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May 16, 2018

Office Forecast Remains Positive throughout 2018

The national and regional outlook for office properties remains favorable. After a strong 2017, where office development increased 53.7 percent year over year, both Commerical Property Executive (CPE) and the National Real Estate Investors (NREI) gave positive outlooks for this year. First quarter results have not disappointed. Generally, West Coast markets ranked high in terms of cap rates, vacancy, absorption, and new development. Breaking down the metropolitan area outlooks across the West Coast, we see upward trends in leasing and demand.

Los Angeles

Office properties are performing very well in Los Angeles. The local job growth outpaces the national average. Office-based employment increased 2.2 percent and accounts for 4.5 million jobs in the area, says CPE. Asking prices continue rising and submarkets like the Jefferson Corridor report an uptick in development. While year-over-year new construction delivery declined, the amount under construction increased by 465 percent. The latest Los Angeles office report contains a closer look at the metropolitan area's first quarter performance and predicted trends.

Orange County

In the first quarter, delivery of new office properties like 400 Spectrum Center, may have temporarily bumped Orange County's vacancy rate in the most recent quarterly data, but overall the market is expected to remain vigorous during the year. Leasing rates across all property classes are steadily increasing and should continue along this trend even if activity declines slightly or remains consistent. The average asking lease rate reached $2.60 by the quarter’s end, even as vacancies increased.

San Francisco

Demand is outpacing available supply, pushing leasing rates skyward. The tech giants remain vital drivers in the San Francisco area's office space absorption. Competition is stiff: Facebook committed to the entire 181 Fremont Tower, while other tech brands like Dropbox and Salesforce prepare to move into their new San Francisco-based properties. All this movement means positive absorption for San Francisco real estate. View the first quarter performance.

Seattle

Employment growth and high confidence in the region's economy means Seattle's office property outlook is good even as the city debates new taxes. In the first quarter, vacancy dropped from 7.74 percent to 7.15 percent and should remain competitive into 2018. Even as Amazon's second headquarters hunt continues, the e-commerce retailer is a major player in the Seattle office space market. By no means is Amazon the only major influence on future absorption and new development: Microsoft might expand their Redmond campus, Apple is expanding its AI office footprint, and Alaska Airlines is growing its campus.

Silicon Valley

It's brisk business as usual in Silicon Valley, which posted robust numbers in the first quarter of 2018. Over 1 million square feet of office real estate was absorbed. Meanwhile, delivery of large new construction projects increased both leasing rates and vacancy numbers. One trend to note is companies shifting leases from Silicon Valley to less expensive locations outside Palo Alto and Mountain View.

Portland

Annual rent growth, investor activity, and technology expansion are benefiting the Portland office market. Even as leasing activity slowed slightly in the first quarter, and several large properties became vacant, big brands like We Work are striking large deals for office space. The local economy remains favorable with unemployment near record lows. Nearly 3 million square feet of office space was under construction and growth should stay stable for the near future.

Sacramento

Fundamentals are strong in Sacramento. The vacancy rate at the end of the first quarter hovered at 10.3 percent and is trending down. Demand is driving the area's leasing rates. The latest office market numbers for Sacramento shows Class A fully serviced buildings leasing rates are up to $2.25 /PSF and downtown properties are reaching record rates. Office property owners, investors, and tenants are attracted to Sacramento's accessibility and amenities. Market interest should continue well into 2018.

Phoenix

Expect continued growth in Phoenix. Unemployment remains under five percent, as it has since November 2015, and now the office space vacancy rates are at the lowest since 2008. While these vary highly by submarket, overall the region is witnessing an office space renaissance. Office space demand and leasing rates are steadily on the rise, as evidenced in our first quarter report.

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