Supply and Demand to Tip Scales in 2013 as Office Rents and Future
Construction Prospects Increase in U.S. Skyline Markets
JLL reports options for large tenants will shrink as leasing equilibrium
triggers future construction
CHICAGO, March 6, 2013
CHICAGO, March 6, 2013 /PRNewswire/ --Constrained construction and heated
demand for office space in the most active segments of the United States
office market are already fueling prospects of rental increases and new office
property development in 2013 and into 2014. An expansion period is approaching
for the high-quality urbanized office sector of trophy skyscrapers known as
the Skyline, according to Jones Lang LaSalle's Spring 2013 United States
(Photo: http://photos.prnewswire.com/prnh/20130306/CL71719 )
"In all but a handful of the Skyline markets, large tenants will have few
existing options to consider and thus will be forced to look at proposed
development options if they desire to explore relocation options," said John
Sikaitis, Senior Vice President of Research at Jones Lang LaSalle.
Jones Lang LaSalle Skyline markets set leasing, rent and investment
Jones Lang LaSalle's proprietary Skyline report identifies and tracks
micro-segments of 34 city centers across the nation, including the Trophy and
Class A buildings where tenants and investors alike have focused demand for
office space in a flight to quality and efficiency throughout the recent
"These are the segments of the markets that always lead the rest of the office
sector in trends of leasing, rent and ultimately investment growth," Sikaitis
said. "The reason behind that is that these core micro-markets are
increasingly where demographics are shifting and thus where tenants most want
to be, allowing supply fundamentals to be tightest, giving investors the
ability to capture tenants, grow rents, shrink yield and even construct new
Leasing highlights indicate Skyline markets will reach equilibrium by mid-2014
Vacancy rates are in the single digits in 10 Skyline markets, including
Pittsburgh, Richmond, Bellevue, Houston, Portland, the New Jersey Hudson
Waterfront, Raleigh, San Francisco, Philadelphia and Boston. Additions to
supply are only beginning to appear, with office construction in eight, or
24.2 percent, of the Skyline markets, including speculative construction in
three markets. By mid-2014, all of the Skyline markets will have reached
equilibrium, where the balance of supply and demand has historically made
rents pop and new construction feasible, Jones Lang LaSalle's researchers
Three large office tenants that returned space to the market in 2012 skewed
overall leasing totals across the Skyline, with a minimal net change from the
previous year. Excluding those deals, however, Skyline absorption would have
tipped the scales at more than 4.6 million square feet. Energy and tech
companies will continue leading absorption in 2013, counterbalanced by
right-sizing among law, financial and consulting firms that seek greater
efficiency by cutting back space, typically between 15 percent and 20 percent.
Landlords offered fewer concessions to tenants in 2012, increasing effective
rents by 4.5 percent, compared with just 1.6 percent effective rent growth the
previous year. More than 85 percent of Skyline markets will see rent increase
in 2013, with compression of tenant incentives in 90 percent of markets as
landlords gain pricing control. In some Skyline markets, asking rents even
surpassed prior market cycles' peaks in four markets (San Francisco; the New
Jersey Hudson Waterfront; Washington, D.C.; and Cincinnati).
Investment sales slowly migrate to pre-recessionary peaks in select top
Skyline sales volume fell to less than 40 million square feet in 2012, down
29.3 percent from 55.7 million square feet sold the previous year, chiefly due
to limited Skyline Trophy activity in New York. Despite reduced volume,
investor appetite for the high-quality product and favorable fundamentals is
pushing sales prices nearer to pre-recessionary peaks in the top five Skyline
markets (New York, San Francisco, Washington D.C., Boston, and
Seattle-Bellevue), and even in top energy markets like Houston and Denver.
Real estate investment trusts topped the list of buyers in 2012, accounting
for 29.6 percent of sales transactions, closely followed by institutional
domestic buyers at 29.1 percent, with global buyers coming in a distant third
at 11.9 percent. An increasingly diversified economic and leasing recovery are
expected to push activity levels up more than 20 percent in 2013 for the
"Super Seven" primary markets (Boston, Chicago, Los Angeles, New York, San
Francisco, Seattle-Bellevue and Washington, D.C.). Stronger investment
activity will be based on increasingly difficult barriers to entry.
"Look for markets like Denver, Indianapolis, Minneapolis, Orlando and
Portland, among others, to capture enhanced institutional demand over the next
few years based on aligned supply and demand and an increased institutional
focus," said Marisha Clinton, Director of Capital Markets Research, Jones Lang
Major market highlights
oNew York: Near-term, large blocks of space weigh on the market, including
3 million square feet that a financial services firm returned to Downtown
Manhattan in 2012.
oSan Francisco: Sizzling leasing velocity drove up asking rents by 27.4
percent in 2012 from the previous year. New projects are breaking ground
in the South Financial District.
oWashington, D.C.: Tenants' flight to quality bolstered the Skyline,
bucking the malaise of the market. Concession packages hovered near record
levels in 2012, however.
oBoston: Rapid technology growth and recovering legal and financial
services contributed to full recovery of jobs lost during the recession.
Widespread absorption and built-to-suit construction in the Back Bay is
accompanied by pre-recession rent levels in premier properties.
oSeattle-Bellevue: The highest price paid per square foot for an office
building here in 2012 reached $642, an all-time high.
To request a copy of the Skyline report, please visit our Skyline webpage.
Jones Lang LaSalle's research team delivers intelligence, analysis, and
insight through market-leading reports and services that illuminate today's
commercial real estate dynamics and identify tomorrow's challenges and
opportunities. Our 350 professional researchers track and analyze economic and
property trends and forecast future conditions in over 70 countries, producing
unrivalled local and global perspectives. Our research and expertise, fueled
by real-time information and innovative thinking around the world, creates a
competitive advantage for our clients and drives successful strategies and
optimal real estate decisions. For greater detail on Jones Lang LaSalle's
research, visit the firm's reports at: www.us.jll.com.
About Jones Lang LaSalle
Jones Lang LaSalle (NYSE: JLL) is a professional services and investment
management firm offering specialized real estate services to clients seeking
increased value by owning, occupying and investing in real estate. With annual
revenue of $3.9 billion, Jones Lang LaSalle operates in 70 countries from more
than 1,000 locations worldwide. On behalf of its clients, the firm provides
management and real estate outsourcing services to a property portfolio of 2.6
billion square feet. Its investment management business, LaSalle Investment
Management, has $47.0 billion of real estate assets under management. For
further information, visit www.jll.com.
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