U.S. office markets stayed strong over the course of Q2. That’s according to Colliers International’s Top Office Metros Snapshot, which said most major markets are in position to keep the momentum going into next quarter.
While six top markets experienced negligible changes in rent, rents advanced in four and absorption rose in six. Despite solid results during the quarter, Colliers said the combination of tenant downsizing and new supply is likely to increase vacancy rates down the road. From Manhattan to Seattle, here’s how the nation’s top office markets finished Q2.
At only 6.2%, the Manhattan office market boasts the second-lowest vacancy rate among the top 10 markets. Some 8.6 million square feet of leases were signed over the quarter and half of the 14.7 million square feet of office space under construction is pre-leased. Rents averaged $73.24 per square foot.
2. Washington, D.C.
The District’s office market continued to soften in Q2. Absorption stayed negative and the vacancy rate rose to 13.4%. Hardly helping that dynamic, construction activity is more than three times higher than it was in 2014 and shows no signs of slowing. Colliers said many developers are willing to risk short-term vacancies in the hopes that tenants continue to prefer high-end space, a bet that could force developers to offer generous incentives to drive occupancy. Rents averaged $47.51 per square foot.
Negative absorption, rising vacancies and flat rent growth suggests Chicago’s office market is cooling. The vacancy rate ended Q2 at 12.7% and asking rents averaged $38.50 per square foot. While not the best picture, Colliers said negative absorption is mostly due to tenant move-outs and is not a major concern since Q2’s absorption loss totals only 0.3% of market inventory.
Houston’s office market is directly tied to the energy sector, and with global oil futures trading below $50 a barrel for most of the quarter, the market is struggling. The vacancy rate stands just above 20% and Q2 experienced more than 800,000 square feet of negative absorption. Space formerly occupied by energy firms fills the sublease market, and construction activity is below historical standards. Average rents stand at $35.02 per square foot.
5. Los Angeles
The Los Angeles office market has not changed much from Q1. Vacancy rates nudged down to 15.4% while average rents inched up to $44.15 per square foot. While the market absorbed just over 300,000 square feet during the quarter, Colliers said the vacancy rate is positioned to rise as 4.1 million square feet delivers over the next year. Those delivers could especially trouble developments in West LA, where less than 10% of space under construction is pre-leased.
While Houston and Chicago struggled, the Atlanta office market enjoyed its highest level of net absorption in a year and a half. The city absorbed over 500,000 square feet and average asking rents rose 3.3% from Q1 to $28.20. Despite those successes, the vacancy rate climbed 30 basis points to 13.2% as new deliveries hit the market.
7. San Francisco
Just barely beating out Manhattan, the San Francisco office market experienced the lowest vacancy rate of the top 10 markets at 6.1% and the highest average asking rent at $74.80 per square foot. The report said tenant demand is healthy, witnessed by the 2 million square feet of leasing activity that took place in Q2. In the Financial District alone 4 million square feet are under construction, of which 45% is pre-leased.
Average rents in the Dallas office market held steady at $30.50 per square foot while rents across the Dallas-Fort Worth metro advanced past $25 for the first time. Vacancies fell to 12.6% and the market absorbed nearly 670,000 square feet. The central business district continues to offer lower rents and greater availability than much of the market, and over the quarter it absorbed the only two leases signed for more than 100,000 square feet. Colliers predicts large tenants will continue to target the submarket.
The Boston office market watched average rents advance 1.6% to $56.10 per square foot, making Boston the third most expensive market on the list. The vacancy rate stayed stable at 10.6% while the market experienced 197,202 square feet of negative absorption. Colliers said landlords who reconfigured space to create more efficient layouts are seeing returns on their investments.