Office Concessions Growing Throughout US
In many cities, rental rate growth has been canceled out by the growth in concessions.
CHICAGO—The US office market has finally begun hitting a peak after nine years of expansion. And the vast amount of new class A space that developers recently created in many major markets, or will soon finish, has changed the supply-and-demand dynamics in favor of tenants, according to JLL’s first quarter office outlook report. In response, landlords across the nation have boosted the value of their tenant concession packages. And in some cities, those offers have led to flat or even declining effective rent growth.
“The tenant improvement packages go hand-in-hand with new deliveries,” Scott Homa, JLL’s director of office research, tells GlobeSt.com. Otherwise, prospective tenants may get “sticker shock.” And even though the most valuable packages are for new trophy spaces and other class A properties, that “sets a new benchmark, and owners of second generation buildings need to follow suit.”
National concession packages rose 3.5% during the first quarter, according to JLL, and now exceed $75 per square foot in most primary markets. In addition, Washington DC, New York and Chicago lead all other markets with concession packages for new supply worth above or approaching $100 per square foot. These three are the only major markets that JLL says have reached and passed their peaks. It found 30 others still in the peaking phase, and 21 were considered rising markets.
Overall growth in direct asking rents rose 1.6% to $33.78, according to the report. That boost was largely driven by a 2.7% rise in suburban rents. But growth within CBDs has started to slow. Asking rents in these areas declined by 0.2%, falling below the $50 mark seen in 2017.
Landlords’ need to fill up new office space is not the only factor driving up the value of concession packages, Homa adds. “Tenants are increasingly going above and beyond in terms of their build-outs of new spaces.” In today’s healthy job market, potential recruits have the luxury of considering several options, and office users entice them with highly-amenitized spaces, making big concessions a must in many cases.