2020 Office Markets

The commercial building market is expected to grow in 2020, driven by medical office and industrial buildings while the general office market will see flatter conditions, according to a survey of commercial real estate brokers Transwestern and its Canadian partner Devencore.
While it predicts the U.S. office sector should remain relatively steady, medical offices will boost the overall market. Respondents expressed concern relating to rising build-out costs, coupled with changes in regulations which could further impact how medical tenants use the space. Not surprising, respondents anticipate industrial to continue outperforming due to tight market conditions and healthy expectations for e-commerce activity.
The Canadian commercial real estate market is expected to perform well in 2020, as economic conditions remain healthy and job growth is steady. Except for Alberta, the major Canadian provinces of Ontario, British Columbia, and Quebec all show robust conditions. The industrial sector continues to outperform with tight market conditions and healthy expectations in 2020.
In the U.S., a little more than half of the respondents believe that office asking rents will be slightly to significantly higher in 2020, mostly due to new construction completion. Market concerns revolve around ebbing consumer confidence given the upcoming elections and potential recession. However, several respondents noted pockets of pent-up demand could occur over the year from tech and medical tenants. Tenants are getting creative with space efficiency with many opting to densify space in order to upgrade quality.
Approximately 69% expect development pipelines to be flat or slightly higher in 2020, with select markets showing concern of oversupply and rising construction costs. Meanwhile, 81% expect concession package levels to be flat or slightly higher in 2020, signaling intense competition for tenant leasing. Regions anticipating a stronger office market include the Northeast, Mid-Atlantic, and West.
Of concern for respondents is the higher, growing costs to build out medical space as well as healthcare regulations, which could impact how medical office space is utilized. Most agree that there will be little, if any, change in concession package levels for medical office space.
The general office market forecast is similar with half of respondents expecting asking rents to rise, with most expecting development levels to remain flat to slightly higher. In select markets, such as Houston and Dallas/Fort Worth, respondents fear overbuilding. Low supply, coupled with high demand from e-commerce, is forecasted to drive the market.
The rising construction prices and lack of available land to build are concerns for industrial building brokers. In select markets the economics of infill are starting to look favorable. Most agree that there will be little, if any, change in concession package levels for industrial space. In the industrial segment, 65% of respondents expect higher investment interest in 2020, with prices remaining steady to increasing slightly.  Regions anticipated to have the strongest industrial market conditions in 2020 include the Northeast, West, and Mid-Atlantic.