Office: Q4 Demand Strongest to End 2016

Date: 01/18/2017

U.S. and Atlanta Market Update

We made it through the election year! Politics aside, the results of the election have garnered positive indicators. “Both the economy and the labor market have picked up considerably since the first quarter and confidence has been buoyed by the prospect of increased infrastructure investments that Trump had pledged during his campaign,” reported REIS.

156,000 jobs were added in December and the unemployment rate was 4.7%, according to the U.S. Bureau of Labor Statistics. Atlanta is the top 3 market for annual job gains with 68,200 jobs added in the past 12 months ending in November (the last metro data available). It was initially reported by the U.S. Department of Commerce that the GDP increased at a rate of 3.5%, later revised to 3.2%

For the office sector, net absorption exceeded new construction by the widest margin since prior to the recession which is indicative of rising demand. In Q4, net absorption was 14.21 million SF, more than the last two quarters combined. New supply totaled 8.53 million SF. The office market absorbed 38.53 million SF in 2016, down from 44.55 million SF in 2015.

The national office vacancy rate declined to 15.7%, (down from 15.9% in Q3 and 16.2% in Q2). As many as 19 metros had an increase in vacancy rate in the quarter but this was due to new construction, not negative net absorption.

The Q4 rent growth was not reflective of the increase in demand and is more in line with the muted rent growth for the entirety of 2016. Asking and effective rent growth decelerated to .3% and .4% respectively in the quarter. “However, over time as demand continues to exceed new construction, vacancy should decline and rent growth will likely pick up as a result,” said Barbara Denham in the Q4 2016 Office Trends report.

All 79 metros that REIS surveys posted positive, yet modest effective rent increases for both the quarter and the year, (Atlanta was one of the leaders in effective rent growth for the year).

The national average market rent of $31.57 per square foot, was an increase of 0.3% in the quarter and 2.2% for the year, while the average effective rent increased by 0.4% in the quarter and 2.4% for the year.

This goes to show that you always have to look at the big picture, especially with the office sector. “The fourth quarter statistics confirm that the office market remains on sound footing as tenants continue to lease space at a healthy rate,” said Barbara Denham in the Q4 2016 Office Trends report.

“My expectations are that demand for office space will improve in the U.S. and in Atlanta. The stock market has been rising since the election. And if Trump sticks to his plan to reduce corporate tax rates and regulatory issues, corporate office users will have more liquidity.  More liquidity means companies will be more likely to expand, which could help the job market. And of course, what’s good for the job market is good for the office market,” said Michael Bull, CEO of Bull Realty and President of The National Office Group.

REIS predicts that office market statistics will improve “noticeably” in the coming quarters, which would be evidence of the office market’s lag time to wider economic forces. Vacancy is expected to decline due to recent employment growth, and rent growth is expected to increase back to 3% annual growth rate. “While this still does not qualify as robust, it is a far improvement from just a few years ago,” said Denham.

For the Atlanta office market in general, effective rent growth was 0.8% in the quarter for an average effective rent of $19.01. The vacancy rate declined 60 basis points to 18.6%. The city was third for annual asking rent growth at 4.4% and fourth for annual effective rent growth at 4.6%. The average quoted asking rental rate in Atlanta’s CBD was $23.88 at the end of 2016, and $22 in the suburban markets, reported CoStar.

For the office sector, it looks like a Happy New Year indeed. 

Bull Realty, Inc., Research