Q2 Report: United States Office Space

In the United States, economic markets have continued on the up and up with the S&P reaching new highs, continued low interest rates, and large volumes of real estate being transacted. Office space in particular has been of unique interest to investors.

The new construction of office spaces is altering the landscape, with more floor plan options, unique to tenant needs, but at a substantially higher rent rate compared to recent years. Landlords have been using concession packages as incentives to bring tenants to repositioned assets and new developments, claiming the new spaces will cater better to their needs. Keith Knutsson of Integrale Advisors expounds upon this, claiming “landlords must be creative in their methods to retain tenant occupancy.” Allowances for tenant improvements have increased 10.5% since 2014 taking pressure off of tenants due to rising rents.

Rental rate hikes may also be attributing to the rise in tenant vacancies. With 11.2 million square feet of new deliveries in Q2, tenant vacancy rose for the third consecutive quarter to 14.8%, particularly within Class B spaces. Jones Lang LaSalle, a market leader in American real estate investment, recently reported there has been a 3.7% rise in Class A asking rents, averaging $54.98 per square foot.

Finally, due to give-backs of second generation space and relocation to new supply, growth is expected to remain muted for the remainder of the fiscal year. In addition, Q1 of this fiscal year represented one of the lowest quarterly net absorption in 3 years but rebounded this year to 8.4 m.s.f. from 5 m.s.f. in Q1.