Driven by a decade of consistent economic growth, major U.S. metro areas added 682 million square feet of office space between 2008 and 2018, according to a report by Yardi Matrix.
The consistent growth has continued through this year according to the most recent September 2019 National Office Report also by Yardi Matrix. Average national office rates reached $36.48 per square foot and vacancy dropped to 13.4 percent. A total of 40.1 million square feet has been completed year-to-date (YTD) with 89% of the YTD completions being rated as either A or A+ properties. Another 179 million square feet are currently under construction, said the report.
However, despite solid growth in the office sector, there are possible clouds on the horizon, according to an article in Market Watch. The article especially focuses on possible repercussions from a sudden change in fortunes affecting co-working giant WeWork and the impact on the office markets where it operates, especially in San Francisco and New York City.
Office Growth from 2008-2018
According to Yardi Matrix, the 632 million square feet growth in the national office market over the past decade was as follows:
Pacific Northwest: 32 million sqft.
Northern California: 54.6 million sqft.
Central California: 3 million sqft.
Southern California: 34.8 million sqft.
Western Region (i.e. Denver, Salt Lake City, Las Vegas, and Phoenix): 58.4 million sqft.
Midwest: 98.4 million sqft.
Southwest: 108.6 million sqft.
South: 26.7 million sqft.
Northeast: 130.5 million sqft.
Mid-Atlantic: 57 million sqft.
Southeast: 47.3 million sqft.
Florida: 30.5 million sqft.
Average U.S. office asking rates increased 0.1% year-over-year in August to $36.48.
National vacancy rates dropped 10 basis points to 13.4%
A total of 40.1 million square feet has been completed year-to-date (YTD), with another 179 million square feet currently under construction.
Transaction volume, at $55.2 billion YTD, maintained its accelerated pace during the summer, and 2019 looks to finish the year somewhere in the ballpark of the $92.0 billion of 2018.
Not surprisingly, Manhattan has the lowest vacancy rate at 7.7%, the highest asking rents at $75.67 per square foot and the highest price per square foot at $200.
Orlando, Florida has the lowest asking rents at $21.13 per square foot and the lowest price per square foot at $36.41.
Houston’s vacancy rate of 21.6% is the highest in the nation.
Clouds Lurking in the Horizon
Meanwhile, the sudden change in fortunes of co-working giant WeWork, including a cancellation of its planned IPO and an emerging liquidity crunch is threatening two key office markets, according to Market Watch.
WeWork holds 2% of NYC’s total office space, or 8.9 million square feet. In San Francisco, WeWork holds 1.9% of the total office inventory, translating into 1.6 million square feet.
All in all, WeWork holds about $50 billion in long-term lease liabilities, but reported a loss of $2 billion last year. The inability of WeWork to continue to pay rent on its long-term leases spells trouble for the areas where it operates.
The potential spillover, should WeWork start giving back its space, could “negatively affect the valuations of surrounding office properties in those cities – even if they don’t have direct exposure to WeWork,” Bank of America Merrill Lynch analysts wrote in a weekly client note.