CHICAGO-The national office market continued on a strong resurgence, according to a recent Jones Lang LaSalle second quarter report, with more than 11 million square feet absorbed. However, while fundamentals and demand continues to seemingly increase across the board, there’s really only a handful of very strong markets leading the pack, with other geographic and property classes lagging.
John Sikaitis, JLL’s director of office research, tells GlobeSt.com that national figures show that 85% of the geographic markets are showing positive momentum, and up to 25% of markets are experiencing rental growth. The 11 million square feet absorbed is triple the number experienced in the past three quarters, he says.
While some believe there is still a ways to go before declaring the office market is strong, due to fundamentals like a weak job market, Sikaitis says the specific office requirements are much healthier than a couple years ago. “If you look at the employment growth of the professional and business services sector, the growth rate is 3% a year, triple the overall economy,” he says.
Small and mid-size tenants are leading the growth in the communities of San Francisco and Silicon Valley, Houston and Dallas and New York City, he says. “Within these geographic areas you’re seeing heightened levels of demand and strong, sustainable rent growth, driven by the technology and energy clusters,” Sikaitis says. Washington, DC had been part of this picture, he says, but has dropped back due to uncertainty with the federal budget.
The class of the building has been more so the deciding factor of strength. Newer Class A buildings in core markets are the properties leading the demand. Class B or older properties, including in suburban markets, are still suffering occupancy declines. “Rent levels are going to continue to flip-flop in these buildings,” Sikaitis says. “It’s still a tale of two markets.”
He predicts national vacancy should drop to the mid-17% level by January, giving more landlords the confidence to grow rents. Sikaitis even mentioned the dirty word of “development,” something not many owners want to see in any market. “There’s nothing breaking ground, of course, but we’re starting to see developers unveil plans. There’s still nothing really planned for delivery through 2014,” he says.
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