Professional & Business Services Employment Drives Demand for Office Space in Q3.2015

Macroeconomic conditions downshifted in the third quarter of this year. Real gross domestic product (GDP) advanced at an annual rate of 2.1 percent, according to the Bureau of Economic Analysis’s second estimate. The gain remained below the long-run historical average of 3.0 percent.

On the upside, employment gains—especially in the professional and business services sector—boosted demand for office space. Commercial lease space continued advancing in the third quarter of 2015. While construction has been ramping up across all property types, the gap between demand and supply continued to add downward pressure on availability.

Office net absorption totaled 14.6 million square feet in the third quarter of 2015, gaining strength with each consecutive quarter this year, based on data from JLL. New completions totaled 26.6 million square feet over the first nine months of this year, with the development pipeline gaining 8.5 million square feet in the third quarter. Overall office vacancies declined 20 basis points from the second quarter, to 15.1 percent in the third quarter. Rents for office properties rose 1.6 percent during the third quarter, bringing the 2015 cumulative gain to 4.3 percent.

Commercial fundamentals in REALTORS® markets continued improving during the third quarter 2015. Leasing volume during the third quarter rose 3.8 percent compared with the second quarter 2015. Leasing rates advanced at a steady pace, rising 2.5 percent in the third quarter, compared with the 2.7 percent advance in the previous quarter. Office vacancies increased 30 basis points to 16.0 percent compared with a year ago.

Tenant demand remained strongest in the 5,000 square feet and below, accounting for 72 percent of leased properties. However, demand for space in the 5,000 – 7,499 square feet more than doubled during the third quarter, comprising 13 percent of total. Lease terms remained steady, with 36-month and 60-month leases capturing 64 percent of the market.

To access the Commercial Real Estate Outlook: 2015.Q4 report visit http://www.realtor.org/reports/commercial-real-estate-outlook.