by Brianna Crandall — October 7, 2016 — Since January, the U.S. office market has continued to record improved fundamentals, and lingering uncertainty from 2015 has lessened as companies continue to grow and return to urban cores. According to global commercial real estate services firm JLL’s third quarter (Q3) office statistics, nearly half (more than 47%) of all leases that exceeded 20,000 square feet (sq. ft.) were expansions.
Robust construction pipeline meets demand
Across the country and despite increasing labor market volatility, employment rates continued to rise and demand for premium office space has followed, finds the report. During the quarter, more than 12 million sq. ft. of new construction projects were added to the pipeline, and tenants prove that location and amenities matter.
The Chicago Central Business District (CBD) alone added 2.7 million sq. ft. of new projects to bring its year-to-date pipeline to 8.3 million sq. ft., placing it among the top five markets for office development. While Chicago is a standout, New York, Dallas and Washington, DC, lead the United States in development volume.
Julia Georgules, vice president, JLL Research, commented:
The United States continues to add jobs and because of that we continue to absorb space. What’s been impressive, though, is that so far this year we are absorbing nearly as much space as is being delivered, and landlords have been able to maintain and grow rental rates as a result.
According to Georgules, preleasing activity has increased along with business expansion. Overall, the nation now has seen a prelease rate of over 50%, up from 46.9% in Q2. The top five preleased markets with more than 1 million sq. ft. under construction include Philadelphia (77%), Nashville (70%), Dallas (68%), Houston (55%) and Silicon Valley (54.7%).
Expansions are not a trend
Steady economic expansion has allowed companies to continue to expand, making a commitment to the market. Both technology and banking and finance consistently outperform their industry partners. In Q3, 19.3% of all leases were attributed to tech companies, with 9.7 of leases coming from the banking and finance industry.
However, economic growth is not isolated within those industries. The largest expansion in Q3 was from publishing giant Penguin Random House, for 603,000 sq. ft. in New York. Other notable activity includes Valve, who signed on for 223,000 sq. ft. in Seattle.
Outlook
Georgules concluded:
Market fundamentals remain largely landlord-favorable, and we’re near the low point of the cycle in terms of vacancy. But we’ll begin to see a shift in 2017 and 2018, with over 80% of markets returning to more neutral conditions as they work to absorb new construction deliveries.
The United States Office Outlook | Q3 2016 report is available to download from the JLL Web site upon brief registration.
