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Office Space Fundamentals Improve, But Will the Trend Continue?

August 05, 2016 | IREM Staff

The 2016 IREM Income/Expense Analysis Reports are now available, and they show a continued strong office sector. Absorption of office space was supported by a more intense pace of employment growth within the traditional office-using employment sectors. Vacancy rates in office sector continued to trend downward, putting upward pressure on asking rents.

Whether the sector continues to experience improvement in the next few years is still an open question, however. A number of factors could have a significant impact on future growth:

  • Space utilization – recent trends in telecommuting, virtual and shared offices, and other office design efforts to reduce the square foot per employee have already put considerable pressure on office demand. The question is whether this trend continues and at what pace.
  • Economic and job growth – the sustained job growth over the last several years has consistently driven office occupancy growth. The question is whether this growth will continue, or are recessionary clouds forming anywhere on the horizon.
  • Development pipeline – supply constraints across the country have helped reduce vacancy rates and put upward pressure on rents. The current development pipeline is still below peak levels, but has been increasing in size. In 2016, occupancy growth is expected to outpace new supply. The questions are whether the current pipeline is at another peak and whether new development will outpace or lag behind growth in occupancy demand.

Other factors for owners and managers to consider are the geographic region of their properties, and whether they are downtown (i.e., Central Business District – CBD) or suburban properties. Just as the economic recovery has been uneven across the country, so too has the performance of office buildings. The geographical and downtown vs. suburban location differences in economic performance makes IREM’s Income/Expense Analysis®: Office Buildings even more critical for analyzing an individual property performance.

The following charts highlight some of uneven results. The charts show the top five and bottom five metro areas in terms of: Total Actual Collections; Net Operating Costs; Total Operating Costs; and Operating Ratios. The charts focus on suburban office buildings, since they are the largest reporting sample in this year’s report.

 

Highest and Lowest Metros - Total Collections  

 

Highest and Lowest Metros - Net Operating Costs  

 

Highest and Lowest Metros - Total Operating Costs  

 

Highest and Lowest Metros - Operating Ratio 

 

The IREM 2016 Income/Expense Analysis Reports are available in softcover book, interactive PDF/Excel, Online Labs and Metro Reports.

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