by Brianna Crandall — August 7, 2017 — When it comes to premium office space, creative firms are doing what they do best: driving change, according to global professional and real estate services firm JLL. JLL’s 2017 Skyline report shows that creative companies’ boomerang to this coveted space and the eighth straight year of occupancy growth are contributing to record rents and a landlord-friendly market.
Skyline is JLL’s annual look at office space within some of the tallest buildings in 57 markets across North America. Some highlights from this year’s edition include:
- Vacancy in skyline office buildings remains below the national average at 12.9 percent, with vacancy of trophy buildings — those ultra-premium office towers within a skyline — at just 10 percent.
- Rents hit a record $44.55 per square foot.
- Buyers, on the hunt for higher investment returns, are exploring secondary markets.
- The construction pipeline remains healthy, but shows signs of slowing.
Scott Homa, JLL director of U.S. Office Research, stated:
We’ve seen an important shift in demand for skyline office buildings. Traditionally law firms, financial institutions and other professional services groups were the main drivers of leasing activity within skyline buildings. Today, a lack of creative space in more unique and eclectic neighborhoods is drawing technology, advertising, media and information companies into more traditional business districts and high-rise office buildings.
Landlords on top, for now
The net change in occupied space, also called net absorption, jumped to 8.3 million square feet — more than five times what it was a year ago. However, JLL expects eight straight years of skyline occupancy growth to ease soon as the market prepares for several large blocks of space to become available.
Vacancy in skyline office buildings sits at 12.9 percent — well below the overall national average of 14.5 percent. Just 10 percent of trophy space (think Chicago’s Willis Tower and New York’s One World Trade Center) is available, giving landlords the upper hand. But that may change as we see a slow rise in vacancy in 2018.
A rising tide lifts all boats
Tenants still want that skyline caché, which is why rents jumped to a record $44.55 per square foot on average. For those coveted few trophy spaces, that premium goes to $57.84 per square foot. New York stands above all others with an average skyline rent of $87.90 per square foot. Nashville hit a high note with the biggest year-over-year rent growth (+27.4 percent).
Buyers selectively target the skyline
According to Jonathan Geanakos, president, Americas JLL Capital Markets:
Skyline assets continue to provide stable value, making them an incredibly attractive option for investors. We’ve also seen a large increase in foreign investment into some of the trophy properties included in our skyline portfolio over the last year and the beginning of this year. In addition, both foreign and domestic investors are finding secondary market real estate to be more readily available and at a relative discount.
So, just how much do investors love the skyline?
- Skyline acquisitions were up by more than $1.2 billion in 2016, while sales in the broader office market fell by nearly 10 percent — the sector’s first decline since 2009.
- Investors are increasingly looking to secondary markets for skyline acquisitions. Ten secondary markets surpassed $300 million of total volume (not just skylines) in 2016. Atlanta, Dallas and Miami led the way.
- Offshore investment increased to 40.3 percent of total skyline volume in the first quarter of 2017.
- Forty-two trophy assets were traded in 2016, increasing volume by $7.2 billion year-over-year.
Getting quieter on the construction front
A healthy 34.7 million square feet of space in skyline office buildings remains in the construction pipeline, but activity is down 8.3 percent since the end of 2016. The delivery of several large projects and a tightening in construction lending are the main factors, according to the report.
With the pipeline extending all the way into 2021 — 15 million square feet is set to deliver in 2018 alone — and the potential for slower economic growth, JLL expects the skyline to shift to neutral territory for landlords and tenants.
JLL’s Skyline report available via digital platform
Investors and tenants can access JLL’s Skyline via a digital platform upon brief registration. The interactive Web site features JLL’s exclusive market insights regarding office supply, demand, rents, leverage and investment into 57 markets across the United States and Canada. It gives users the ability to compare and contrast individual markets or multiples of markets as well as individual properties or portfolios. In addition, the site offers videos and infographics, all of which are available via mobile access.
