Economic growth, rising employment, and the growing importance of services to the American economy have driven rising demand for office space.
Yet certain trends are shaping unique patterns of supply and demand in different markets. As a result, while new supply is rising overall, putting downward pressure on average rent growth, particular markets and subsectors are poised to outperform.
The heart of the economy
The office market sits at the heart of the economy. People come together in offices to create, build, and manage the companies that drive growth. Office design and location affect productivity and recruitment, and companies spend millions to find just the right fit.
Traditionally, investors have turned to commercial office to generate income and to preserve and grow their capital. Office leases are typically long-term, lasting five or ten years. In addition, because suitable office locations are limited, office buildings in desirable locations tend to retain or even increase their value.
Commercial office thrives when the economy grows and new businesses and jobs are created. However, office may suffer during downturns when business closures reduce demand. Therefore, selection is key.
Office market fundamentals
Office has performed well over the last two years, growing broadly in line with the overall real estate market (Figure 1). The performance of the commercial office market is essentially a function of supply and demand.
Demand: More office jobs, more office workers
The key driver of office demand is office employment. In recent decades, more and more Americans have started working in offices. The U.S. economy has been transforming from one dominated by goods into one dominated by services. This has led to a sharp rise in service-sector jobs in industries like financial services and technology, many of which are performed in offices (Figure 2).
This economic transformation set the foundation for today’s thriving commercial office market. The stable, positive economic growth of the last decade has supported this market and led to rising demand in most parts of the country.