Office Space Tightening Amid Greater Economic Concerns

Despite continued economic volatility and sluggish growth, the top tiers of the office market are still drawing significant activity and interest, according to a Jones Lang LaSalle report.

September 1, 2011
By Nicholas Ziegler, News Editor

Courtesy Flickr Creative Commons user laverrue

If you had to distill the state of the U.S. office market into one adjective, it could be “turbulent.” Despite continued economic volatility and sluggish growth, many economists are seeing strong fundamentals and portions of the tightening office market seem to bolster that idea. According to a new report by Jones Lang LaSalle, flexibility is going to be the key to meet rapid market changes.

“Increased office space demand, though highly varied across industries, geographies and product types, is placing pressure on corporate occupiers to execute transactions now to either accommodate growth or seize upon remaining market leverage since the ability to lock in favorable terms may become more difficult,” said Tod Lickerman, CEO of corporate solutions at Jones Lang LaSalle. “Regardless of where the economic needle moves in the next six to 12 months, corporate real estate executives will continue to implement strategies that achieve cost savings, mitigate risk, shed surplus space and increase utilization rates.”

Demand remains strong in the top tiers of the market, with trophy and Class A spaces drawing the bulk of activity and interest. According to the report, “this trend will continue until there is a transition in the economic environment toward significant widespread growth.”

The anemic second quarter of 2011 did little to help the recovery in real estate. GDP moved up only 1.3 percent, dragged down by weak customer spending and government slowdowns. In the last 12 months, U.S. GDP has averaged only 1.6 percent, illustrating a recovery that has lost significant steam. But that recovery could be driven by the need for office space, net absorption rose to nearly 11 million square feet, its highest level since the end of 2007, during 2Q11. Demand was strongest in New York City, Dallas, Houston and Seattle.

Some of the moves have been driven by a flight to quality, those top levels of the market. The overall vacancy rate in Class A space this past quarter declined from 18.4 to 18.1 percent. And occupier demand also accelerated, with 73 percent of tracked markets registering a decline in the number of office options available. But spread between availability of premiere CBD space versus suburban space and between Class A and Class B product is showing even higher discrepancies than last quarter.  At the end of the second quarter, the CBD vacancy rate was 15.0 percent compared to the suburban rate of 20.0 percent on a national basis.

“Occupiers are leaving behind older, less efficient space and outdated suburban campuses for the open layouts of modern buildings in core urban areas,” said Kenneth Rudy, International Director, Corporate Solutions at Jones Lang LaSalle. “These pockets of the market enable companies to tap into a broader talent pool and be on the leading-edge of innovation, a non-negotiable competitive advantage in today’s market.”