Rising Employment Boosts Office Space Demand

U.S. macroeconomic momentum slowed during the fourth quarter of 2015, buffeted by global economic slowdown and financial volatility. Based on the second estimate from the Bureau of Economic Analysis, real gross domestic product (GDP) rose at an annual rate of 1.0 percent. The second estimate was an upgrade from the first one, which measured 0.7 percent. However it remains well below the long-term average of 3.0 percent.

The fourth quarter offered a silver lining on the employment front. Payroll employment rose at the strongest pace in the last stretch of the year, adding 837,000 new jobs. The figure closed the year with a total net gain of 2.7 million employees. Average weekly earnings of private employees rose by 2.4 percent in the fourth quarter of this year, compared to one year earlier. Employment in private service-providing industries provided the main thrust for new job growth during the fourth quarter of the year.  Employment in professional and business services gained 199,000 net new jobs, followed by education and health with 177,000 net new jobs. With the holiday travel season in full swing, and warmer-than-usual weather, leisure and hospitality added 130,000 net new positions, while retail trade gained 72,400 jobs. Financial services added 39,000 new positions to payrolls during the period, keeping demand for office space positive.

Office net absorption totaled 14.4 million square feet in the second quarter of 2015, up from the weaker first quarter’s 6.3 million square feet, based on data from JLL. Compared with 20.7 million square feet absorbed in the first half of the year, new completions totaled 15.5 million square feet over the period. Overall office vacancies declined from 15.6 percent in the first quarter to 15.3 percent in the second quarter. Based on JLL’s research, office vacancies are expected to drop below 15.0 percent by the end of this year. Rents for office properties rose 2.5 percent over the first six months of 2015, leading to projections that—at the current demand pace—they will close the year higher by 5.0 – 6.0 percent from 2014.

Commercial fundamentals in smaller markets continued improving during the fourth quarter of 2015. Leasing volume during the quarter rose 3.0 percent compared with the third quarter of 2015. Leasing rates advanced at a steady pace, rising 2.5 percent in the fourth quarter, compared with the 2.5 percent advance in the previous quarter. Office vacancies declined 62 basis points to 14.3 percent compared with a year ago.

Lease concessions declined 3.1 percent. Tenant improvement (TI) allowances averaged $47 per square foot per year nationally.

To access the Commercial Real Estate Outlook: 2016.Q1 report visit http://www.realtor.org/reports/commercial-real-estate-outlook.