Top 10 Markets for Office Rent Growth

A U.S. economy run that appears headed for the nation's longest expansion in history has been good for office landlords.

Nationally, average office rents in cities with at least 1 million in population have continued to rise although at a slower pace now than several years ago. That rate is now at 2.1% over the past 12 months, roughly a third of what office rent growth was several years ago.

Few would be surprised, though, that cities heavy on technology have seen office rents far surpass the national average. Rising rents mean landlords make more money.

For small businesses, rising rents could be a double-edge sword. Needing new space is a good sign that the business is flourishing. But higher rents may make those business owners think long and hard about expanding.

They shouldn't be deterred, though. "Growing small businesses can explore how well they are using their existing space in order to counter the rising cost of rent," said David Koziak, executive managing director with real estate firm Savills. "By narrowing in on that usage, they can build a plan that may actually lead to saving money on rent, or at least holding the cost steady."

Using recent data from CoStar, here are the Top 10 cities for the highest average office rent growth over the past year.

10. East Bay, California -- 4.1%

The metropolitan area is centered around Oakland, the more affordable neighbor to nearby San Francisco and San Jose. The area is notable more for being one of the largest ports in the country. But it is getting spillover from the tech sector in San Francisco and San Jose, according to Jesse Gundersheim, CoStar's director of market analytics in San Francisco. "Momentum has been building, particularly in downtown Oakland," Gundersheim said. Credit Karma, for example, decided to expand outside San Francisco, signing a lease for a big chunk of space at 1100 Broadway in downtown Oakland, an office tower scheduled to open next year.

Not much new (office) construction is happening, which has helped push rents up. "Developers have been prudent" in deciding when to build," Gundersheim said. Rents didn't justify new construction until two or three years ago, and only in downtown Oakland.

(Tie) 8. Sacramento, California -- 4.2%

The state capital has seen office rents grow but it's a slower market because it lacks the "dynamics like you have in a lot of other markets," said David Whitmore, CoStar's market analyst for Sacramento. While tech companies in general haven't come in and leased large amounts of space, office rent prices have gone up chiefly because so few new office buildings have been built.

Outside of government, healthcare companies have been active in leasing new space. St. Louis-based healthcare company Centene Corp. announced last year that it would open a regional headquarters in Sacramento as part of a 1.25 million square-foot campus, which is now under construction.

(Tie) 8. Tampa, Florida -- 4.2%

San Antonio-based USAA, which has had a big presence in Tampa for several years, continues to expand in this Florida market. But this is another city in which office rents have gone up primarily because new construction has remained so low. Financial industry growth has boosted employment but "developers have remained wary of the Tampa market, which has been one of the lowest construction metros in the nation this cycle," according to a CoStar market report. Of the Top 10, Tampa has the lowest percentage of total office space under construction at 0.7%.

7. Raleigh, North Carolina -- 4.6%

The state capital has drawn many companies seeking to take advantage of the educated workforce and lower business costs there. It is home to the Research Triangle anchored by Duke University, North Carolina State University, and the University of North Carolina at Chapel Hill. Biotech and medical research has been the biggest draw. Pharmaceutical Product Development based in Wilmington signed one of the biggest office leases here last year.

6. Jacksonville, Florida -- 4.8%

Jacksonville has the least amount of office space on the list at 64.5 million square feet. The city's employment has grown through back-office operations of big financial companies such as Merrill Lynch, Voya Financial and Citibank. “A lot of it has to do with rents being so low that landlords have a lot of runway to push rents,” said Trent Turner, CoStar’s market analyst for Jacksonville. Rent growth has happened mostly with the high quality office buildings.

Like Tampa, office rent growth has been helped by a dearth of new construction. Jacksonville is just above Tampa with the least new office space under construction. Most of the new construction is built only after it has been preleased to a specific tenant, Turner said. The PGA Tour is building a new global headquarters there, for example, to consolidate area employees into one building.

5. Seattle -- 5.3%

Amazon has had a big impact on Seattle's office market. The city experienced a building binge for a few years but the internet behemoth accounted for 40% of leasing in new space built between 2015-2018, according to CoStar's Seattle market report. Tech and biotech leased up the rest -- Lyft, Uber, Oracle, Google and the list goes on. The large amount of new construction could tamp down rent growth, however.

(Tie) 3. San Francisco -- 5.5%

Technology, technology, technology. Office rent growth has slowed from early in the economic expansion but remains far above the national average. Big blocks of space are difficult to find and there are limited opportunities for new development, according to a CoStar report on the market. The big companies compete for the premier space and locations, the report noted, "but many second generation space options in less prestigious buildings remain available for mid-sized and smaller tenants."

(Tie) 3. Charlotte, North Carolina -- 5.5%

Banking and finance still reign supreme, despite several mega mergers over the years. Job and population growth have driven economic activity in the Queen City. Ally Bank, Bank of America and First National Bank are among the biggest tenants in downtown Charlotte. Construction has picked up. Currently, there's 6 million square feet being built, putting it second among the Top 10 for percentage of total office space under construction.

2. San Jose -- 5.7%

Again, technology, technology, technology. Over the past year, some two dozen companies -- names such as Google, Splunk. LinkedIn, Nokia, Amazon -- have signed leases for more than 100,000 square feet each. Five of those recent deals exceed 200,000 square feet. But it's only been in the past two years that landlords have been able to push rent growth. It dropped to less than 2% toward the end of 2017. And today, rent growth is less than half the rate in early 2015, according to the CoStar's San Jose Market report. Developers are building 6.1 million square feet of space now, just behind Charlotte in percentage of the total office in the area under construction.

1. Austin, Texas -- 5.8%

In the early 2000s, the Austin Independent Business Alliance adopted the slogan "Keep Austin Weird" as a way to promote local small businesses. But there's nothing weird about Austin's economic development that has lured the likes of Google, Facebook, Amazon and Apple into Dell's backyard. Since about 2010, companies have been filling office space faster than supply can keep up.

Austin office rent growth has been near or at the top of all cities since 2010, according to Sam Tenenbaum, CoStar’s market economist for Austin. “We’ve hit 8% in multiple years,” he said. “Austin is powered by tech.” Apple, for example, announced last December a $1-billion campus in the Austin area.

Tenenbaum said there is currently little room for an expanding company to fill big blocks of space. “Of all the buildings built since 2000, only five properties have 50,000 square feet available,” he said. Currently, 7.3 million square feet of office space is under construction in the Austin area, representing 6.6% of the area’s total office space. That’s the highest percentage among the Top 10 and the new space could help attract even more companies to Austin.