Last week, we looked at some numbers showing the difficult prospects in front of office properties approaching the Wall of Maturities.
Enough gloom and doom. There are plenty of reasons to look at the office sector with optimism. While some assets will surely reach maturity in need of additional capital, the majority find themselves in improving conditions.
Here’s a quick glance at some positive trends:
Unemployment: More people working = more demand for office space. It’s that simple, and it will help pick up property values. The U.S. economy added 280,000 jobs in May, according to the U.S. Department of Labor’s report on Friday. The strong showing demonstrates the sustainable nature of the job market following a weaker-than-expected first quarter. Even with a sluggish start to the year, employers have kept hiring.
There’s still room to grow, too. The unemployment rate nationwide actually ticked up to 5.5 percent in May because more people started looking for work. Plus, the Labor Department still counts about 2.4 million people as long-term unemployed. As these workers (and Millennials entering the workforce) find jobs, office buildings are poised to see improving vacancy rates and better prospects for refinancing and new investment.
New Construction: New office towers are back in style from mid-tier cities to global centers. Pick a growing city and office tower chatter is in the air. The flurry of activity signals investors’ renewed interest in underwriting office projects as they search for yield. It also illustrates the pent-up demand for new Class A space in many cities.
A few examples: San Antonio, Texas just approved a multi-million dollar public-private land swap deal to bring the city its first new Class A office tower since 1989. In Charlotte, North Carolina a new office tower is already under construction, and two more will break ground this year. New York’s Park Avenue is poised for its first new office tower in three decades, too. MassMutual Financial Group last week agreed to fund a $556 million tower at 425 Park Ave.
‘Burbs Surge: Suburban office space is filling up, too. With many cities facing pent-up demand in the central business district and new construction not yet ready for tenants, suburban offices are experiencing some accelerated recovery. Colliers International last week reported 9.6 million square feet of commercial office space was absorbed in suburban markets in the first quarter, compared to a virtually flat quarter for CBDs.
“Relatively strong, improving market fundamentals, coupled with attractive yields compared with other investments should drive transaction volume in both gateway cities as well as the resurging secondary and suburban markets,” Colliers says in its Office Market Outlook.