Robust office demand from growing technology firms moved Seattle-Tacoma up one notch to lead this year’s Index.
National Office Property Index (NOPI)
Robust office demand from growing technology firms moved Seattle-Tacoma up one notch to lead this year’s Index. Boston sits in second place, supported by institutions of higher learning, which provide a well-educated workforce that attracts companies to the region and encourages a thriving startup scene.
Tampa-St. Petersburg (#9) registered the greatest leap in the Index, jumping nine places as persistently low deliveries amid increased demand mark one of the largest vacancy declines. Other significant upward changes were posted by metros with a low level of new inventory due this year. Sacramento (#31) and Milwaukee (#40) climbed six and five places, respectively. Milwaukee will benefit from the construction of the Foxconn facility as suppliers search for office space nearby.
Corporate tax cuts might play a role in reshaping the economy and could lift the office market moving forward. A reduction in the corporate tax rate will provide a windfall to companies, and several organizations have committed to investments into wages, hiring and infrastructure.
Heightened small-business optimism will reinforce hiring trends and office space demand in 2018. Historically, small-business confidence and net absorption have moved hand in hand as firms expand to larger office footprints in anticipation of new hires.
To incentivize corporations with investments abroad to move these assets back to the U.S., Congress has considerably cut taxes on money made internationally. The tax provisions will narrow the gap between corporate rates among countries, potentially bringing investment back into the nation.
National Office Market Overview
Completions below the historical average and steady space demand will drive office property operations into 2018. Improvements will be led by suburban assets, which began to recover from the Great Recession later than their central business district counterparts.
Office space availability will tighten for an eighth consecutive year after experiencing a slower start to the recovery than most other property types. Completions rise slightly from last year and demand will outpace supply, improving vacancy. Deliveries will abate this year as roughly 79 million square feet of office space is finalized. More than half of all completions will be concentrated in 10 markets.
A transition to larger layouts in the suburbs will support declining suburban vacancy. Net absorption in CBD properties has begun to slow and this trend will likely continue into 2018 as steep rents and the limited availability of quality space prompt tenants to consider other options as leases expire.
Investors have largely adapted to the rising interest rate environment as the Federal Reserve continues to normalize its policies and balance sheet. The central bank has hinted at three to four increases of the fed funds rate during 2018 as it hedges against the inflation risk amid accelerated economic growth.
Debt availability for office properties remains elevated, with a range of lenders catering to the sector. CMBS and national banks will continue to serve a significant portion of larger office deals while local and regional banks target smaller transactions in secondary and tertiary markets.
Investors have reaped gains over the course of the recovery through improving market fundamentals and pricing, but ambiguity around tax and fiscal policy mitigated the pace of transaction velocity in 2017. As clarity on tax reform emerges, transaction activity may accelerate in 2018 amid reduced uncertainty.
In the post-recession era, improving market fundamentals in CBD assets reinvigorated interest for these properties, driving up valuations roughly 36 percent from the cycle trough and compressing cap rates 230 basis points to the low-6 percent range.
Over the last year, buyers have begun to show resistance to the elevated pricing, flattening cap rates and prompting many investors to consider suburban properties. In addition to lower prices per square foot, the suburbs offer initial returns up to 100 basis points higher than their CBD counterparts as well as potential value-add opportunities.