by Brianna Crandall — December 27, 2019 — US office leasing fundamentals remained solid in the third quarter (Q3) of 2019, with vacancy sitting at just 14.2% nationally and absorption ticking up to 54.5 million square feet on the year, according to global professional services firm JLL’s Q3 U.S. Office Outlook. Rent growth also ticked up by an average of 0.9% nationally, though effective asking rents were compressed as concessions outpace rent growth.
The leasing landscape remains positive generally, but there are some signs of a leasing slowdown starting to emerge. For instance, the US office market saw just 26.7 million square feet of leasing activity larger than 20,000 square feet in the third quarter (the threshold for what JLL tracks), well below the 30-34 million square feet that has been typical for the last several years.
Scott Homa, JLL director of Office Research, pointed out:
Employers are having a more difficult time finding the talent they need in primary and secondary markets, and job creation has been uneven. Those factors led to a quarter of muted, but still fundamentally strong, activity. There is still strong demand for the high-end, Class A CBD product coming online, as well as more value-focused product in certain markets.
Office continues shift to flexible, alternative models
Despite emerging headwinds facing the coworking sector, flexible-space operators and technology users combined to contribute 43.4% of all leasing activity in Q3. So far this year, those two sectors have contributed 29.8% of all leasing activity, slightly behind the 32.1% contributed at this point last year.
JLL Managing Director Jeff Eckert stated:
Technology and coworking firms are continuing to grow their footprints at a healthy pace, and although certain operators are likely to decelerate their leasing activity, we predict those sectors will continue to comprise a large portion of overall activity. We’ll also continue to see buildings that have flexible space options excel as more traditional occupiers look to emulate the amenities, services and nimbleness seen in coworking spaces.
Asking rents remain consistent, but effective rents compressing
Rent growth nationally fell in line with recent quarters at 0.9% with a few standouts including Silicon Valley, Austin and San Francisco, where asking rents rose by more than 15% over last year. Direct average marketed rents were highest in San Francisco, New York and the San Francisco Peninsula, with per-square-foot rates of $92.59, $85.16 and $70.66, respectively. San Francisco’s average direct rents grew 8.7% over last quarter, the highest of any market. Tampa Bay saw the second highest quarterly rent growth at 5.4%.
However, concessions are outpacing growth in several markets, including Class A CBD (central business district) assets in Washington, DC, and Houston, and in pockets of Chicago and Midtown Manhattan, where triple-digit concessions have become commonplace, z
New deliveries set to hit cyclical high
The third quarter was relatively slow for completions compared to the breakneck pace seen recently, with just 11.9 million square feet of deliveries. However, that pushed total completions past 40 million square feet, and with several massive projects set to deliver in the fourth quarter (Q4), 2019 looks to surpass the 60-million-square-foot mark and claim the title of most active year this cycle.
According to the report, the construction pipeline doesn’t appear to be slowing down. Development activity reached a cyclical high of 118.5 million square feet in Q3, and with demand for blocks of space larger than 500,000 square feet driving the market, the pipeline is now extending into 2022 and 2023.
While there is some concern about oversupply, there is still strong absorption as companies continue their flight to quality in an attempt to modernize their workspace and compete for talent. There will also be fewer mega-projects, as mid-size developments will become more common later in the cycle as lenders exercise greater caution and larger building sites become harder to find.
Eckert added :
The flight to quality is underscored by the fact that we’re seeing the majority of absorption happening in Class A buildings, and not in the more value-driven Class B buildings. Tenants are willing to pay for the high-quality buildings with best-in-class lifestyle amenities that are continuing to come online.
JLL’s Q3 U.S. Office Outlook is available to download from the firm’s website.