Expanding Businesses Boost Office Market
- Jan 14, 2016
The U.S. office market ended 2015 on a high with total vacancy declining to its lowest level in eight years and rents reaching pre-recession levels. This largely due to expanding businesses seeking out more space in their home markets and in new locations. Nearly 50 percent of leasing activity came from company expansions—a trend expected to continue this year, according to a new JLL report.
“One of the biggest trends we saw and expect to continue through 2016 is the expansion activity,” Julia Georgules, director of office research at JLL, told CPE.
Part of that expansion is within home markets, but more than 1.7 million square feet of new-to-market leases were signed during the fourth quarter, bringing total volume to 7.5 million square feet for 2015, the Office Outlook report for Q4 2015 stated. America’s CBDs, with an average 12.1 percent vacancy rate, remain the premier location for many tenants. But the report notes suburbs and secondary markets like Atlanta, Charlotte, Dallas and Raleigh-Durham are also gaining attention as both demand and pricing increase.
“So many large leases are coming through. Companies are signing multiple leases in multiple markets due to expansion,” Georgules said.
The report cited companies like Brown & Toland signing two leases in New Jersey and Oakland, and co-working giant WeWork taking space in Portland, Denver and two spaces in Chicago. Other companies like Nationwide and SurveyMonkey moved into new markets. Nationwide is opening a 246,442-square foot location in Columbus’ Grandview/Upper Arlington submarket and SurveyMonkey is leasing a 210,000-square-foot location in San Francisco Peninsula’s San Mateo submarket.
For the first time in two years, the West Coast markets led occupancy growth in the fourth quarter, which contributed to 45.6 percent of the net absorption, the report said. Los Angeles, for example, posted 1.6 million square feet of net absorption as a result of expansion by The Honest Co., Facebook and Yahoo. On the West Coast, only two markets, Orange County and San Diego, had occupancy losses.
Total vacancy fell 40 basis points to 14.7 percent, the lowest in eight years, even with the addition of more than 44.2 million square feet of new supply across the U.S.
“It is not pre-recession but it is definitely the lowest and with the momentum moving forward we will continue seeing this decline,” Georgules said.
The report said nearly 50 million square feet of new supply is expected to deliver in 2016, “putting upward pressure on rental rates while providing large tenants with much needed supply to support expansion.” Georgules said about half of this year’s pipeline is preleased.
More than 7.3 million square feet of new construction starts were recorded during the fourth quarter, which is also expected to continue throughout 2016, particularly in supply-constrained secondary and tertiary markets. Still, 60 percent of the total development pipeline is occurring in just 10 out of 50 U.S. office markets, according to JLL. Some major office projects will deliver in 2016 including 10 Hudson Yards in Manhattan on the Far West Side, the Phillips 66 headquarters in Houston’s Westchase submarket and Moffett Gateway in Silicon Valley’s Sunnyvale submarket.
Georgules said the vast majority of office development is speculative “illustrating the strength of those markets to the point where developers feel confident.”
While build-to-suit comprises about a third of all development, almost all of it is preleased, she added. Preleasing rates vary from market to market, averaging about 50 percent, Georgules noted.
But there are places like Nashville, which has one of the lowest vacancy rates in the nation, where there is 2.8 million square feet of office development in the pipeline and 82 percent is preleased.
At least eight markets have no construction at all. But the JLL report notes that some of them, including Jacksonville and West Palm Beach in Florida, and Oakland/East Bay and Sacramento in California, “are starting to see renewed interest and activity, resulting in above average rent increases within their hottest submarkets.”
Georgules said it took longer for some of the secondary and tertiary markets to recover from the recession than major cities like New York, Chicago and San Francisco. Markets like Atlanta had a lot of vacancy heading into the recession and had to work through that, but demand is now growing.
“We’re seeing some rent growth accelerating ahead of the market and will continue to see that market grow and expand,” she said.
Across the U.S., asking rents saw their second highest level of quarterly growth during 4Q 2015 at 2.3 percent, up 3.5 percent year-over-year and reaching pre-recession levels. Rents vary with the country’s hottest markets getting the most rent per square foot, including New York City with an average asking rent of $71.46 per square feet; San Francisco, $68.74; San Francisco Peninsula, $53.98; Silicon Valley, $42.36, and Washington, D.C., $36.90.