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Special Report

IPA Office Investment Forecast

2020 Outlook

Office Space Important in Tight Recruiting Climate; Capital Pouring Into Tech and Sunbelt Markets as Demand Sustains Investor Interest

National Office Index (NMI)

  • Stronghold tech markets hold several spots at the top of the Index. San Francisco (#1) swaps places with last year’s leader Seattle-Tacoma (#2) while San Jose (#3) holds onto the third rung.
  • Companies moving to be closer to available skilled labor pools or to lower costs are finding secondary markets attractive. Orlando (#14) and Sacramento (#22) make the biggest hikes this year, each vaulting six rungs. Riverside-San Bernardino (#21) and Kansas City (#28) follow, each ascending five positions as strong office employment gains amid single-digit vacancy boost rent growth.

National Economy

  • Employment growth remains strong as 1.5 million positions will be added to the workforce this year. Gains will be fewer than in 2019 but sufficient to keep the unemployment rate from rising from a nearly 50-year low in the mid-3 percent range.
  • Business sentiment is favorable entering 2020 due to the strong economic expansion. Small-business confidence rebounded late last year due to healthy consumer spending and remains at a historically elevated level.
  • A tight recruiting environment is encouraging companies to become more flexible with employee locations, often opening satellite offices in smaller cities to capture a larger workforce.

National Office Overview

  • Space demand aligns with economic growth, generating a nine-year run of declining vacancy, even as office inventory made steady gains during the same span. Limited available floor plates will push the national average asking rent higher and embolden the construction of new properties during this year.
  • Companies increasingly factor office amenities into their recruiting and retention strategies to compete for a limited number of workers. Tech and creative firms seek footprints with an abundance of features, open floor plans and urban locations when considering relocation or lease renewal decisions.
  • Office deliveries during 2020 will rise to the highest level since 2009. Construction is concentrated within 12 markets, which account for 60 percent of the new inventory. Speculative office space is focused in Boston, Chicago, Dallas/Fort Worth, Los Angeles, New York City and San Jose.

Capital Markets

  • The Fed reiterates expectations of growth in 2020 with few changes to policy, but Chairman Jerome Powell emphasized that the committee will change course if conditions warrant.
  • Although underwriting standards are tightening for certain segments of the market, debt financing remains readily available for office investments. Local, regional and national banks, life insurance companies and private capital sources remain active.
  • Lower interest rates may spur greater foreign investment into U.S. office assets following a slight pullback in 2019. Buyers from Europe, Canada and Asia continue to pursue stabilized properties in large gateway markets as well as in rapidly growing secondary metros.

Investment Outlook

  • The sector has been late to emerge as an attractive investment opportunity as buyers are taking a calculated approach, though a backdrop of robust underlying fundamentals preserve a consistent level of transactions. - Investors are compelled by opportunities in markets with an outsized tech presence, such as Austin, San Francisco and San Jose. Rapidly growing markets in the Sunbelt, including Charlotte, Phoenix and Tampa-St. Petersburg, also draw buyers due to their strong job and population gains along with greater diversification across office users.
  • Properties in primary markets recorded an average initial yield in the upper-6 percent band, while properties in secondary markets traded 50 basis points higher. Tertiary markets have an average cap rate in the high-7 percent range.

 

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