Office markets in various regions of the U.S. will be affected by current economic trends in different ways in the coming year, according to Newmark’s recently released U.S. Office Property Sector Market Outlook 2008.
High oil prices, the “credit crunch,” and the severe retrenchment in the nation’s housing industry combined to force slower economic growth in the last quarter of 2007, and these forces remain in play for a substantial portion of 2008, according to the global real estate services provider’s report. In many regional markets, the slackening of demand for office space began to appear in the second half of 2007 and continues into 2008. The impact on the various regional markets, however, is far from uniform. Regional markets that have a large energy industry continue to do well, and even some high tech markets will be buoyed by foreign demand.
In short, the report notes that different markets will feel the impact of the coming year’s economic slowdown in varying ways.
Among East Coast office markets, “New York City will soften only modestly, with a relative lack of new supply keeping both vacancy in check and rental rates from a significant decline, even in the face of possible contracting employment levels in the financial services sector,” said report author Peter P. Kozel, Ph.D., Newmark executive managing director, Research and Real Estate Strategies.
In contrast, “The Washington D.C. office market will be strained by a large influx of new product,” said Kozel, “resulting in rents that will have a hard time maintaining their current levels in the face of a significant shift in the balance between supply and demand.”
In the Southeast, Atlanta will likely see its rapid economic growth slow a bit in 2008, but this is a market with substantial gains in the supply of new space. As a result, rent levels remain flat in 2008. Supply and demand growth rates appear balanced in the Nashville market.
On the West Coast, Northern California office markets, along with those in Seattle and Portland, “are doing well as the capital spending boom continues around the globe,” Kozel said. Growth in demand is keeping most Southern California markets balanced, he notes, with excess supply a problem in only a few.
High oil prices are pumping up major Sunbelt office markets, including Houston and Dallas. Vacancy rates have come down dramatically in these markets, “and additional declines are in the cards for 2008,” according to Kozel. At the same time, the residential housing bust has slowed office markets in Florida, he notes, “but conditions should stabilize by the second half of the year.” Many Midwestern markets, meanwhile, “are being helped by the surge in manufactured and agricultural product exports.”
If the U.S. avoids a recession in 2008, (“the consensus forecast and the most likely outcome”), then demand for space will be strong enough in most markets to absorb newly developed space, according to Kozel. “Vacancy rates will remain essentially unchanged in 2008 in many markets, but will drift higher in the remainder, with excess supply the basic problem for those few markets that weaken.”
Rents will fall in relatively few markets during 2008, Kozel adds. “In a few cases, years of strong growth have encouraged excess development, although typically the increase in supply has not been large enough to collapse pricing.” That said, though, “The surge in office rents is over in the east for at least a year, with more upside in rents possible for a few select markets on the West coast and in Texas.”
Newmark is one of the largest independent real estate service firms in the world. Headquartered in New York, Newmark and London-based partner Knight Frank Newmark operate from over 165 offices in established and emerging property markets on six continents. Last year, transactions were valued at more than $37.3 billion with annual revenues of over $537 million. With a combined staff of more than 5,300, this major force in real estate is meeting the local and global needs of owners, tenants, investors and developers worldwide. For further information, visit www.newmarkkf.com.