by Brianna Crandall — July 25, 2016 — Volatility linked to oil prices, global stocks and the recent “Brexit” sell-off may be causing uncertainty in the market, but, according to JLL research, companies are growing and pushing demand in the U.S. office market. Professional services and investment management firm JLL’s second quarter (Q2) U.S. office statistics show that, despite a slow first quarter, U.S. office demand is returning as corporate expansions are on the rise, accounting for 46% of all leases signed.
Julia Georgules, vice president, JLL Research, commented:
Unlike the first quarter of 2016, leasing activity and overall occupancy growth has returned to what’s closer to the norm we’ve recorded the past two years, and we’re not seeing any near-term signs of a depressed office market. In fact, the large majority of local markets expect expansions to keep market conditions tight into 2017.
Rent growth spurring new development
According to the report, markets from coast to coast are seeing increased pricing, but rental rates are expected to slow over the next few quarters. Until then, developers will continue to deliver new supply at a premium rate, in comparison to market averages.
Nearly every city in the top 10 construction markets is already posting above-average rental rate increases. This is especially true in central business districts (CBDs) like Dallas (+5.9%) and Houston (+6.3%) and Salt Lake City (+4.6%). Additionally, in markets where supply constraints remain, competitive conditions have further bolstered rents in markets such as Oakland and East Bay suburbs (+9.3 and +12.1%) as well as Nashville (+7.4%).
With limited Class A supply ahead of new developments being delivered, many tenants are turning to Class B space — especially where that space can be creatively reimagined to meet recent trends toward flexible, technology-integrated workspaces that encourage collaboration, mobility and wellness while increasing energy efficiency and reducing carbon emissions.
Occupancy gains leading across the country
According to the report, technology and financial services firms continue to drive activity and are maintaining consistent market share when compared to previous quarters. Notably, over 51% of all leases signed by business and professional services companies in the last quarter were expansions.
Georgules noted:
The fact that big block leasing is back and we’re seeing extremely limited contractionary activity means that any trepidation in the marketplace as we went through the first quarter [was] somewhat exaggerated.
All of this leasing activity is expected to continue to lead to further occupancy gains. Only 10 markets posted occupancy losses during the quarter, for a combined total occupancy loss of just under 1 million square feet nationally.
However, this was counteracted by 13.4 million square feet of positive absorption in markets like Boston, Dallas and Phoenix, recording occupancy gains of 1.2 million square feet, 850,000 square feet and 1 million square feet, respectively.
Ben Heller, JLL managing director, pointed out:
Boston has seen strong demand, particularly from suburban tenants and new companies like Boston Globe and General Electric. Both firms have looked to Boston to retain and recruit today’s top talent. In addition, the city has seen strong growth from its existing tenant base, most notably Wayfair and WeWork. All of these dynamics have contributed to Boston’s strong absorption and occupancy growth.
Vacancy inching downward
Vacancy is inching downward at 14.6% overall, 12.1% in U.S. CBDs, and 16.1% in the suburbs. Nashville remains the tightest market in the country with just 5.2% vacant, followed by San Francisco at 8.0%.
Georgules added:
Fears of a pending slow-down or contraction have not come to fruition, with sublease vacancy remaining steady at just 1% of the total inventory. This could shift over the next several quarters as tenants begin to occupy new developments, but we don’t anticipate any significant increase in sublease space due to corporate contractions, outside of Houston. What we will be closely watching is the economy’s ability to continue to add jobs.
The United States Office Outlook | Q2 2016 report is available on the JLL Web site.
