Economy Watch: Office Sector Faces Softening, Ten-X Commercial Predicts

Demand remains tepid, despite employment growth that tops previous expansions. Ten-X Commercial also identifies the office sector's top "buy" and "sell" metros.
Image courtesy of Flickr Creative Commons user totalAldo
Image courtesy of Flickr Creative Commons user totalAldo

According to Ten-X Commercial, which released its latest U.S. Office Market Outlook late last week, the office sector is looking a bit anemic these days. The report noted that vacancies that have remained essentially the same over the past two years (just over 16 percent), while rent growth has slowed to its weakest pace in five years.

Despite office employment growth this cycle that has topped previous economic expansions, the report noted, demand for space has remained tepid. Since 2010, technology and changes in work strategy have reduced the office footprint by about one third, to just 150 square feet per worker today. That trend has left the U.S. office segment oversupplied.

Tougher times might be ahead both for metros that have done well in recent years, as well as those that have struggled. Markets that recovered during the current cycle are now faced with increased supply, threatening future growth. Meanwhile, markets that have seen only limited improvement in this cycle remain weak. 

Ten-X Commercial also offered an analysis of markets in which investors ought to consider buying office properties—those relatively few locations with strong prospects—and those where investors should consider selling. Portland, Sacramento, Dallas, Tampa and Long Island are the top “buy” markets, because  of supply constraints, industries generating demand for office space, or both.

As for the “sell” side, metros topping Ten-X Commercial’s list include Houston, San Francisco, Memphis, Baltimore and suburban Maryland. These markets have either seen lackluster office job growth, which has contributed to high vacancy, or have had strong recoveries that led to development of more new product than even a strong market could absorb.