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OFFICE/OCCUPIER

2020 U.S. Real Estate Market Outlook
November 19, 2019
 

FUNDAMENTALS WILL REMAIN STEADY

Office-using employment is expected to increase by 0.3% or 45,700 jobs in 2020, down from 1.5% between 2018 and 2019. The expected top-three markets for 2020 jobs growth are Austin (2.4%), Dallas/Ft. Worth (1.9%) and Houston (1.6%). Office completions will decrease to an annual total of 51.1 million sq. ft., representing 1.3% of total inventory and down from the 56.4 million sq. ft. total in 2019. Despite the moderate decline, completions will outpace forecast net absorption of 20 million sq. ft., 70% of which is expected in suburban markets, according to CBRE Econometric Advisors (CBRE EA). As a result, the suburban and downtown vacancy rates are expected to increase modestly by 60 and 70 bps, respectively, after generally declining since 2009. Rent growth will slow to 1.6% as a result of moderately weaker market fundamentals.

FIGURE 7: OFFICE RENT GROWTH VS. VACANCY

2020-Market-Outlook-Office-Occupier-FIG07-01

Source: CBRE Research, CBRE Econometric Advisors, Q3 2019.

TECH TENANTS TO DOMINATE 2020 LEASING ACTIVITY

The technology industry, which accounted for 21.6% of overall leasing activity in H1 2019 (Figure 8), should continue to dominate office demand in 2020. As of mid-2019, approximately 4,000 tenants were seeking more than 174 million sq. ft. of office space, with tech tenants representing the largest share.

FIGURE 8: OFFICE LEASING ACTIVITY

2020-Market-Outlook-Office-Occupier-FIG08-01

Note: The above categories account for more than 90% of leasing activity in 2018 and H1 2019. Projections for H2 2019 were based on actual distribution of leasing activity in H1 2019. Aerospace & Defense is combined with Mfg. & Transportation. Health Care and Education are combined with Life Sciences. Categories not included are Confidential/Undisclosed/Unknown, Other, Retail and Telecom.
Source: CBRE Research, Q3 2019.

HOT MARKETS IN 2020

The tech industry is driving strong construction activity in certain markets. Austin, San Jose, Salt Lake City, San Francisco and Nashville will see the highest rates of completions due to increased demand in 2020. San Jose, Salt Lake City and Austin will also have high rates of net absorption next year. A relatively low amount of office completions in Los Angeles will make it the nation’s strongest market for rent growth in 2020.

FLEXIBLE OFFICE SPACE GROWTH WILL MODERATE

Per CBRE’s recent report, flexible office space inventory had been expected to grow exponentially this year, largely driven by major flex office provider WeWork. Since that report, WeWork has significantly tempered its growth strategy. Given this development, CBRE has adjusted its growth forecast of flex space to 23% this year and 13% in 2020. Flex office inventory should total approximately 87 million sq. ft. by year-end 2020. This growth will come from flex operators with sound operating models that increase their offerings in strategic markets.

The model of engagement between landlords, occupiers and flex operators will continue to evolve in 2020 as the risk tolerance of occupiers and landlords lessens. To hedge this risk, partnership or service agreements between landlords and flex operators will be a prime driver of flexible office space expansion in 2020, allowing landlords more insight into and control over flex operations in their buildings. Occupier demand for flex space should remain strong in 2020 as companies deal with headcount uncertainty and decentralized workforces. Speed, flexibility and low capital outlay will remain at the heart of flexible office space occupancy demand in 2020 and beyond.

FIGURE 9: FLEX OFFICE PENETRATION FORECAST

2020-Market-Outlook-Office-Occupier-FIG09-01

Source: CBRE Research, Q2 2019.

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Contributors

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Richard Barkham, Ph.D.
Global Chief Economist & Head of Americas Research
+1 617 912 5215
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Spencer Levy
Chairman, Americas Research & Senior Economic Advisor
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Julie Whelan
Julie Whelan
Head of Occupier Research, Americas
+1 617 912 5229
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Ian Anderson
Director of Research and Analysis
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Travis Deese, Senior Research Analyst
Travis Deese
Associate Director, Occupier Research
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