The U.S. and South Jersey office space market marked 2015 as their best year for sales since 2007’s pre-recession peak. Thanks in part to higher demand and restricted levels of construction that contributed to tightening space availability in metro areas across the U.S., net absorption for U.S. office space exceeded 100 million square feet for the first time since the Great Recession and the U.S. office vacancy rate dropped another half-percentage point at year-end 2015.
The downward slide in the U.S. office vacancy rate, which includes the Southern New Jersey office space vacancy rate, continued in 2015, dropping to 10.8% from 11.3% in 2014 and 13.2% at the worst point during the economic downturn, according to the CoStar Group’s recent State of the U.S. Office Market 2015 Review and Forecast.
CoStar’s economists said 64% of U.S. office submarkets and 56% of metro office markets experienced a drop in vacancies during fourth quarter 2015, and predicted the vacancy rate would maintain the downward trend in 2016, hitting around 10% in 2017.
Investment market were red hot in 2015, CoStar said, with preliminary office asset sales jumping almost 18% to $152 billion.
In 2015, the office market shifted away from technology- and energy-driven metros that fueled the economic recovery and expansion and toward markets hit by the Great Recession’s housing bust. This shift was illustrated by the large annual vacancy improvements registered in Atlanta, Miami and Nashville, all of which outperformed San Francisco, Seattle and Boston. San Francisco’s office vacancy rate declines appeared to be slowing in the final quarter 2015 with new office supply delivered to the market, CoStar said.
As expected, Silicon Valley markets saw the strongest annual occupancy gains. But the 2015 shift away from higher occupancies in markets driven by energy or technology meant big-tenant markets like Atlanta and Dallas performed well. Eight of the 13 markets with the highest year-over-year occupancy improvements came from markets that were not driven by energy or technology, the CoStar economists reported.
Lower prices at the pumps put money in consumers pockets, but certain geographical areas and parts of the economy saw increasing pressure from the declining energy prices, their effect on the stock market, and global economic instability, CoStar reported. The S&P 500 is down about 11% from its May 2015 high as the result of, in part, weakness in energy-related stocks and a decline of more than 10% in technology stocks.
The tech market continues to be among the nation’s most turbulent, according to CoStar, adding that markets in San Jose, San Francisco, Boston, Raleigh, Austin and Seattle are waiting to see how lower private and public market valuations will influence hiring.
Both Apple and Samsung Electronics are among the big companies that have predicted a tech slowdown in 2016, citing global economic volatility and declining demand as the reasons for the glum forecast.
Yahoo plans to slash its workforce another 15%, by 1,700 jobs; discard surplus real estate; close five global offices; and look at “strategic alternatives” that could result in the company selling or spinning off its core search engine and web portal business, the CoStar review and forecast said. Yahoo in December started marketing a 48-acre tract near Levi Stadium in Santa Clara that the company had intended to use for expansion.
In spite of the expected slowdown in the energy and technology sectors, 2015’s continuing strong momentum in the U.S. office space market and the overall U.S. commercial real estate market, including the Southern New Jersey office space market, is forecast to go solidly into 2016, CoStar said.
Annual net absorption of U.S. office space stood at 101 million square feet at year-end 2015, up from 93 million square feet in 2014. CoStar reported that 64 million square feet of U.S. office space was delivered last year, 41% more than in 2014. New office space under construction rose a modest 7% for 2015 after two quarters of declines.
Annual rent growth exceeded 2014’s 3.8% growth and stood at 4.4% at year-end 2015, the CoStar economist said. Rents were strong in CBDs, including San Francisco at 19.4% and Raleigh, NC at 13.9%. Even urban core rents in Atlanta and Detroit rose, up 11.2% and 10.5%, respectively.
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