The new year could prove to be a double whammy for office markets across the country, as new supply is expected to grow at an accelerated rate while demand from office-using employment wanes.
Over the past three years, new office construction increased the office inventory by about 1 percent per year, but in 2018 the annual growth rate is expected to be double that, according to a new report by Moody’s cited in the Wall Street Journal.
At the same time, office-using employment in 2018 is expected to grow at half the rate it’s shown this year, according to Moody’s.
And there are concerns that underwriting standards are softening as lenders underwrite buildings at values that surpass those from the peak before the financial crisis.
“We’re looking at a cyclical shift in how underwriting is being done on the loans we see coming through,” Moody’s vice president Kevin Fagan said. “Typical of the late stage of a cycle, we see some pretty aggressive underwriting with high expectations of future rent growth, and very low vacancy assumptions.”
In Manhattan, the vacancy rate during the third quarter was 9 percent, down slightly from 9.1 percent a year earlier, according to Cushman & Wakefield. But Green Street Advisors said markets like New York City and Washington, D.C. are cause for concern when it comes to supply growth.
“Office fundamentals continue to slowly decelerate as supply growth waxes and job/demand growth wanes,” a recent Green Street report read. [WSJ] – Rich Bockmann