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7/19/17
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Oakland, Portland, Sacramento, Dallas and Atlanta are the five U.S. cities showing the greatest promise as “buy” opportunities for investors of office properties, according to a recent study by Ten-X Commercial, the online real estate marketplace. Concentrated largely in the West, these markets are boosted by growing populations and strong employment, keeping rents high even as supply additions loom on the horizon.
The Ten-X analysis also identifies Memphis, Baltimore, Houston, Fort Worth, and Suburban Maryland as areas where investors may wish to consider selling office assets. While the respective employment climates in these markets vary considerably, each is seeing rents decline as new supply meets with slow or even negative absorption rates.
The report specifically highlights slowing employment gains across much of the country. Limited job creation – a dynamic arising in a labor market approaching full employment – is likely to suppress the need for companies to add to or expand their office space requirements, slowing absorption.
The report notes that vacancies remained flat to start the year and have subsequently hit the midyear point with no improvement yet this year. Vacancies remain at a level far higher than during the prior expansion. Stalled vacancies have resulted in lower rent growth, with rents advancing at their slowest pace since 2012. Ten-X expects vacancies to reach a cyclical trough of 15.3% in 2018, however, the firm’s downside recessionary model foresees vacancy levels reaching 17.6% by the end of 2020, which would be on par with their recessionary peak in 2010.
The Office Market Outlook took note of changes in both technology and workplace culture that have combined to reduce the market demand for office space. The growth of cloud computing has decreased the need to devote on-location space to servers and computers, while the increasing obsolescence of paper filing also lowers space requirements. At the same time, the growing embrace of open-floor plans is lowering the square-foot-per-worker ratio.
“While we’re seeing tepid growth nationally, office investors have to be aware of cyclical risks associated with subdued job growth. It is noteworthy that our analysis resulted in downgrades in 17 regions, and an upgrade to only one,” said Ten-X Chief Economist Peter Muoio. “That said, a number of economically vibrant metro areas around America are seeing high levels of absorption and present buyers with strong investment opportunities.”
While office rent growth has slowed in recent quarters, Ten-X expects growth to reach the mid-2% range on an annual basis in 2018. The company’s downside recessionary model expects office rents to contract by less than 1% by 2019 and by less than 1.7% by 2020 as vacancies reach recessionary levels.
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