JLL: Demand for U.S. office space continues to grow in Q3

by Brianna Crandall — October 23, 2015—With the economy growing at its fastest pace of the current cycle during the third quarter (Q3), employers across a range of industries added jobs and expanded their real estate footprints. That activity translated into another quarter of steady but significant improvement in the U.S. office market, according to global commercial real estate services firm JLL’s Q3 2015 U.S. Office Outlook, which details increases in net absorption figures and rents as well as dipping vacancy rates.

“We are seeing widespread job growth in the U.S., and it’s being led in particular by companies in the technology, financial and professional and business services sectors, especially those firms located in the dense, urban markets to which talent is migrating,” said Julia Georgules, vice president of U.S. Office Research for JLL. “With supply remaining constrained in lots of these urban areas as well as some suburban ones, many landlords are more aggressively thinking about repositioning dated and obsolete office product to meet the growing demand.”

U.S. office leasing activity actually declined slightly in the third quarter to 62.3 million square feet, a 3.1% dip from the preceding quarter. However, expansionary activity once again remained the dominant driver of leasing, accounting for more than 57.9% of leases of 20,000 square feet or more; the quarter marked the fifth straight one in which the majority of such activity stemmed from expansions.

Absorption grows again

Occupancy gains mounted in the third quarter, as nationwide net absorption totaled 14.6 million square feet, up from 14.4 million and 6.2 million square feet in the second and first quarters, respectively. Seattle led the country with 1.3 million of net absorption in the quarter, a dynamic fueled by the ongoing growth of the city’s technology sector.

New York and Washington, DC, continued to rebound from first-quarter losses as the two markets combined to post a quarterly net absorption figure 1.4 times greater than their year-to-date occupancy gains. Meanwhile, Chicago, Dallas, and Silicon Valley, all of which are experiencing strong and consistent employment growth, together have accounted for 23% of the national net absorption in 2015.

Conversely, Fairfield County, CT, and Westchester County, NY, continue to struggle, posting combined quarterly occupancy losses of 1.4 million square feet, while Houston experienced a net absorption of negative 89,000 square feet. The figure marked Houston’s first office occupancy decline since oil prices began their steep descent.

Vacancies drop, rents rise

With office supply remaining constrained across the country, the national vacancy rate declined to 15.1% in the third quarter, a 20-basis-point dip from the second quarter and an 80-basis-point drop from one year earlier.

New York, Portland, Salt Lake City and San Francisco each posted a vacancy rate of less than 10% in the third quarter. Combined, the four metro areas have seen just 1.8 million square feet of new office space delivered this year; however, the supply-demand imbalance in these markets is set to soon shift, as a total of 20.6 million square feet of new construction will come online in the metro areas over the next two years, giving tenants there some much-needed large-block options.

Overall, 26.6 million square feet of new office space has been delivered across the United States so far this year. The development pipeline grew by 8.5 million square feet during the third quarter to reach a total of 92.8 million square feet; the latter figure represents an increase of 16.3% from the end of 2014.

In a related development, the average U.S. office rent grew by 1.6% during the third quarter for a cumulative 4.3% increase since the beginning of 2015. The gains continue to be strongest in Class A properties in central business districts (CBDs); such office buildings have seen their average rent jump by 9.1% so far in 2015. Meanwhile, suburban office markets, led by high-growth areas in Fort Lauderdale, FL; Oakland, CA; and Minneapolis, MN, saw their average rent rise by 2.7%.

Looking ahead, the U.S. office market is poised for additional improvement, according to Georgules. “Despite concerns about an impending interest rate hike and China’s faltering economy, we should be optimistic about both the U.S. economy and the office sector,” she said. “With primary markets challenged by limited supply, secondary and tertiary markets — cities like Charlotte, Phoenix, Portland and Salt Lake City — will continue to benefit from occupier growth and investment activity. Additionally, the new supply coming online next year may in fact boost leasing activity far above current levels as tenants shop new options for expansion.”

JLL’s full Q3 2015 U.S. Office Outlook and Q3 Office Statistics are available on the JLL Web site.