JLL: U.S. office activity picks up, yielding tightest market in years

Featured Image

by Brianna Crandall — August 4, 2014—From rising rents to new leases to shovels in the ground, office space is in demand across the United States—so much so, that in some cities, market fundamentals are mirroring and even eclipsing previous market highs, according to the latest U.S. office market report from JLL (formerly Jones Lang LaSalle), the global professional services and investment management firm offering specialized real estate services.

According to the JLL Office Outlook – U.S. – Q2 2014, Houston and the major Northern California metro markets reported the strongest overall office market performance in the second quarter. In San Francisco and Silicon Valley, rental rates pushed up a substantial 5% and 3%, respectively, while combined, the markets saw close to one million square feet of net absorption. Houston, meanwhile, saw nearly the same amount of space absorbed, while its average rental rates rose 2.7%. All three markets outpaced the national average in these key data points and topped the list of largest lease transactions for the quarter.

“The office activity in these markets is a clear reflection of booming industry performance, particularly in energy and tech,” observed John Sikaitis, Managing Director of Research at JLL. “The biggest new leases in both San Francisco and Houston featured large tech and energy tenants respectively, and several high-profile office developments are going up to accommodate growth of companies in these sectors.”

In San Francisco, for example, Salesforce inked the largest lease in the city’s history: 714,000 square feet in 415 Mission Street, which is set to be the tallest building on the West Coast once completed. Meanwhile, Houston currently has more than 15 million square feet of new office space under construction—the most of any U.S. city. Developments include campuses for major energy companies such as AirLiquide and Phillips 66, among many others, as well as a number of speculative projects.

These positive performance trends may be most obvious in cities where high-growth industries are concentrated; however, more diversified markets are also seeing a noticeable upswing in corporate office expansions. Chicago had at least four leasing transactions over 100,000 square feet in the second quarter, with tenants including Google and law firm Seyfarth Shaw among others. Combined, these deals helped inch the city’s total net absorption up 0.4% from last quarter. Also notable, New York’s rebounding tenant activity led to 9 million square feet in completed transactions in the second quarter—the highest leasing volume of any U.S. market.

In all, across the country, close to 62 million square feet of leasing deals were reported, driving total volume for the quarter up 6.2% from the first quarter. Leasing volume picked up in 49% of the 51 markets included in JLL’s office report, and rents ticked up in more than 60%, with 17 markets reporting 1.0% rate growth or more. “The pace of activity and recovery varies from one market to another, but what’s clear is that overall fundamentals are strengthening,” commented Greg Green, President of JLL’s Agency Leasing.

“Altogether, these metrics shed light on the broader U.S. economic picture because they reflect where business confidence is escalating and where activity is taking place. With few exceptions, the recovery is broadening and diversifying to nearly all geographies, industries and even asset classes, with landlords increasingly confident about their market position(s) over the next 24 months,” Sikaitis concluded.