JLL Report: American Office Market Continues to "Tighten" While Urban Cores Increase in Popularity

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JLL Report: American Office Market Continues to "Tighten" While Urban Cores Increase in Popularity

Area Development Online News Desk (08/31/2011)

Hear what Director of Occupier Research Lauren Picariello has to say about stronger demand in the top tiers of the market and the impact increased competition will have on corporate real estate transaction decisions.

According to the new "Mid-Year 2011 National Office Occupier Outlook Occupier Report" from Jones Lang LaSalle (JLL), the American office market continues to "tighten" in spite of the economy's anemic growth. Its data shows occupiers are focused more on strategies which enhance the real estate productivity and flexibility to meet rapid market changes.

JLL is a financial and professional services firm specializing in real estate. It serves clients in 70 countries from more than 1,000 locations worldwide.

Tod Lickerman, CEO of JLL's Corporate Solutions, noted that increased office space demand--though highly varied across industries, geographies and product types--is placing pressure on corporate occupiers to execute transactions now to "either accommodate growth or seize upon remaining market leverage since the ability to lock in favorable terms may become more difficult. Regardless of where the economic needle moves in the next 6 to 12 months, corporate real estate executives will continue to implement strategies that achieve cost savings, mitigate risk, shed surplus space and increase utilization rates.”

Some of the many report highlights include:

Occupiers are more active this year, sensing that the timeframe to negotiate favorable lease terms is expiring. Year-to-date, 14 million square feet has been absorbed. However, while competition to lease space is up compared to 2010, it is still depressed from a historical perspective.

Flight continues to modern buildings with open layouts located in core urban areas, and away from older and less efficient space found in outdated, isolated suburban campuses. These market pockets allow companies to tap into a broader talent pool and be on the leading-edge of innovation, a non-negotiable competitive advantage in today’s economic environment.

Recent rightsizing has led to reduced footprints and smaller square feet per employee allocations. This trend will continue as occupiers look to avoid cost, reduce risk and use space more effectively, creating more productive, dense and cost-efficient office space.

The spread between availability of premiere CBD space vs. suburban space and between Class A and Class B product is showing even higher discrepancies than last quarter. The CBD vacancy rate at the end of the second quarter was 15 percent (compare that to the suburban national rate of 20 percent).

Strong leasing activity in Class A product is behind the overall vacancy rate’s decline from 18.4 to 18.1 percent in the second quarter.

Occupier demand accelerated in most U.S. markets, with 73 percent of the markets JLL tracks registering a decline in the number of space options.

Average asking rents held steady in the second quarter at $27.42 per square foot, indicating a bottom of the market from a pricing perspective. The asking rent has ebbed up and down within 1.0 percent over the last five quarters, indicating that landlords have put the brakes on widespread rent cuts.

The lowest vacancy rates were found in San Francisco’s South of Market submarket (6.9 percent) and New York City’s Midtown South (6.7 percent). Conversely, vacancy rates were highest in Cleveland (24.0 percent), Sacramento (22.4 percent) and Palm Beach County (26.3 percent).

Looking ahead, the JLL report forecasted that the sluggish economy will continue to push many occupiers to "scrutinize" the productive use of real estate and enhance the flexibility of their portfolios to meet rapid market changes.

"A step change in leasing conditions is possible if there is a further slowdown in the economic recovery and landlords of top-tier product are forced to pull back on rental rates," stated the report’s authors, "but at this time it appears the market stay on its current course of steady--if slightly stunted--growth. Over the second half of the year, demand for office space will likely be slower, but not negative, and remain highly uneven across markets and product types. As the market tightens the ability to lock in favorable terms may become more difficult."