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Improving Job Market Leads to Office Sector Success

Improving Job Market Leads to Office Sector Success

With businesses finally embracing expansion in 2014, the office sector posted its best performance in years, according to fourth quarter statistics. And the outlook for 2015 remains bright.

According to a report from CBRE, office vacancy averaged 13.9 percent nationally in the fourth quarter, 100 basis points lower than at year-end 2013, marking the sector’s best performance since 2007. San Francisco had the lowest vacancy rate in the country, at 7.3 percent.

Office vacancies should continue to fall this year, according to a statement from Jeffrey Havsy, chief economist for the Americas region with CBRE. “We do expect office space demand to remain strong during 2015, fueled by healthy expansion, low inflation and the internal stability of the U.S. economy,” he said.

It was a great year for the job market. More than 866,000 jobs were added in the fourth quarter, the highest quarterly amount in almost nine years, according to a recent Cushman & Wakefield report. Of the 252,000 jobs added in December, professional and business services led the way, at more than 52,000 jobs, with almost 870,000 total office jobs added last year.

This led to the strongest year for office space demand since 2006, according to a fourth quarter report from real estate services firm DTZ. Garrick Brown, a vice president of research with the company, says West Coast markets experienced by far the greatest improvement in absorption during the year, with 24.4 million sq. ft., a 90 percent increase compared to 2013. San Jose/Silicon Valley led the pack with more than 4.4 million sq. ft. of growth, while San Francisco followed with 3.3 million sq. ft., and San Mateo County posted 1.4 million sq. ft. of expansion.

“Expansions in these three markets were overwhelmingly driven by tech users,” Brown says. “Google alone during the fourth quarter expanded its Bay Area footprint via leases and building purchases by more than two million square feet. The Oakland market was the odd market out in the Bay Area; it’s one million square feet of occupancy growth was almost entirely driven by healthcare, education and government users. Though it has the same access to workforce as its neighbors across the Bay and asking rents that are half as much, the tech trend of clustering has meant that this market has struggled to develop a tech presence.”

West Coast still leads

Silicon Valley, which posted the highest absorption rate, at 3.4 percent, for the quarter, leads the country in the number of office transactions totaling more than 20,000 sq. ft., according to a report from JLL. Silicon Valley continues to reign as the most expensive suburban sub-market for office space, with asking rents of up to $93 per sq. ft. The market is so hot that the rent difference between class-A and class-B buildings is now very slim, note JLL researchers.

Meanwhile, Seattle saw office absorption of 2.1 million sq. ft. in 2014, about 42 percent above that city’s 10-year average. Currently, Seattle has the most construction projects underway on the West Coast, at about 5.1 million sq. ft., with more than 26 percent of that stock pre-leased.

Corporate confidence is improving, as evidenced by the three million jobs added in 2014, according to a statement from John Sikaitis, managing director of office research with JLL. The amount of nwew construction on a per sq. ft. basis was 68 percent higher in 2014 than the year before, JLL reports. There was 105 million sq. ft. of new office construction in the pipeline at the end of the year, up 76 percent from December 2013.

“Labor and performance growth means businesses also need to grow physically, which explains why the national office vacancy rate has reached a six-year low, and why there is nearly 80 million square feet of new office space under construction,” Sikaitis said.

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