US office market sees an uptick in activity
The office market in the United States absorbed 13 million square feet of space during the fourth quarter 2013, the highest level recorded since 2007, according to a new report.
It is also a 24.5% increase over the highest quarterly net absorption levels over the past six years, says the National Office Market Report from Jones Lang LaSalle.
In total, approximately 40 million square feet of positive net absorption was recorded for the year, a notable increase over the 28.2 million square feet of occupancy gains across the national office market in 2012.
The last three months of 2013 also marked the 15th consecutive quarter with positive net absorption. In addition, of the 44 major downtown and 55 suburban markets, 80%c of geographies recorded positive absorption levels between October and December.
Further, more than 65% of the national office markets reported higher tenant touring activity heading into 2014, the fourth consecutive quarter of increases.
‘These findings show a cohesive, across the board tightening in fundamentals, an uptick in overall activity and broadening recovery. After five years of recovery defined by geographic and industry segmentation, increased leasing, touring and absorption helped supply and demand metrics align for the overall national office market in 2013,’ said John Sikaitis, managing director of local markets and office research with Jones Lang LaSalle.
As a result, Jones Lang LaSalle’s report shows vacancy rates during the past 12 months dropped by 40 basis points to 16.6%, the lowest rate in five years. Overall, the Central Business Districts faired better than their suburban counterparts with a 13.9% vacancy rate at the end of 2013 compared to 18.2% in the suburbs. While still high, the suburban vacancy rate is down a noteworthy 140 basis points from 2012 levels.
As market dynamics shift toward a more stable office environment, landlord confidence continues to grow and for the 12th consecutive quarter, has fuelled increased asking rents and decreased concessions across a broad range of markets, the report also says and some 76% of the national office market showed higher rents of an average of 0.4% in the last three months of 2013 alone and ended out the year some 3.5% higher than where they started.
New York and Washington, DC, the two largest office markets in the US, accounted for more than five million square feet of net absorption, well over a third of national absorption gains between October and December and pushing the previously dominant tech and energy markets into second place. The strong year end showing reversed the previous four quarter trend where more than five million square feet was returned to the market.
Throughout 2013, Texas stood out as the beacon of growth with Austin, Dallas, Houston and San Antonio posting 8.4 million square feet of net absorption, some 2.2% of overall inventory levels and double the rate of national growth over the past 12 months.
Technology driven markets continued to gain speed with Northern California tech hubs, the Pacific Northwest, Cambridge near Boston and New York’s Midtown South regions recording 7.6 million square feet of net absorption for the year or 1.8% of total inventory levels.
Looking forward, brighter economic prospects should continue to push leverage in the landlords’ favour until additional supply hits in the middle of 2015 into 2016, the report predicts.
It says that a combination of diminishing new supply and a dwindling number of large and mid sized blocks of space will keep mid-sized tenants as the main drivers of activity. The spreading of growth across industries and geographies should benefit such diversified economies as Dallas, Chicago, Los Angeles, Philadelphia, Atlanta, and Phoenix.
It also says that tech and energy markets may begin to see signs of peaking in the next 12 months until immigration and energy reform efforts in Washington reignite the next phases of growth. Finally, should New York and Washington exhibit continued stability, fundamentals could exceed forecasts over the next couple of years.
‘What we will see over the next five to 10 years is that Millennials will replace the Baby Boomer generation as the stewards of the office market. That has a huge impact on where Millennials go, how they want to be, how they want to work and it’s making some of the market challenged,’ said Sikaitis.
‘It makes buildings without a sense of place, without amenities, without transit, without a story probably a bit more challenged than what they’ve experienced over the past 20 years,’ he added.