Labor Market at Heart of Shifting Office Dynamics

A tightening labor market, combined with low construction levels, made the second quarter of 2014 one of the strongest periods for office space absorption since the recession. Net space absorption hit 15M square feet for the period, the highest rate since 2007, according to CBRE’s U.S. Occupier View report. The national vacancy rate fell by 30 basis points to 14.5 percent in the second quarter.

The surge in absorption levels is a “pretty big thing,” says CBRE’s brokerage leader for the Americas, Whitley Collins, because it comes at a time when many tenants are trying to minimize their office space requirements through more efficient workplace design. “There is a continuing trend towards densification,” Collins says. “They might have 100 people on a floor-now they’re trying to get 120 people on the floor.” The high-tech sector was the most active industry, responsible for 19.9 percent of all major leasing deals in the first half of the year. Financial services tenants were behind 12.4 percent of leasing activity, and business services 10.6 percent. As vacancy falls, rents are expected to climb. CBRE Econometric Advisors tips average rent growth of 3.4 percent to the end of 2014, rising to 4 percent by 2016. This should prompt a new wave of office development, Collins says. Rents are unlikely to fall, despite the additional space in the market, because they will be top-quality assets. However, there is a cap to how much rents will rise, says Collins, because tenants now have more flexibility to shift labor interstate, where their costs will be much lower. At major employers, new technology means that companies can move segments of their business interstate, where both rents and labor are cheaper. “Labor is the biggest trend for us,” Collins says. “[Employers] don’t need people to be housed in one area; they can move bodies and grow elsewhere.” The trend is already evident in the high-tech industry, which has spread beyond its traditional heartland in San Francisco’s Bay Area, with tenants taking up space in cheaper markets like Seattle, Denver, Austin, and Boston. Collins says many smaller office markets that have not been in high demand in recent years are actively courting employers, promoting the local talent pool, and offering incentives for them to set up shop in the area. “This should be interesting to watch in the next five years,” Collins says, “and it should temper rent growth.”

A tightening labor market, combined with low construction levels, made the second quarter of 2014 one of the strongest periods for office space absorption since the recession.

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