IRVINE, Calif. and SILICON VALLEY, Calif., Feb. 7, 2018 /PRNewswire/ -- Ten-X Commercial, the leading dynamic and data-powered online commercial real estate transaction platform, today released its latest U.S. Office Market Outlook, including the top five 'Buy' and 'Sell' markets for office properties. The analysis shows a strikingly vulnerable national office sector with vacancies that have remained essentially unmoved in the past two years and rent growth slowing to its weakest pace in five years.
Markets that recovered this cycle are struggling with increased supply while "left behind" markets that saw limited improvement, remain weak. While 26 different regional markets saw their four-year projections downgraded by Ten-X in this most recent analysis, there were no markets in which the four-year prospects improved, highlighting the widespread nature of the sector's vulnerability.
Portland, Sacramento, Dallas, Tampa and Long Island are the top markets in which investors should consider buying office properties, according to Ten-X Commercial. These markets either have strong overall economies and specific sectors creating office jobs, or are simply benefiting from constricted supply.
Houston, San Francisco, Memphis, Baltimore and Suburban Maryland are the top markets where conditions might cause investors to consider selling their office properties. These markets have either seen tepid office job growth this cycle contribute to high vacancy rates, or have had strong economic recoveries lead to larger new office supply than the market can digest.
Across the U.S., vacancies in the third quarter of 2017 were unchanged in the past year, at 16.1 percent. However, they are projected to rise to 18.3 percent in 2021 after a modeled recessionary period in 2019-2020. Office rent growth slowed to the one percent range in 2017 overall, the slowest pace since 2012.
Despite office employment growth this cycle that has surpassed the pace of previous economic expansions, demand remains lackluster. Since 2010, technology and workstyle changes have reduced office space per worker by approximately one third to just 150 sf per worker today, a trend that has defined this cycle and left the U.S. office segment oversupplied.
"Even with the prolonged nature of this economic cycle, demand for office space has been limited, leaving the segment extremely vulnerable," said Ten-X Chief Economist Peter Muoio. "At this point, regional nuances are getting lost. Our "heat map" gives a graphic portrayal of the performance of the office segment, and it clearly depicts a sector that is faced with considerable risk."
Ten-X Research expects annual rent growth to edge up to two percent in 2018 from 1.5 percent last year. However, the modeled recession in 2019-2020 will push office rents to contract about 2.5 percent over two years.
3Q 2017 - 2021 US OFFICE PROJECTIONS
Top 5 Buy Markets |
3Q 2017 |
2021 |
Change in Rents |
3Q 2017 |
2021 Vacancies (%) |
Change in |
Portland, OR |
19.32 |
20.26 |
4.8% |
11.8 |
15.6 |
380 bps |
Sacramento, CA |
20.21 |
20.68 |
2.3% |
18.1 |
18.7 |
60 bps |
Dallas, TX |
18.88 |
19.15 |
1.4% |
21.7 |
22.8 |
110 bps |
Tampa, FL |
18.71 |
19.15 |
2.4% |
17.9 |
18.4 |
50 bps |
Long Island, NY |
22.64 |
23.22 |
2.6% |
13.8 |
13.8 |
0 bps |
Top 5 Sell |
3Q 2017 |
2021 |
Change in Rents |
3Q 2017 |
2021 Vacancies (%) |
Change in |
Houston, TX |
23.74 |
22.67 |
-4.5% |
19.5 |
21.7 |
220 bps |
San Francisco, CA |
49.49 |
48.85 |
-1.3% |
9.8 |
15.7 |
590 bps |
Memphis, TN |
15.30 |
14.98 |
-2.1% |
25.6 |
27.9 |
230 bps |
Baltimore, MD |
19.79 |
19.45 |
-1.7% |
16.5 |
19.2 |
270 bps |
Suburban MD |
24.10 |
23.73 |
-1.5% |
17.6 |
19.9 |
230 bps |
US |
26.23 |
26.68 |
1.7% |
16.1 |
18.3 |
220 bps |
The Office Sector's Top Five 'Buy' Markets:
Portland
Portland is attracting enough newcomers to see population growth of 1.7 percent, a figure that has accelerated for a third straight year and is more than double the U.S. average. While the city's economy continues its expansion, information jobs are declining and Portland is not generating robust office job growth. However, demand for office space is strong enough to absorb new supply. Per Reis, vacancies fell below 12 percent for the first time in the cycle and rents are at an all-time high. Ten-X Commercial expects reduced availability to drive rent growth in the mid three percent range through 2018, pushing NOI above four percent.
Sacramento
Sacramento's office market offers relative resiliency to cyclical risk because its supply pipeline remains light. Even amid Ten-X Commercial's forecasted downturn, vacancies are projected to rise only to roughly 18 percent, up from the mid-17 percent range in the near term. Rents will contract slightly during the modeled downturn but will settle near their current levels as recovery begins in 2021. Sacramento continues to benefit from population growth that has outpaced the national average.
Dallas
Ten-X Commercial forecasts a steep drop-off in demand for Dallas office space during the 2019-2020 downturn scenario, which will lead to rent declines and higher vacancies. Nevertheless, as the market begins to correct in 2021, strong demand is expected to return. This forecasted surging demand will coincide with a decelerating rate of completions, which will be a major factor in Dallas' relative resilience. Underpinning office demand in Dallas is strong demographics, growth in the professional/business services sector, and an unemployment rate of 3.2 percent, well below the national average.
Tampa
Tampa's lack of new supply over the past few years has trimmed vacancies to 17.9 percent while rents have been growing in the two percent range year-over-year, per Reis. Ten-X Commercial expects vacancies to reach the low-17 percent range through 2018 as demand stays healthy. Rents will peak at a new all-time high in 2018 before contracting modestly during the downturn modeled for 2019-2020. Rising vacancies and a pullback in rents will drive NOI down in these years, though the loss will be mild compared to most U.S. metro areas. In addition to limited supply, this positive outlook is underpinned by a robust economy heavily weighted towards financial activities and professional/business services, two major creators of office jobs.
Long Island
Despite uninspiring economic and demographic growth, Long Island's quiet supply pipeline will help keep its office market on track during the projected downturn scenario. Even with its middling performance, including vacancies near their recent peak and sub one percent rent growth for most of the cycle, Long Island is one of just a few markets nationwide that will see rents and NOI continue to rise during our downturn model. As recovery begins in 2021, fundamentals should further improve.
The Office Sector's Top Five 'Sell' Markets:
Houston
Houston is extremely vulnerable because its fundamentals have been weak in recent years and they are projected to continue sliding in the short term. Per Reis, vacancies have been climbing throughout the cycle and have reached an all-time high of 19.5 percent. In Ten-X's projected downturn scenario, vacancies are seen popping nearly 300 bps in 2019-2020 while rents will likely drop five percent in aggregate. Most alarming, rents will see additional declines at the start of the new cycle in 2021, resulting in a 1.8 percent average annual NOI decline over the forecast period.
San Francisco
San Francisco's professional/business services sector has been losing jobs for much of 2017 as the city's information sector has seen annual growth slow to the one percent range in recent months. Effective office rent growth has already decelerated to just one percent, and with vacancies projected to swell during the 2019-2020 recessionary scenario, Ten-X Commercial sees rents falling a cumulative seven percent. Even when economic recovery comes at the national level in 2021, vacancies in San Francisco are likely to settle some 500 bps above their current levels. San Francisco NOIs are expected to see the steepest drop of any top U.S. office markets.
Memphis
Underlying Memphis' weak outlook is the city's sluggish growth and stagnant demographics. Both the professional/business services and the financial sectors – major creators of office jobs – are currently contracting. Employment has finally surpassed its pre-recession peak but growth is extremely weak. As completions outstrip absorption, office vacancies are forecasted to rise through 2018 before setting a new all-time high in 2019-2020. In these recessionary years, rents and NOIs are expected to fall. Even when recovery comes in 2021, Memphis will continue to see dismal fundamentals with rents below today's levels and vacancies at an alarming 28 percent.
Baltimore
Per Reis, Baltimore's office market has seen little improvement over the cycle with rents only growing modestly and vacancies remaining above pre-recession levels. Recent supply additions will amplify the pain of the coming downturn. Rents are expected to plunge in 2019-2020 as vacancies approach 20 percent, which will generate an eight percent cumulative NOI loss. In 2021, Baltimore will enter recovery with elevated vacancies and rents below their current levels.
Suburban Maryland
Suburban Maryland's economy is stalling with the massive government sector losing steam and the professional/business services sector extremely volatile. The area's unemployment rate has remained strong in the three percent range, but population growth has been slowing for five straight years. According to Reis, vacancies are at an all-time high in the upper-17 percent range and the 2019-2020 recessionary scenario will bump them even higher, up to 20 percent. While effective rents have appeared somewhat resilient so far this cycle, NOIs will register an overall decline over the next four years.
About Ten-X Commercial
Ten-X Commercial is the nation's leading dynamic and data-powered online commercial real estate transaction platform. Since 2009, the company has sold more than $18 billion in commercial real estate. The company blends data-driven technology with industry expertise to accelerate close rates and streamline the entire transaction process. Ten-X Commercial and its parent company, Ten-X, are headquartered in Irvine and Silicon Valley, Calif., with offices in key markets nationwide. Investors in the company include Thomas H. Lee Partners, L.P., CapitalG (formerly Google Capital) and Stone Point Capital.
SOURCE Ten-X Commercial
Related Links
WANT YOUR COMPANY'S NEWS FEATURED ON PRNEWSWIRE.COM?
Newsrooms &
Influencers
Digital Media
Outlets
Journalists
Opted In
Share this article