Office Outlook Positive for 2017

We’re still witnessing a ‘flight to quality’ mentality among tenants, but vacancy rates are inching higher as new deliveries are outpacing demand, according to JLL's most recent study.

JLL’s U.S. Office Outlook report for the first quarter of 2017 shows optimistic economic forecasts for the office market, which saw higher rents and continued growth.

US Office Outlook - Q1 2017
YTD total net absorption, average asking rents according to JLL’s US Office Outlook for Q1 2017

“The main takeaway is that we’re seeing average asking rents trend upward as high-quality new product delivers to the market,” Scott Homa, JLL’s senior vice president, director of U.S. office research, told Commercial Property Executive. “We’re at a point in the cycle in which new deliveries are outpacing tenant demand, which is resulting in some overhang among newly constructed buildings, which in turn is driving up market averages. There’s still very much a ‘flight to quality’ mentality among tenants, but vacancy rates are inching higher given moderate levels of oversupply.”

Asking rents across the U.S. increase by 0.1 percent during the fourth quarter, slower than the 1.0 percent increases during the second and third quarters of the year but still representing growth. However, the report showed that as the U.S. slowly enters a new phase of the economic cycle, there’s a noticeable shift in supply and demand.

Scott Homa
Scott Homa, JLL’s senior vice president

“We expect vacancy to continue to creep higher through the end of the year and for average asking rents to continue to rise as Class A space delivers to the market,” Homa said. “In some locations concession packages—such as free rent and tenant improvement allowances—have ratcheted up, which is putting more of a lid on net effective rent growth despite the rise in asking rates.”

The good news for the market is that new ground-breakings were cut in half during the first quarter of 2017, so once the projects that are actively underway deliver, supply and demand should be in fairly good alignment.

“We’re especially hopeful for markets that have a large TAMI (technology, advertising, media and information) presence, especially the West Coast tech hubs, as well as Boston and the Midtown South submarket in New York,” Homa said. “The tech sector remains a clear leader on the demand side, contributing about 25 percent of all growth, so those places are best positioned to see sustained leasing demand.”

Expansion continues for companies that need small blocks, while large deals are closing without much footprint growth. Furthermore, as the labor market tightens, many companies are struggling to find the skilled talent they need. As a result, occupancy gains have slowed to 3.6 million square feet even with rising rents and strong demand.

“We’re in a development boom. Nearly 16 million square feet delivered during the first three months of the year, and more new, quality supply will hit the market throughout 2018,” Homa said. “More companies will relocate and give back their existing space, which, in turn, could inch vacancies higher as occupancy growth plateaus.”