Measuring Office Leasing Momentum

Winter 2016/2017 Issue

A momentum index uses demographic, economic and property-related indicators to rank metro markets.

THE COMMERCIAL real estate industry uses many indicators to measure the health of the leasing market, including the “big four”: absorption (demand), construction (supply), rent and vacancy. Momentum isn’t one of these, because it’s hard to quantify. Momentum is in the eye of the beholder; we know it when we see it.

The adjacent graph offers NGKF’s attempt to quantify office leasing momentum by calculating a momentum index that ranks metro markets with populations of at least 1 million. The analysis has two steps. First, NGKF selected 16 indicators related to momentum and divided them into demographic, economic and property-related categories. In this analysis, demographic indicators account for 10 percent of the final score, economic indicators for 40 percent and property-related indicators for 50 percent. In the second step, each of the 16 indicators was assigned a weight of one (least important), two (moderately important) or three (very important), based on its relevance to momentum. All of the data and weighting factors are combined into a single score, as shown in the graph. There is a theoretical maximum score of 100, which would mean that the top metro market scored first in all 16 indicators.

office market momentum q3 2016

The 16 indicators include seven that are demographic in nature, four that are economic and five that are property-related. The demographic indicators measure population growth, including that of the millennial generation, as well as household income and educational attainment. The economic indicators measure labor market performance, both recent and projected. The property-related indicators cover recent movement of vacancies, rents, absorption and construction as well as a barriers-to-entry variable. Markets with strong demographic and economic growth receive high scores, as do those with sharp decreases in vacancy, sharp increases in rent, strong absorption, low construction and high barriers to entry.

A few observations:

Markets in the South and West dominate the top quartile. Many of these, including Orlando, Atlanta and Phoenix, were devastated by the housing collapse during the Great Recession and were slow to regain their former vigor, but they have found their stride. A number of high-ranking markets like Austin, Nashville, Raleigh, Seattle, Portland and Denver are favorites of millennials. Oakland-East Bay is attracting spillover demand from the high-cost San Francisco and Silicon Valley markets, although momentum has slowed enough in those two markets to push them into the second quartile. Los Angeles makes the list on the strength of its local market fundamentals.

A rising tide lifts all boats. Overall demand for office space remains solid, and construction is under control as regulators keep a close watch on lenders. Most markets, no matter where they are positioned on the list, are tightening, creating opportunities for savvy developers, investors, lenders and tenants. Many lower-ranking markets attract less attention, meaning there is less competition to find such opportunities.

There is no single “right” way to measure momentum. Indicators and weights can be adjusted depending on one’s goals; this is simply one example.