Office market lagged other CRE sectors in first quarter

And vacancies are slated to hit the highest rate in almost 30 years

Office market lagged other CRE sectors in first quarter

The growth in flexible and remote working is having an effect on the US office market.

The first quarter of 2019 saw the office sector of the commercial real estate market lag other sectors including multifamily, hotel, industrial, and retail, according to a new report from CRE transaction platform Ten-X Commercial.

While strong economic fundamentals remain including the labor market, more employees are working from home and demand for co-working space is rising. Technology is making remote working more prevalent.

"Developers are noticing this change and the persistently high vacancies that have ensued, as the number of new offices coming to market fell 73% in the first quarter of 2019," said Ten-X Chief Economist Peter Muoio. "Even though more Americans are employed, it is not translating into the pace of absorption it historically has, as office absorption also slowed 39% in Q1 2019. Office vacancies remained stagnant at around 16% for the fifth year in a row."

Supply still expected to gain

Despite the weaker performance, office supply is still expected to rise and the report forecasts vacancies to reach 17.9% by the end of 2019.

With conditions set to continue as they are, Ten X Commercial is forecasting vacancies to hit 18.3% by the end of 2020, the highest rate since 1992.

Even as absorption rates improve in 2021, it could be 2022 before demand and supply draw closer but even then, vacancies are expected to remain elevated at 18.2%.

Rent growth meanwhile, is set to post its lowest rate since 2010 while hitting a new high of $27.29 psf.

"Following continued weak demand for office space, we expect rents to fall by about 2.2% in 2020," Muoio continued. "Moving into 2021, we predict rents will average a modest 0.9% year-over-year increase, which would put rent prices just below their 2019 level."