by Shane Henson — January 16, 2013—Analysis by Jones Lang LaSalle (JLL), a global financial and professional services firm specializing in real estate, indicates that 2013 may be a better year overall for the U.S. office market.
The domestic office sector experienced steady but mild occupancy growth throughout 2012, buoyed by a few strong market sectors impacting leasing activity in a handful of states, according to the company’s year-end analysis, United States Office Outlook – Q4 2012. As the year drew to a close, however, several bright spots on the horizon suggested that the market expansion will broaden to other sectors and geographies in 2013.
“The vast majority of occupancy growth in 2012 was in energy-rich and technology-heavy markets in California, Texas and Colorado. Recently, there’s been lease activity and growth in health-care and housing-related industries, suggesting that strong office absorption in 2013 may extend to Arizona, Nevada, Florida, Georgia and the Carolinas, among other geographies,” said John Sikaitis, director of office research at JLL. “However, the U.S. office market outlook is still very segmented by sector and geography, with some urban and most suburban markets facing a long road to recovery.”
National net absorption totaled 7.5 million square feet in the fourth quarter, bringing the total to 28.2 million square feet of space absorbed during all of 2012. Rents increased 3.1 percent over the course of the year, while rent abatement concessions fell by 10.8 percent and tenant improvement allowances decreased by 4.3 percent, Sikaitis said, indicating continued market tightening.
The national vacancy rate declined to 17 percent at the end of 2012 from 17.6 percent 12 months earlier, as the country experienced its eleventh consecutive quarter of occupancy growth and its eighth straight quarter of average rental rate increases. Of the 44 U.S. office markets JLL tracks, 84.1 percent experienced occupancy growth during 2012, says JLL.
Despite the slight tightening of overall occupancy levels, however, the pace of the office recovery declined 19.4 percent in 2012 compared to the vibrant market experienced in 2011. California and Texas alone accounted for 60.3 percent of the country’s total net absorption, Sikaitis noted.
“While the technology and energy facets of the economic engine do not appear to be pulling back, they will be joined by some other burgeoning sectors and further supported by the slow-moving economic recovery,” Sikaitis said. “If momentum does pick up across the board, tenants will eventually be confronted with a dwindling amount of large-block and quality space options as the development pipeline is thin and largely consists of build-to-suits.”
Only 9.8 million square feet of supply was delivered in 2012, with another 40.7 million square feet of space currently under construction. Of the 44 top U.S. office markets, 17 have less than 100,000 square feet in the construction pipeline, Sikaitis observed. In a typical year, new office supply in the U.S. averages 50 million square feet.
Despite the recent gains in rent and occupancy, the U.S. office sector faces significant challenges to demand that threaten long-term growth prospects, JLL says.
“Traditional office tenants—banks, law firms, accounting and consulting firms—are adding headcount, but their real estate footprints are shrinking as they move to increasingly efficient floor plates and spaces,” explained Sikaitis.
