The U.S. office market, including Philly office space property, continued to benefit from strong fundamentals going into 2018, despite continued deceleration in net absorption, occupancy, and rental rate growth.
With robust corporate profits and continued office-using job growth, that trend is expected to hold through the year as the recently approved tax cuts and expected gradual increases in interest rates make U.S. office space, Philadelphia office space, and other institutional-grade property types an attractive place for investors to park capital and get cash flow.
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“You’re going to like GDP growth over the next few months,” CoStar Portfolio Strategy’s Hans Nordby said during CoStar’s year-end 2017 State of the U.S. Office Market report, co-presented with managing consultant Paul Leonard. “Corporate profit growth is a good story, and if you already think it’s strong, look underneath the hood. It’s even better.”
The improved profit growth outlook for the services sector and other industries that drive demand for U.S. office space and Philly office space, along with expected higher GDP growth projected at a very strong 2.5% to 3% in the next few months, should help office job growth hold steady at strong levels for the next few month, Nordby said.
The rate of vacancies in U.S. office space markets, including Philadelphia office space, held steady at 10.1% at the end of the fourth quarter 2017, unchanged from the same period a year prior, despite a large amount of new supply and a 20% decline in office net absorption to 65 million square feet for 2017.
Meanwhile, the total amount of office property acquired by investors declined about 15% in 2017 from the prior year, largely due to a sharp drop in office trades in New York City, in Philly office space, and in other gateway markets.
Despite the declining sales volume, average prices in primary markets – such as those involved in Philadelphia office space – continued to rise, prompting investors to fan out into secondary markets such as suburban Phoenix, where Transwestern Investment Group and JDM Partners acquired Marina Heights, State Farm’s office campus in Tempe, AZ, for $930 million at $459 per square foot.
Leonard sees the vacancy rate involving both national and Philly office space ticking up beginning this year through 2020 as the expected new supply of space finally begins to outpace demand.
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