The overall availability rate for U.S. office space was unchanged as of the end of the third quarter of 2018, remaining at 18.1 percent, according to the latest Savills Studley Report: National Office Sector from commercial services firm Savills Studley. San Francisco remains the tightest market in the country, with an availability rate of 9 percent, followed by Boston/Suffolk County, 9.7 percent; New York City, 11.6 percent; and Austin, 12.8 percent. The report shows that the national overall asking rent fell by 0.1 percent to $34.37 per square foot ($369.96 per sq m) from $34.39 ($370.17 per sq m) in the third quarter from the previous quarter, but has jumped 2.4 percent year-on-year.
Other highlights from the third-quarter numbers include:
- Tariffs’ Toll on Lumber. Hard costs associated with the steel, lumber, drywall, and wiring that go into buildings have been mounting in the past year, the reports says. According to lumber market industry tracker Random Lengths, the price of lumber from western Canada jumped from less than $220 per 1,000 board feet in fall 2015 to $350 last summer and then spiked to more than $650 by June 2018—an 80 percent rise in one year. Tariffs, national disasters such as Hurricane Irma, and a transportation worker shortage all contributed to the spike. The increase came a year after the Trump administration imposed a 20 percent tariff on Canadian lumber.
- Build before the Cycle Ends. Though material costs like that for steel are rising, new office development remains elevated in many markets, according to the Savills Studley Some tech centers such as Silicon Valley, Boston, and Raleigh/Durham are near the top of the list for speculative office development. These three markets have a combined 9.8 million square feet (910,000 sq m) of development underway. San Francisco has just under 3 million square feet (279,000 sq m) under construction, but more than 90 percent of it is pre-leased. Development activity is also at high levels in markets that are more dependent on traditional office space users, such as Manhattan and Washington, D.C.: 20 million square feet (1.86 million sq m) of development is underway in those markets.
- A League of Their Own. For many of the largest tech and creative-sector firms, the cost of space is not a stumbling block. In turn, office landlords still have ample pricing power in most tech markets such as San Francisco and Silicon Valley. At the same time, the flow of tech firms either relocating entirely to lower-cost markets or moving portions of their operations to secondary locations is not abating, Savills Studley reports.