The year 2015 was a phenomenal year for sales in the U.S. office space market, including the Philly office space market. The U.S. office market, in fact, registered its best year since 2007, thanks in part to increased demand and constrained levels of construction that led to tightening space availability in metro areas nationwide. U.S. office space net absorption surpassed 100 million square feet for the first time since the Great Recession and the U.S. office vacancy rate was down another half-percentage point for the 12-month period that ended December 31, 2015.
The downward trend in the U.S. office vacancy rate, which includes the vacancy rate for Philadelphia office space, continued in 2015, reaching 10.8%, down from 11.3% in 2014 and 13.2% at the peak of the recession, according to the CoStar Group’s recent State of the U.S. Office Market 2015 Review and Forecast. The 2015 vacancy rate for Philly office space came in a hair below the national average.
CoStar said vacancies dropped in 64% of U.S. office submarkets and 56% of metro office markets in the last quarter of 2015. Economists said the vacancy rate would continue to decline through 2016, reaching about 10% in 2017.
The investment market was particularly hot in 2015, with preliminary office asset sales soaring almost 18% to $152 billion, CoStar reported.
Atlanta, Miami and Nashville saw the biggest annual vacancy improvements, performing better than San Francisco, Seattle and Boston, a result that clearly illustrated the office market shift away from technology- and energy-driven metros that fueled the economic recovery and expansion and toward markets hit by the Great Recession’s housing bust. San Francisco’s office vacancy rate declines showed indications of slowing in the last quarter of 2015 as new office supply came to the market, the CoStar economists reported.
It was no surprise that the strongest annual occupancy gains came from Silicon Valley markets. Still, the 2015 shift away from higher occupancies in markets driven by energy or technology, gave big-tenant markets like Atlanta and Dallas a boost in occupancy results. Eight of the 13 markets with the highest year-over-year occupancy improvements were not in energy- or technology-driven markets, CoStar said.
U.S. consumers have been enjoying savings as a result of the lower gas prices, but some geographical areas and parts of the economy have been hurt by the drop in energy prices, the effect on the stock markets, and global economic turbulence, CoStar’s economists reported. Since its May 2015 peak, the S&P 500 dropped about 11%. Both weakness in energy-related stocks and a drop of more than 10% in technology stocks contributed to the S&P’s decline.
Tech markets continue to be among the nation’s most volatile, CoStar said. Markets such as San Jose, San Francisco, Boston, Raleigh, Austin and Seattle are waiting to see how lower private and public market valuations will impact hiring, CoStar said.
Recently, both Apple and Samsung Electronics warned that tech is facing a slowdown in 2016, blaming global economic instability and declining demand.
Yahoo says it will cut its workforce by another 15%, or 1,700 jobs; dispose of surplus real estate; shut down five global offices; and examine “strategic alternatives” aimed at possibly selling or spinning off its core search engine and web portal business, according to CoStar. Last month, Yahoo already had started looking for a buyer for a 48-acre tract near Levi Stadium in Santa Clara that the company had planned to use for expansion.
Notwithstanding the predicted slowdown in energy and technology, ongoing momentum from 2015’s strong performance in the U.S. office space market and the overall U.S. commercial real estate market, including the Philadelphia office space market, is expected to continue well into 2016, CoStar said.
Annual net absorption of U.S. office space rose to 101 million square feet in 2015 from 93 million square feet in 2014. Roughly 64 million square feet of U.S. office space was delivered to the market in 2015, an increase of 41% over the previous year. New office space under construction was up a modest 7% at year-end 2015, an improvement after two quarters of declines.
Annual rent growth reached 4.4% by the end of 2015, surpassing 2014’s 3.8% growth, according to the report. Rents showed particularly strength in CBDs, such as San Francisco at 19.4% and Raleigh, NC at 13.9%. Even Atlanta and Detroit’s urban core rents were up, increasing 11.2% and 10.5%, respectively.
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