CHICAGO—Jones Lang LaSalle has just reported that the US national office market absorbed 13-million-square-feet of space during the fourth quarter, the most absorbed since 2007 and a 24.5% increase over the highest quarterly net absorption levels in the past six years. According to its 2013 National Office Market Report, the market also absorbed a total of about 40-million-square-feet of space during the year—a big increase over the 28.2 million-square-feet of gains in 2012.
Since the economic crash, “we've had growth, but it's been a lot more uncertain,” says John Sikaitis, managing director of Local Markets and Office Research with JLL. But with this solid quarter and year, he thinks the market may have truly turned a corner. “We're starting to see some growth and optimism coming out of Europe,” he points out, and confidence in the US economy has grown so much that the government shutdown in the fourth quarter seemed to have little impact. “I think that would have been a lot more debilitating 12 or 20 months ago,” he adds, but “the private sector wrote it off.”
This was the 15th consecutive quarter with positive net absorption. And most regions of the country received good news. JLL reported that of the 44 major downtown and 55 suburban markets studied, 80% recorded positive absorption in the quarter. And JLL researchers say 2014 might look even better. More than 65% of US office markets saw higher tenant touring activity in the run up to 2014—the fourth consecutive quarter of increases.
“The recovery [in 2011 and 2012] was dominated by tech and energy,” says Sikaitis. Cities like Houston, San Francisco, Seattle, Boston, among a few others, did very well in those years. Today, however, “we've seen more and more markets participate in tightening fundamentals. That's something we couldn't point to last year.”
In 2014, he expects that as the economic recovery broadens to other sectors, cities with more diverse economies, such as Los Angeles, Atlanta and Chicago, will see vacancy rates fall faster and rents rise at an increasing pace. “Those are the markets that will shoot out of the gate.”
Rent growth, which has been somewhat marginal for years, should also pick up. According to the report, 76% of the national office market showed higher rents in the last three months and ended the year about 3.5% higher than last year. But Sikaitis expects many markets will see increases between 5.0% and 5.5% in the next year.
Vacancy rates were driven down 40 bps during 2013 to 16.6%–the lowest rate in five years. Overall, CBDs fared better with a 13.9% rate versus 18.2% in the suburbs. And even though suburban business districts have suffered tremendously from the recession and the presence of many obsolete buildings, the vacancy rate has declined 140 bps from the 2012 level.
“We're starting to see more and more buildings in more geographies push rents up,” Sikaitis says, as increased demand boosts the confidence of landlords. In fact, landlord confidence has now grown for twelve consecutive quarters, and JLL expects that by 2015, less than 10% of the areas it tracks will be tenant-favorable.
The right-sizing trend, however, will continue as office tenants, especially those that rent more than 50,000-square-feet, search for ways to increase efficiency and shrink footprints. “That's going to present some buildings with challenges.”
Still, Sikaitis also believes the national market could see more than 50-million-square-feet of absorption over the next year, and a vacancy rate just shy of 16.0%. “Our forecast for next year is probably the most bullish of any in the recovery so far.”
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Brian J. Rogal
Brian J. Rogal is a Chicago-based freelance writer with years of experience as an investigative reporter and editor, most notably at The Chicago Reporter, where he concentrated on housing issues. He also has written extensively on alternative energy and the payments card industry for national trade publications.
