In Brief: CBRE Foresees Continued U.S. Office Market Expansion in 2018

Improved U.S. office market fundamentals should continue, downtown markets will receive a disproportionate amount of new supply, the tech sector likely will remain a primary demand driver, and occupiers will pursue space efficiency and agility this year, according to CBRE’s “2018 U.S. Real Estate Market Outlook.”

“The strongest gains in employment, occupancy, and rents will likely occur where recovery has lagged during this cycle and where there is little or no construction underway, including many former housing-bubble markets in the South and West,” said Scott Marshall, CBRE Americas president, advisory and transaction services/investor leasing.

“Suburban submarkets that offer a range of housing choices along with urban amenities—including retail and restaurant options, public transit, and walkability—are well positioned to capture demand from maturing millennials and thus could be attractive to both real estate investors and occupiers.”

CBRE expects U.S. office market growth to continue this year, with net absorption projected to total 32.1 million square feet (3 million sq m). As occupiers have focused on maximizing efficiency and productivity in their portfolios, net absorption has become more muted in recent years than in past expansion periods, CBRE noted. That has led to more moderate but sustainable growth rates, which should continue this year, it predicts.

With significant construction activity occurring in Manhattan, San Francisco, Washington, D.C., and other large downtown markets, CBRE expects city centers to account for a disproportionate share of new supply in 2018. This will likely result in the downtown vacancy rate increasing more than the suburban vacancy rate—60 basis points versus 10 basis points, CBRE predicts.

Overall, completions are expected to outpace net absorption for a second straight year, driving a modest 20-basis-point increase in the vacancy rate to 13.2 percent—only slightly above the cyclical low of 12.9 percent in the third quarter of 2017. Given the modest increase in vacancy, CBRE expects overall rent growth to slow to 2 percent from 2.4 percent in 2017.