Demand for Office Space Ramps Up

Demand for Office Space Ramps Up

U.S. employers are leasing office space at the fastest pace since the recession, showing a new appetite for expansion after years of sluggish growth.

Employers added 15.3 million square feet of office space in the fourth quarter, more than any other quarter since the third quarter of 2007, according to real-estate research service Reis Inc. That pushed the vacancy rate down to 16.3%, while rents sought by landlords hit $30.86 a square foot, up from $29.94 a year earlier, according to Reis.

For all of 2015, employers occupied an additional 42.4 million square feet. That is up from 31.4 million square feet in 2014, Reis said.

The increase shows newfound strength in a sector that experienced tepid growth for most of the recovery—hobbled by slow expansion in the financial industry and trends such as denser work spaces.

“Demand is really starting to ramp up,” said Ryan Severino, an economist at Reis, which surveyed 79 markets.

Driving much of the growth has been the technology sector, with startups and tech giants alike propelling fast-rising occupancy in markets like Silicon Valley, Seattle and Austin, Texas.

In Seattle, rents grew 8.1% during 2015 to an average of $27.67 a square foot, the most in the country, according to Reis. It was followed by San Francisco and the San Jose area, which includes Silicon Valley, where rents grew 6.1% and 6%, respectively.

Such growth extends beyond tech clusters on the West Coast.

Early last year, online lender Avant Inc.’s headquarters in Chicago was about 30,000 square feet. With its head count swelling, the company first signed a lease for 80,000 square feet for a new headquarters, and then in the fall it added another floor to bring its total to 120,000 square feet.

An Avant spokeswoman said the company plans to add 600 employees this year.

On the other end of the spectrum is the energy sector. Low oil prices are taking a toll on the Houston market. Companies there have dumped millions of square feet onto the sublease market while a rash of new construction is adding supply.

Houston’s vacancy rate rose to 15.6% from 14.5% a year earlier, according to Reis, and many real-estate experts expect it to get much higher.

“The next 12 to 24 months are going to be tough for landlords as tenants have the upper hand,” analysts at Evercore ISI said of the Houston market in a note to clients Monday.

 

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