Office Midwest

With unemployment dipping, expect those office vacancies to keep falling

Expect those office vacancies to keep falling,ph01
As the labor market tightens, expect companies to dangle modern office space as a key amenity to potential employees.

The unemployment rate continues to drop. New jobs are added to the U.S. economy every month. And for the first time on record, the number of job openings is higher than the number of people out of work and seeing jobs.

What does this mean for the commercial office market? Only that demand could soar in this sector in the coming months.

Marcus & Millichap recently released a research brief on the relationship between today’s changing labor market and the office sector. According to the brief, as companies compete for workers in an increasingly tight labor market, the demand for modern office space could soar.

After all, to attract the best talent, companies will have to offer potential workers plenty of perks. A good salary is the most important of these perks. But a modern office space in the center of a CBD that includes plenty of amenities? That’s a nice perk to dangle in front of possible workers, too.

According to Marcus & Millichap, at the end of April, job openings stood at 6.7 million, while the number of unemployed people stood at 6.3 million.

The company also reported that during the past 12 months, the professional and business services sector has been expanding at a faster pace than overall employment, driving up office demand. This sector added almost 500,000 jobs and grew at a rate of 2.5 percent during this time. The increased hiring sent the national office vacancy rate to 13.8 percent in the first quarter of this year.

Also interesting? Since 2012, Class-B and Class-C office rents have been growing at a faster rate than have rents for Class-A buildings. That is a trend that continued in the first quarter of this year, as rents for Class-B and -C office buildings increased by 2.2 percent. Rents for Class-A office buildings increased at a slower 1.7 percent rate during the same period.

The demand for Class-C and Class-B office space is significantly higher than the limited new supply in these classes, according to Marcus & Millichap. It’s not surprising, then, that the vacancy rate for Class-B and -C office properties stood at a low 12.3 percent in the first quarter. The rate for Class-A office properties during the same time was a higher 16.3 percent.

These rates will probably continue to fall. Marcus & Millichap reported that in May the U.S. economy added 223,000 jobs. That marks the 92nd straight month of emplyoment additions. The unemployment rate dropped to 3.8 percent. This rate has been that low since April of 2000.