Investor Capital Moves Further Out On Risk Curve Betting that Office Tenants Are Ready to Expand as Economy Continues Growing

December 30, 2014
While demand for apartments remained strong across most markets in 2014, office demand remained rather spotty, with traditional office strongholds such as Manhattan and Washington DC struggling while tech and energy hotspots such as San Francisco, Houston and Denver experiencing explosive growth in the office sector.Total U.S. office net absorption is projected to enjoy robust 21% growth in 2015 to 95 million square feet, according to Director of Office Research Walter Page with CoStar Portfolio Strategy. And because new supply is still well below historical levels and growing at just half the rate of demand, office vacancy rates continue to slowly decline and are expected to gradually dip toward a low of around 11% in late 2016. As vacancy has declined, rent growth has picked up, rising at a respectiable 3.6% annual rate in the third quarter, versus 2.6% for the same period one year earlier.

With the U.S. economy in expansion mode and construction largely in check, the question facing office landlords in 2015 is, which way is the office market headed? For most, the answer may largely depend on your location.

“We’re very bullish on the marketplace right now, at least through the first half of 2015,” said Randy Gabrielson, executive vice president at Newmark Cornish and Carey in Palo Alto, CA. “Heading into 2015, we continue to see job growth in the Silicon Valley, with interest rates staying low and the stock market high. There are a lot of larger tenants that have been in the marketplace, and when those deals land, there are other new tenants backfilling their requirements.”

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