by Brianna Crandall — May 1, 2015—Tight U.S. office market fundamentals in 2014 continued into the first quarter (Q1) of 2015 with increases in leasing, touring, rents and developments, but the rate of absorption slowed, according to new analysis by global commercial real estate services firm JLL (Jones Lang LaSalle).
The new report offers a United States office property clock to compare market performance across key categories.(Click on image to enlarge)
JLL’s Q1 2015 U.S. Office Outlook pegged nationwide net absorption at 6.4 million square feet for the quarter — positive, but down from nearly 17 million square feet in Q4 2014. Slower absorption levels kept the U.S. vacancy rate stable at 15.6% due to a substantial uptick in sublease activity in Houston and also space givebacks in New Jersey, New York and Washington, DC, that mitigated growth in markets like Dallas, Silicon Valley and Austin.
Despite absorption slowing, incidence of leasing expansion grows
According to JLL Research’s findings, despite slower occupancy gains in the quarter, the incidence of tenant lease expansion has jumped in recent quarters, with more than 55% of leasing transactions larger than 20,000 square feet representing expansionary activity, up from 43.0% in just three quarters’ time. That’s an increase of 1300 basis points and more than double 12 months ago, points out JLL. In short, more tenants are growing and even fewer are shrinking, with just 6.9% of all transactions in this range representing contraction in the first quarter.
“Corporates are feeling more confident in the overall outlook of the economy, and that’s translating into real job growth across a variety of industries. Tech remains a dominant player in the expansionary trend, but we’re really starting to see a return of banking and finance, professional business services and healthcare that’s having a significant impact across markets. All of that will lead to occupancy gains in the coming quarters,” highlights John Sikaitis, managing director of U.S. Office Research for JLL.
Landlord confidence at an eight-year high
This positive momentum across local markets has pushed the overall average asking rate to nearly $30.00 per square foot at an increase of 3.1%—the highest quarterly uptick so far in the cycle. JLL found that greater supply constraints in central business districts (CBDs) resulted in a 6.1% quarterly jump in rents compared to 0.9% in the suburbs. Rent growth was led by tech-heavy markets such as Cambridge, Midtown South (New York), Austin and San Francisco, where rents spiked by 10.1, 8.3, 7.3 and 3.5%, respectively, during the quarter.
Sikaitis adds, “Over the next 18 months, we expect to see increasingly heightened supply constraints, that when combined with a 22.7% rent premium for new construction and more aggressive underwriting in the capital markets, yields rent spikes over the near term.”
Development boom expands
Supported by this increasing demand, new development has soared in recent months. A trend that started in Houston and Northern California has spread across the USA. According to JLL, 80% of markets have space under construction, and 18 markets have more than a million square feet underway, including Phoenix, Raleigh-Durham and Seattle. Overall, construction levels reached 84.2 million square feet at the end of March, compared to 56 million at the same time last year. Breaking down that development, 74.8% is speculative, of which 33.8% of that is preleased; including build-to-suit activity while overall preleasing jumps to 49.3%.
Houston’s correction
The correction in energy markets has created a correction in the office sector in Houston over the past six months. Net absorption levels have declined from averaging a million square feet in the last quarter of 2014 down to just 167,000 square feet in the first quarter. The slowdown in demand and increased incidence of availability, both through sublease space and the vacant development pipeline, have yet to be realized fully as energy and oil companies work through losses incurred over the past six months. Sikaitis says JLL is still seeing investor interest in Houston as a market with future growth potential.
JLL’s full Q1 2015 U.S. Office Outlook and Q1 Office Statistics are available on the firm’s Web site. For more news, visit JLL’s online and mobile app, The Investor, a global news source providing real-time commercial real estate news to asset buyers and sellers around the world.
