues to be a cost-effective alternative for businesses, could turn out to be a buffer for the office market in the next downturn.

Leasing and sales remain robust and steady since reaching peak post-recession levels in 2015, may slow sharply over the next two years, along with price appreciation and rent growth, analysts and economists for several of the largest commercial property brokerages said.

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