Office Owners Seen Gaining Edge Over in More U.S. Cities

Office landlords will gain leverage to raise rents in all but one of 43 large U.S. cities by 2016 as rising demand for space in an improving economy combines with tight supplies, Jones Lang LaSalle Inc. said today.

Markets including Washington, Baltimore, Miami and downtown Los Angeles will no longer be “tenant friendly” in two years as vacancy rates decline, leaving Newark, New Jersey, as the sole city that favors office occupants by 2016, the Chicago-based brokerage said in its “United States Skyline Review.”

Construction isn’t keeping up with demand for space in many office markets, said John Sikaitis, a Jones Lang LaSalle managing director and one of the report’s authors. Young workers are flooding major cities and an influx of foreign investors is driving up property prices. Those increases eventually will find their way into rents, he said.

“There’s a perfect storm for landlords to better leverage the market,” Sikaitis said. “The major cities are the hot spots. The millennial generation is choosing to be urbanized in walkable, high-amenity, transit-served locations.”

Seventeen of the 43 large U.S. cities studied by Jones Lang LaSalle are landlord friendly this year, meaning office owners have more power than tenants to set rents. Those areas include San Francisco, Boston, Seattle and Houston.

By 2016, 28 cities, including New York, Chicago and Stamford, Connecticut, will be more favorable to landlords than to tenants, the brokerage said. Fourteen other cities will be “neutral,” meaning neither landlords nor tenants are favored.

Under Development

About 17 million square feet (1.6 million square meters) of offices are under development in the 43 cities, with more than half of that construction in New York, Houston and San Francisco alone. Rents will stabilize more quickly in the three markets with the majority of development, Jones Lang said.

New York, with an office vacancy rate of 14.5 percent in 2013, is considered neutral this year and is expected to become landlord friendly in 2015, according to the report.

Jones Lang uses vacancy rates to determine whether the office market in a particular city favors tenants or landlords. The tipping point varies from city to city, with an 11.9 percent vacancy rate considered the U.S. average, Sikaitis said.

Office rents have gained the most in the past 36 months in cities dominated by the technology and energy industries, Jones Lang LaSalle said. In San Francisco, rents have surged almost 81 percent over the past three years, and in Houston they’ve climbed almost 18 percent. San Francisco’s vacancy rate was 9.6 percent last year, while Houston’s was 6.7 percent.

New York

New York also was in the top five for rent gains, with an increase of almost 17 percent in the past three years, the brokerage said.

Foreign real estate investors acquiring buildings in major American cities will lead to rent increases in coming years, Sikaitis said. Overseas buyers are competing aggressively, driving up prices, which will ultimately trickle down into higher rents and taxes for office occupants, he said.

“The tenants are really going to feel the crunch on a number of levels,” Sikaitis said.

In 2013, foreign buyers accounted for 50 percent of office sales in what Jones Lang LaSalle considers primary markets: New York; Chicago; Houston; Boston; San Francisco; Washington, D.C.; Seattle; Los Angeles and Bellevue, Washington. In the past, overseas purchases accounted for about 11 percent of transactions in those cities, Sikaitis said.

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