JLL: After Q1 pause, 2016 U.S. office market looks positive

by Brianna Crandall — April 25, 2016 — Office markets across the United States continued to tighten during the first quarter (Q1) of 2016, but stock market volatility paired with concern over China and oil prices led to fears of a near-term recession, causing many tenants to take a step back and revaluate space needs, according to global commercial real estate services firm JLL’s Q1 2016 U.S. Office Statistics, released earlier this month.

Despite generally positive market indicators, leasing activity shifted, with expansions taking a back seat — unlike the last several quarters.  Instead, a majority of tenants have opted to stay the same size, but that has not stopped them from relocating within their existing metro areas, according to the report.

“Like the first quarter of 2015, which saw a significant slowdown in occupancy growth following a strong close to 2014, this quarter was very similar,” said Julia Georgules, vice president of U.S. Office Research for JLL.  “Leasing activity has taken a ‘status quo’ approach for now, but we fully expect continued expansions to mount later in the year.”

Vacancy rises slightly

Movement within the U.S. office market and industry consolidations and expansions continue to drive demand, but with new supply and some planned vacancies coming online, vacancy across the country increased slightly, from 14.7% to 14.8%.

Nashville, Portland, Salt Lake City and San Francisco all topped the list for markets with the lowest vacancy rates.  Each maintained single-digit vacancy rates as some of the most in-demand markets in the country, with activity driven by Millennial and tech demand.

“Portland’s urban core is seeing strong demand and growth from technology, digital media, and apparel companies.  These sectors are aggressively absorbing high-quality space that’s existing, adaptive reuse or new construction,” said Jake Lancaster, managing director with JLL Portland.  “The landscape of the CBD is quickly evolving for both landlords and tenants.”

Strong pre-leasing activity

New supply is expected to place only short-term upward pressure on office market fundamentals this year.  While nearly 47 million square feet will come online in the next eight months, over 54% is already pre-leased. But pre-leasing is even higher in the top 10 development markets where it accounts for 57% of the activity.

While some markets expect supply to sufficiently meet demand, fast-moving markets may continue to see tightening conditions in advance of new deliveries, according to the report.

Markets like Austin, San Antonio and Silicon Valley demonstrate occupancy growth momentum.  All three recorded the highest rate of absorption during the quarter, at 1.6%, 1.5% and 1.2% of total inventory, respectively — seven times higher than the U.S. rate of 0.2%.

Rate pressure remains

As strong tenant demand continued to consume available space and expensive deliveries came online in certain markets, average direct asking rents climbed to $32.28 per square foot.  This is the highest quarterly gain recorded in the cycle thus far, and represents a growth rate of 3.2%.

Comparatively, Silicon Valley posted a whopping 15.8% rent increase, and while not as dramatic, rents in Oakland-East Bay, Nashville and Austin increased by 9.7%, 6.7% and 4.5% during the quarter.

“Market leverage shifted slightly during the quarter toward more balanced conditions in some markets, but where space is limited and demand is undeterred, landlords maintain significant leverage,” concluded Georgules.  “Tenants may continue to exercise some caution, but momentum will continue to build this year, and the overall outlook is positive.”

The Q1 2016 U.S. Office Statistics report is available to download from the JLL Web site upon brief registration.