Office Market Update & Occupier Strategies

Date: 07/24/2014

Office Update & Occupier Strategies

The second quarter results indicate some increasing improvement in the US office market recovery. The sector has been experiencing a slump over the past several years, but the improving economy will drive office employment which translates into improving office demand further pressing the demand for a limited supply.

These were some of the imperative facts presented during the most recent Office Market Update episode of America’s “Commercial Real Estate Show”, in which guests Ryan Severino, Bob Chodos and Scott Panzer discussed with show host, Michael Bull, the sector’s current market performance, tendencies effecting the market and what to expect advancing into the next few years.

Office Market Headway

The U.S. office market exhibited a clear improvement in this second quarter. Ryan Severino, Senior Economist at Reis, stated that he expects the rate of improvement to accelerate in the coming years. He also mentioned that vacancy though mid-year was about 16.8%, an elevated rate, but down from a cyclical high the market experienced recently.

“Rent on an asking basis has grown by about 1.4% this year, and effective rent has grown about 1.5%”, Ryan reported, ”and both of which are actually the fastest rate of growth that we’ve seen since the market begin recovering in earnest in 2011.”

Will this trend continue? This seems to be a common question being asked by many people impacted by the office market’s performance. Ryan postulates improvement will continue to take place. “As the economy continues to create not just more jobs, but especially for the office sector, more office using jobs, and I think we’ve been seeing that more improvements in recent months coming out of the labor market.”

The reciprocated belief when discussing the office market is that while the office market continues to improve, so does the investment sales volume.  “Cap rates for class A properties are down at a mid to high 6% range, and the best properties are trading below that”, Ryan stated, “Even the B & C properties are only marginally higher, at a low 7% range.” Although we are still seeing volumes low in terms of considered “normal activity”, interest is beginning to come back, and volume is starting to drift higher over time.

“Over the next few years, office cap rates will continue to drift slowly down. We’ve been seeing a lot of cap rate compression over the last few years, so I don’t expect to see that kind of breakneck pace.”, Ryan stated. “I think with the economy continuing to recover, generating more office using jobs that’s going to translate into NOI (Net operating income) growth, and as NOI growth starts to ramp up, risk premiums, which are already fairly low for good quality office properties will result in improving valuations.

Occupier Strategies

Companies are beginning to cater more to the millennial generation when developing their workplace environment. The work place is drifting away from assigned seating, to more of an open office atmosphere. Bob Chodos, Principle at Colliers International, feels strongly that an open workplace with access to outside light and views is an exceptional way to produce more success in the workplace with millennial generation employees. “We’re also seeing food as a central theme across design in almost every work place today because people can gravitate around a space that allows them to sit and share food, and hold meetings,” says Bob. This strategy not only is key to retaining employees, but also benefits recruiting for the future of companies. Statistics say that 50% or more of the workforce by 2016 will be millennial, so this is a trend that is just going to continue to hasten.

Scott Panzer, Vice Chairman of Jones Lang LaSalle, points out that many companies are still decreasing their square footage per millennial generation employees.

“A lot of that is benching, which is taking a long conference table and packing in millennials that they just hired over the last 18 months and give them a lap top and that’s their workstation.” This open style atmosphere is embraced by millennial generation more so than any other generation.

Scott also explains key components for landlords to follow when attracting more tenants and tenant reps for their properties. He explained summertime is the best time to ramp up hospitality and host cocktail events around after Memorial Day weekend. “They’ll invite the entire brokerage community to their buildings and showcase their assets and walk them through the building.”