US Leasing May Reach Highest Point in a Decade

U.S. office leasing is surging, and it may keep rising for at least the next year.

Expansions by technology giants such as Amazon, Google and Facebook and financial firms such as Deutsche Financial Services pushed the national office vacancy rate to single digits last year for the first time since the early 2000s, falling to 9.8 percent in the final quarter of 2018 from 10.1 percent for the same time a year earlier, according to a CoStar analysis.

Total U.S. leasing volume for 2018 will probably top 400 million square feet for the fifth straight year when analysts finalize the tally, probably setting a new high for leasing in the past decade, exceeding 450 million square feet, CoStar analysts said. New York led all markets with 42 million square feet of leasing last year, followed by Los Angeles, Washington, Dallas, and Chicago.

“Given this level of leasing activity, we’re pretty confident that demand will remain pretty strong over the next year or so,” said CoStar Managing Director and Senior Economist Robert Calhoun. “Our forecast calls for vacancies to continue to fall into 2019, despite some pretty significant supply on the way.”

Keeping the market in balance is the relatively light amount of overall office construction relative to the past 15 years, helped by something of a paradox.

"Markets like New York, San Francisco, and Boston are seeing record levels of new construction, perennially oversupplied markets like Atlanta, Dallas, Houston, and Phoenix have seen relatively little new supply," said CoStar Managing Consultant Paul Leonard.

Construction of mega projects like the $25 billion Hudson Yards in New York City, 61-story Salesforce Tower in San Francisco and the redevelopment of Boston’s Seaport District have added millions of square feet and challenged the traditional notion that these gateway markets are “supply constrained.”

Strong leasing and low vacancies haven’t translated into impressive rent growth for the past several years, however. Rents grew just under 2 percent in 2018, the smallest amount since 2011 and well below the decade’s peak rate of 6 percent in 2015. CoStar expects rent growth to slow further, especially in the largest cities, with rents leveling out in 2021 as the economy sheds jobs.
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