The U.S. office market in 2017 experienced a slowdown in tenant expansions while supply growth stayed at about the same level as in 2016, according to a new report.
Tenants at the end of 2017 occupied 21 million square feet more office space than they did at the beginning of the year. This level of “net absorption” was the lowest since 2012 and was down from 29 million square feet in 2016, said data firm Reis Inc., which tracks office markets in 79 metropolitan areas.
Falling net absorption typically is a concern for office building landlords because it makes it more difficult to raise rents. But in the current cycle, the concern is being mitigated by the restraint being shown by developers and their investors in delivering new supply in most markets.
In 2017, developers added 37.6 million square feet, up just a little from the 36.6 million square feet delivered in 2016, Reis said. Because of the “steady balance between added supply and positive net absorption” the national vacancy rate remained at 16.3% in the fourth quarter, unchanged since the second quarter of 2017, Reis said.
Vacancy increased during the fourth quarter of 2017 in 33 of the 79 markets studied. New York ended the year with the lowest vacancy rate at 8.7%, down 0.3 percentage point for the year. Dayton, Ohio, had the highest rate, 27%, unchanged for the year, Reis said.
Office rents continued to grow in the fourth quarter but at a sluggish pace. Effective rents—which include landlord incentives such as free rental periods—were up only 1.8% at year-end compared with the end of 2016.