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Office Rents in Secondary Markets Soar

CHICAGO—Landlords have an advantage in secondary markets, especially when it concerns class B office space, according to a new report by JLL.

By Brian J. Rogal | brianjrogal | | Updated on July 01, 2016

 

OAKLAND,_CA,_USA_-_Skyline_and_Bridge (2) Oakland has begun attracting a lot of firms pushed out of the expensive San Francisco market.
CHICAGO—As reported yesterday in GlobeSt.com, landlords still hold the upper hand in the nation’s primary markets, even ones such as Chicago which have relatively active development pipelines and millions of square feet set to open in the next year. But landlords’ advantage in secondary markets, few of which have seen any significant development, is much greater, especially when it concerns class B office space, according to a new report on the second quarter by JLL . “There is a heightened demand for class B space,” says Julia Georgules , v ice president and associate director of US office research at JLL, especially in markets that are adjacent or near to primary markets such as San Francisco. “Oakland is really starting to benefit from being in the Bay Area.” Tech firms have begun to migrate into the city, and have helped drive the overall vacancy rate down into single digits, with class B sinking to just 3.1%. “As a result, landlords feel they can push up rents,” and class B rents in Oakland have increased an astonishing 22.1% just since the end of 2015.  
chi-Georgules_Julia (3) Julia Georgules of JLL
One of the strengths of class B these days is that many creative office users, especially in the burgeoning tech sector, actually prefer class B spaces, at least the ones that have a certain aesthetic appeal or “cool” location. And other markets have seen class B office spaces garner much higher rents in 2016, JLL’s data show. In Nashville, class B rents increased 11.6% in the first two quarters, Miami saw a 10.5% boost in the same period, and Austin’s class B rents went up 8.5%.   The depth of the recession made many developers very cautious, and that has kept many working in primary markets ever since. In fact, 65% of the current supply pipeline is concentrated in just 10 cities. Georgules expects the landlord advantage in secondary cities to continue for some time. “Secondary cities are growing full swing in this cycle; they are experiencing robust activity without seeing much new development.”

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