Investors chase higher yields as US office market evens out

Boston, USA

Investors are chasing higher yields at the start of 2017, as the US office market evens out.

New figures from Colliers show that rents increased modestly in 2016, while rent growth has slowed considerably in the final months of last year. At the peak of the prior cycle in 2007, the national office vacancy rate fell to a low of 12.2 per cent. In 2016, the vacancy rate held at virtually the same level. While Class A rents in most markets are holding firm or growing at a reduced pace, tenant incentive packages are increasing in some locations where vacant new supply is being added or occupiers are moving out.

The year ahead is expected to move forward at a slower pace, although the country’s economy is forecast to provide a boost to the sector.

Net absorption fell in 2016 as occupiers sought to limit costs. New leasing has been restricted by an increase in downsizing, consolidation and renewals as well as backfilling shadow space. Still, increased GDP growth in 2017 could help offset this trend and early 2017 leasing volume in Manhattan bodes well.

“If enacted by the new administration, deregulation and business tax reductions may lead to demand gains, though it will take some time to filter through the market,” says Colliers.

Financial services and technology companies are forecast to continue leading leasing activity. Most markets are still improving, says the report, with almost 75 per cent of the metro office markets tracked seeing an increase in asking rents and a fall in vacancy rates in 2016. Just over 60 per cent experienced positive net absorption.

Suburban markets account for most current absorption, driven by large build-to-suit campuses and new urban environments that compete with traditional downtown locations.

“Office tenants are not abandoning downtowns but the desire to be located near highly-qualified, young professionals who prefer urban living must be balanced against the limited availability of large blocks of space,” says Colliers.

Investors, meanwhile, are prioritising higher yields where available. As yield gaps tighten due to rising inflation and increased finance costs, investors are selectively chasing higher yields. Additionally, several large suburban campuses were brought to market. As a result, investment in suburban assets in 2016 outpaced investment in downtown markets, accounting for 59 per cent of the total sales volume. Nonetheless, institutional and cross-border investors are still attracted to trophy central business district assets with high-credit, long-term income streams. Low domestic bond yields continue to drive cross-border purchases.


US office market continues positive momentum

29th November 2016

The USA’s office market is continuing its positive momentum this year, with fundamentals remaining unchanged.

Net absorption in the US office market reached 20.6 million square feet in Q3, nearly equal to the 23.8 million square feet absorbed in the first and second quarters combined, according to Colliers’ latest report. Third quarter sales volume in the US was down 4 per cent year-on-year to $33.9 billion, although the pace of decline is slowing from earlier in the year and secondary markets saw a 3 per cent increase.

The national vacancy rate, meanwhile, dropped to 12.4 per cent, down 10 basis points from Q2 2016 and down 40 basis points over the year. That is mostly driven by new tech companies, says Colliers. Indeed, the tech sector is growing rapidly in the digital age, while the US economy is enjoying gradual growth; GDP rebounded to 2.9 per cent in Q3 2016, the strongest quartet in two years.

The economy added an average of 206,000 jobs per month in Q3 2016, up 41 per cent from Q2 2016, the kind of figure that is boosting positive sentiment in the country, despite initial uncertainty surrounding the Trump election win. The Federal Reserve is likely to raise interestrates in the near future, further bolstering confidence in the economy.

With vacancy rates falling, Class A asking rents averaged $46.54 per square foot in central business districts and $28.91 in the suburbs at the end of Q3, up from the same period a year ago.

“Robust office leasing in the third quarter should set the table for a solid year-end figure, as the fourth quarter has historically been strong for absorption,” says Colliers. “While the rate of occupancy gains is slowing as many businesses increasingly focus on efficiency, the US office vacancy rate has a strong chance of matching or dipping below the prior cycle low by early 2017.”