The fourth quarter was another lackluster one for the U.S. office market, according to the latest analysis by Moody's (NYSE: MCO) property analytics arm REIS. While the vacancy rate remained steady and rents continued rising during the period, the office property market is in a relatively tepid state.
However, while the overall picture for office property investors isn't very enticing, there are pockets of strength. Here's a closer look at the market data last quarter and what it means for commercial real estate investors who focus on office properties.
The building boom continues
The national vacancy rate of office real estate remained steady during the fourth quarter at 16.8%. On the one hand, that's good news since vacancies had been on the rise since bottoming out in the low 16% range in 2017. It's also a positive considering the amount of new space developers brought online during the period.
Overall, developers completed 13.7 million square feet (sf) of new office space in the quarter, 13 million of which the market absorbed with tenant move-ins. That was the highest level of net absorption since 2007. Meanwhile, the sf added during the period was just short of the 14.7 million sf developers brought online at the end of 2018, which was the highest level of construction and deliveries since 2009.
That uptick in new rentable space is one of several headwinds impacting occupancy, which also included economic and demographic changes, the continuous rise of remote working, and a shift in how office tenants use space. These factors have weighed on the growth of asking rent (i.e., the list price), which only increased by 0.6% during the quarter and 2.5% for the full year. While that matched 2018's rise, it was well below 2015's peak of 3.4% rent growth.
Hot spots in a cool market
While the overall U.S. property market was lukewarm last year, some markets stood out from the pack. Several metros, for example, saw notable declines in their vacancy rates during the fourth quarter, led by New Haven, Suburban Maryland, Tampa-St. Petersburg, San Bernardino/Riverside, and Columbus. Meanwhile, more than a dozen markets enjoyed asking rent growth of more than 1% last quarter, led by Seattle, Austin, Denver, Phoenix, and Raleigh-Durham.
For the full year, the following six metros delivered asking rent growth of more than 4%: