Page 2 — Office Properties Quarterly — September 2019 Market Update E ntering the second half of 2019, the tight labor market remains a primary driver of domestic growth; however, exception- ally low unemployment is restraining job gains, slowing first-half employment creation to its lowest level since 2010. Reflective of this, job openings still outnumber job seekers by roughly 25%, enabling many people with weaker skills and education to find work.With recruiting competition heating up, many organizations are becoming increasingly competitive, opening additional locations to tap new labor pools, and boosting com- pensation packages to attract new staff members and retain existing workers. This has provided a bump to household and disposable income lev- els nationwide. Q Millennials, suburban office are keys to outlook. The millennial cohort will have a transformative impact on suburban office demand moving for- ward as this generation approaches a new life stage. Many millennials are beginning to form families after delaying marriage until their late 20s or early 30s. Family formation will increase the appeal of subur- ban neighborhoods as more afford- able housing costs and proximity to quality schools become increasingly important. Corporations are taking note of this, setting up campuses and build- ing amenity-rich offices in suburban employment hubs, bringing jobs to the growing talent pools. Additional suburban retail, particularly in prox- imity to office properties, will be developed to create live-work-play hubs that support the migration to the suburbs in pri- mary metros. Q Coworking oper- ators expand foot- prints. Coworking continues to gain prominence among office markets nationwide as work trends transform. More companies are allowing their employees to work remotely, encourag- ing operators like WeWork and Regus to capitalize on the growing trend. Many small businesses also occupy these spaces as it can be more afford- able and flexible than entering a long-term lease, depending on the size and dynamics of the company. Coworking could be a viable option for more small businesses if economic momentum further moderates due to the short-term nature of the leases, allowing companies to quickly opt out if the cost burden becomes too heavy. However, this concept may have an adverse effect on indepen- dent contractors who use coworking to enhance their work environment. These people may choose another option, such as working from home, if budgets tighten, leaving more open desks for coworking entities to fill. Q Buyer pools transforming as sector outperforms. Yield-driven investors are capitalizing on late-cycle dynam- ics and demographic transitioning, remolding investment strategies. Strong price appreciation in primary and secondary metros is also con- tributing to this, outperforming other areas of commercial real estate. With some talent pools beginning to shift out of urban areas, office invest- ment may begin to pick up in the suburbs. Suburban assets can produce stronger yields than similar proper- ties in central business districts, giv- ing investors more opportunities with high-growth potential. The national average price per square foot rose to $263 over the past year, increasing 5%. Office pric- ing in primary and secondary metros jumped substantially during that time, climbing 7.8% and 12.4%, respec- tively. Strong appreciation has paved the way for more sophisticated capital in these markets, refining buyer pools as some investors get priced out. Rising asset values in larger metros and the extended cycle have evoked increased economic growth in many of the nation’s smaller metros, propel- ling investor demand. Elevated buyer demand in these smaller cities, trans- lated to a roughly 20% rise in tertiary market deal flow during the past year. Q 2019 Outlook. Unresolved trade talks and the extended cycle are plac- ing pressure on domestic markets, prompting some consumers and businesses to act more cautiously until additional clarity emerges. Ris- ing interest rates at the end of 2018 encouraged many companies to slow expansion plans, which translated to more moderate leasing activity for some property types in several mar- kets during the first half of this year. While the economic outlook has eased modestly, the recent interest rate cut should bolster investment and spending, giving the economy a lift during the remainder of 2019. Office-using job creation will again Modest supply to keep rental gains stable Brian C. Smith, CCIM, SIOR First vice president investments, Marcus & Millichap Please see Smith, Page 23