As Uncertainty Rules Office Sector, Seattle Takes Top Spot in Marcus & Millichap Index

The national office market is on uncertain footing today, as many decision-makers delay their plans for investment and leasing. “The risk, at least in the immediate term, is more to the downside than the opportunity is to the upside,” Alan Pontius (pictured), national director of office and industrial properties for Marcus & Millichap Real Estate Investment Services Inc., told CPN this morning. “Right now, there clearly is a weakness on the demand side of the equation.” Many tenants and investors are putting decisions on hold in light of economic worries that are compounded during a presidential election year. Nevertheless, market fundamentals are generally much better than they were during the downturn of 2003-2004, noted Pontius. Inventory coming on line this year amounts to only 1.8 percent of total national inventory. By contrast, new construction increased office inventory by 8.5 percent annually during the mid-1980s. Pontius offered the analysis during an exclusive preview of Marcus & Millichap’s annual National Office Market Index, which evaluates supply and demand factors for 43 major U.S. markets. He stressed that market conditions may change quickly, both nationally and in individual markets. Nevertheless, the report suggests that market forces may tend to balance out one another nationally. Marcus & Millichap projects that 68 million square feet of inventory will come on line this year, up from 55 million square feet in 2007. But the office development pipeline is 45 percent thinner than it was a year ago. The study also estimates that the rate of rent increases will fall by half year-over-year, from 10 percent in 2007 to 5 percent in 2008. But rents will continue to edge up despite a national vacancy rate that is expected to rise 80 basis points, to 13.4 percent. The National Office Market Index evaluates major metropolitan areas by such factors as growth in employment of office workers, construction, absorption, vacancy and rent growth. Pontius emphasized that the index ranks each market for its supply-and-demand equation and its growth potential, rather than for fundamentals. That said, Seattle took the top spot in the index for its strong technology-related hiring. Seattle bumped New York City, which moved to second place but boasts intense investor interest, projected effective rent growth of 8 percent, and a 5.7 percent vacancy rate, the nation’s lowest. California metro areas took five of the top 10 spots in the index. San Francisco jumped 12 places from last year to the fourth spot overall, based on strong growth from the information technology sector, 9.6 percent vacancy, and a 5.9 percent effective rent increase. Los Angeles (#5), Oakland (#7), Riverside-San Bernardino (#8), and Orange County (#10) also represent the Golden State. Rounding out the top 10 are Boston (#3), Washington, D.C. (#6) and Las Vegas (#9).