Solid Demand Drives Office Vacancies Lower in the Fourth Quarter of 2016

Economic activity continued on an upward trend in the last quarter of 2016, but at a slower pace, as the first estimate of real gross domestic product (GDP) from the Bureau of Economic Analysis documented. Preliminary figures indicated that GDP rose at an annual rate of 1.9 percent, on par with the average 1.9 percent typical of fourth-quarter GDP growth over the 2000-15 period.

The pace of employment growth remained positive, but softened slightly in the fourth quarter. Payroll employment advanced by 495,000 net new jobs during the fourth quarter, closing 2016 with a net total of 2.2 million new employees, according to the Bureau of Labor Statistics. Private service-providing industries continued as the growth engine during the quarter, with 455,000 net new jobs.

Within the service industries, education and health services added 163,000 net new payroll positions, the largest industry sector advance. Professional and business services posted the second-highest number of net new employees—122,000—while financial services added 29,000 new positions, indicating continuing demand for office space.

Office net absorption picked up speed in the last quarter of 2016, totaling 13.0 million square feet, almost double the amount from the third quarter, based on data from CBRE. Office construction added 9.7 million square feet to the supply pipeline during the quarter. With the robust demand, office vacancies declined to 12.9 percent, the lowest level in eight years. The decline was driven by solid improvement in suburban office occupancy. Rents for office properties rose 0.9 percent during the fourth quarter, to an average of $31.61 per square foot. Yearly rent growth for office properties advanced by 6.0 percent in 2016.

Commercial fundamentals in smaller markets strengthened during the fourth quarter of 2016. Leasing volume advanced 2.5 percent from the prior quarter, as leasing rates rose by 3.1 percent.

NAR members’ average gross lease volume for the quarter was $953,700. New construction echoed the broader economic landscape, posting a 6.6 percent gain from the third quarter of 2016. Tenant demand remained strongest in the 5,000 square feet and below segment, accounting for 87.0 percent of leased properties. Demand for space in the Under 2,500 square feet segment increased in the last quarter, capturing 46.0 percent of responses. Demand also rose for properties in the 50,000 - 100,000 square feet segment and for those in the Over 100,000 square feet.

To access the Commercial Real Estate Outlook: 2017.Q1 report visit http://www.realtor.org/reports/commercial-real-estate-outlook.