CHICAGO—Despite global economic uncertainty, the US economy continued to expand in 2015 through both employment and output. As a result, office market fundamentals across the US showed no signs of a slowdown, with occupancy growing at a rate 1.3 times faster than new supply, according to a new report by JLL.
The nation's CBDs remain quite healthy, as reflected in the 12.1% vacancy rate, but JLL found that pricing and competition has also encouraged tenants to look to the suburbs in increasing numbers.
Perhaps most significant, 2015 was the year of growth as nearly 50% of leasing activity represented company expansions, on average, while a mere 8.3% was the result of company downsizing.
"Across most markets, we see this expansion continuing for the next two years," Julia Georgules, vice president, director of US office research for JLL, tells GlobeSt.com. Certain markets, such as Houston, have become favorable to tenants due to the collapse of energy prices, but most will not see that shift until at least 2018.
Leasing volume in the fourth quarter came in at 60.4 million square feet, making a year-to-date total of 241.9 million square feet leased across the country—a 2.5% increase year-over-year.
The technology, banking and financial services industries were the most important, contributing to 15.6% and 11.2% of leasing volume during the quarter, respectively. For tech, top markets included the usual suspects: Silicon Valley, Boston, SF Peninsula and Seattle-Bellevue, but Chicago surpassed New York to round out the top five.
Tech is "now the driving force," Georgules says, and in 2015 accounted for a disproportionate amount of the corporate expansions. Furthermore, these firms have begun to push into surprising areas, including new neighborhoods in traditional markets and secondary and tertiary cities that historically had small tech scenes.
Total vacancy declined to its lowest level in eight years, falling 40 bps during the quarter to reach 14.7%—even though developers added more than 44.2 million square feet of new supply across the country.
However, a lot of the new development remains concentrated in a handful of markets, Georgules adds. Of the roughly 88 million square feet currently underway, about 12 million is in New York City, and the top ten markets accounts for about 60 million square feet. She expects that tenants will immediately occupy much of this space as soon as it comes online. "The rest of the markets are becoming supply-constrained," and across much of the country "we're going to continue to see occupancy outgrow supply. As a result, rents are going to keep going up."
But average rents should keep increasing even in those cities that have the most new construction activity, she says, primarily because developers are mostly putting up top-of-the-line spaces that will command premium rents. Tenants today increasingly expect, and will pay for, new office spaces that include amenities like gyms, rooftop decks, restaurants and community spaces.
Sun Belt markets posted the highest rent growth during the quarter, with Jacksonville, Phoenix, Tampa Bay, and Orange County increasing by an average of 4.4%, while rents in tech markets San Francisco, Boston, and Silicon Valley increased by an average of 2.4%.
Another striking development during 2015 was the strength of class B in many cities, especially Portland, Seattle and Chicago, driven in large part by the expansion of tech-related firms, Georgules says. Overall there is a 35% gap in rental rates between class A and class B, but in cities like Chicago, San Francisco and others, the gap has shrunk to just 10%.
Businesses expanded at the highest rate thus far in the cycle, absorbing more than 18.7 million square feet of office space during the fourth quarter for a year-to-date total of 55.5 million square feet, compared to 53.5 million square feet in 2014 and 40 million square feet in 2013.
Looking ahead, JLL expects 2016 to be another year of big numbers as developers prepare to deliver 48.9 million square feet of new supply, 4.7 million more square feet than total deliveries in 2015.
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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.
