Office Market – 2015 Recap


While continuing to face headwinds, encouraging demand was observed in the national office market in 2015, facilitating an increase in absorption at the national level compared to the year prior. Supporting demand, payroll figures among the traditional office-using employment sectors increased by nearly 3.0% year-over-year in 2015 on the net addition of nearly 1.5 million jobs, rising to a level more than 5.0% above the previous peak. Employment growth is supporting improvements in underlying market fundamentals, but a pronounced shift in space-per-employee ratios continues to adversely impact absorption figures.

A more encouraging pace of absorption in the national suburban office market was observed in 2015, particularly across a number of markets with high technology location quotients. Tighter vacancy rates have fostered a more robust pace of rent growth within the CBD office market in recent years, leading more tenants to consider available suburban office inventory. Although the pace absorption in the suburban office sector at the national level has become more forceful, a clear distinction of leaders and laggards within nearly all markets has emerged.

Among regions, office absorption was led by the West region, followed by the Northeast and South regions, with the Midwest region lagging. In the West region, demand for office space was strongest in the San Francisco, San Jose, and Seattle markets. Growth in the healthcare and technology sectors is driving the pace of absorption in the Nashville market, while demand for office space within the Boston, New York, and Philadelphia markets led absorption in the Northeast region.

The Chicago market observed the strongest demand for office space in the Midwest region during the year. Positive absorption was recorded within both the suburban and CBD segments in the Chicago market, with the average vacancy rate in the Chicago CBD office market falling under 11.0% at the close of 2015. Strong demand for office space in the River North area has driven vacancies below 8.0% within the submarket. Absorption in the Twin Cities office market totaled nearly 700,000 square feet in 2015. Absorption figures during the year were strongest in the St. Paul CBD submarket, but absorption also remained healthy in the Minneapolis CBD and Northwest submarkets.

New Construction

While appearing to reach a cyclical peak in the second quarter of 2015, the amount of new office space deliveries increased by over 30.0% in 2015 compared to the year prior. In the office sector, new construction remains well-above levels observed in the 2009 to 2013 period, yet the pace of new office construction is relatively moderate compared to historical norms. Office construction activity is most robust in the South and West regions, and new development continues to be concentrated in core areas across most markets. Construction levels are strongest in the San Jose, Seattle, and San Francisco markets in the West region, while the Houston, Nashville, and Austin markets led construction in the South region. In the San Jose market, the amount of new office development under construction represents approximately 7.0% of the existing inventory, yet nearly 70.0% of the space set to be delivered in the San Jose market is preleased or built-to-suit activity. Conversely, the amount of new office development under construction in the Austin market represents less than 3.0% of the market’s existing inventory, but only approximately 40.0% of scheduled deliveries are preleased.

Office development activity in the Twin Cities market remained strong in 2015 but almost certainly represents the high-water mark for the area in the current cycle. New construction is underway on several major developments that will introduce a significant amount of new inventory into the Twin Cities market, putting substantial pressure on occupancy levels and resulting in softer vacancy rates within segments of the local market. In the Minneapolis CBD submarket, the massive Downtown East development is scheduled for delivery in the summer of 2016, while the T3 office development will be delivered in the final six months of 2016. The Downtown East and T3 developments will add over 1.4 million square feet of new office space to the existing Minneapolis CBD inventory.


In spite of a faster pace of new construction activity, the vacancy rate within the national office market declined by 30 basis points during the year, as the average office vacancy rate fell to the low-15.0% range at the close of 2015.  From a national perspective, vacancy rates remain tightest in the West region, with vacancy rates in the San Francisco, San Jose, Portland, and Seattle markets standing well below the national average.

A number of markets in the South region, including Nashville, demonstrated the most impressive year-over-year improvements in occupancy levels.  Further improvements in occupancy levels within the South region were held back by losses sustained in the Houston market, with the Houston CBD and Energy Corridor in the western submarkets noting material weakening among occupancy levels.  Conditions in the oil and gas industry are heavily weighing on the Houston office market, with layoffs and adjustments to growth plans among producers affecting other industries that provide goods and services to the energy industry.  Vacancy rates in 70.0% of submarkets in the Houston market increased during the year, with the market’s overall vacancy rate increasing by over 2.5% in 2015.

Vacancies in the Twin Cities market decreased by 70 basis points from the close of 2014, declining into the low-15.0% range in the fourth quarter of 2015.  Office vacancy rates in the Twin Cities are tightest in the West submarket, while among asset classes, occupancy levels are strongest within the Class ‘A’ segment.

Asking Rent

Asking rents in the national office market increased by 4.4% over the year ended December 2015, on par with gains noted in the year prior.  Robust rent growth was noted across a number of major markets with strong exposure to the technology sector, while rent growth within markets with high energy employment location quotients stalled.

Driven by growth across both the CBD and suburban segments throughout the Bay Area markets, the West region recorded the strongest year-over-year growth during the year.  Strong asking rent growth was also noted within several CBD office submarkets in the South region, including the Atlanta, Nashville, and Dallas markets.  Asking rents in the Nashville market increased in excess of 6.0% in 2015, as vacancies in the market fell below 6.0% during the year.

Meanwhile, office rent growth in the Midwest lagged all other regions, though an encouraging pace of growth was noted in the Detroit market.  Asking rents in the Twin Cities market advanced at a healthy pace in 2015, with the strongest growth observed in the West, Southwest, and Minneapolis CBD submarkets.

Investment Activity

Comprising approximately 32.0% of all sales activity among the four major property types, sales volume in the national office sector increased year-over-year by 10.0% in 2015, with office sales volume at the national level reaching over $138 billion during the year.  Reversing a trend established in 2012, sales activity in the national office market was robust in the first half of 2015 before decelerating in the final six months of the year.

In spite of healthy investment activity, property prices on a per square foot basis were up a mere 1.0% in 2015 compared to the year prior, as suburban office assets accounted for a greater composition of sales activity and the upward trend in pricing for CBD showed signs of flattening.  Given the greater composition transactions involving suburban office properties, capitalization rates in the national office market remained relatively stable throughout the course of 2015, as the risk premium spread in the office sector widened, but declined by 20 basis points compared to the year prior.

Natl office market rates & spreads

Office sales volume during the year was driven by activity in the New York City, Washington DC, and Chicago markets, but the strongest growth in investment activity was recorded in the Seattle, Atlanta, and Austin markets.  Sales volume in the Chicago market totaled over $6.5 billion during the year, surpassing the previous record of approximately $5.3 billion in 2006.  Notable transactions in the Chicago market during the year included the sale of the Willis Tower in June for $1.3 billion and the AON Center in October for $712 million.

Investors were active in the local office market in 2015, and sales volume in the Twin Cities office market totaled approximately $1.5 billion in 2015.  A number of transactions closed during the year involving office assets in the Minneapolis CBD, but investment activity was healthy within several submarkets, including the St. Paul CBD and Southwest submarkets.  Madison Equities purchased the iconic 32-story, 662,000-square-foot First National Bank building in November 2015 for $37.25 million or roughly $56.25 per square foot.  Following on the heels of recent office-to-housing conversions, plans for a portion of the space at the First National Bank building could include the conversion of some existing office space to apartment units.  Also in the St. Paul CBD, Travelers sold the 17-story, North Tower building in August for $47 million to Ecolab, which plans to relocate employees from existing space to the North Tower building by 2018.  Sales volume was also healthy in the Southwest submarket, particularly within the city of Bloomington.  Met Life sold Northland Plaza in August 2015 for $52.5 million, while Invesco sold the Wells Fargo Plaza for $46.25 million in the fourth quarter of 2015.

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