To see where rents are moving up, investors are looking down South to mid-size cities in the Sun Belt. That’s where, according to JLL’s Skyline, office space in the skyline is seeing the highest rent growth – and it’s not even close.
A quick look at the stats makes for eye-popping reading: Nashville leads the way with 27.4 percent rent growth year-over-year through Q1 2017, while Austin (24.2 percent), San Antonio (21.2 percent) and Raleigh (17.4 percent) aren’t far behind.
“Tenants are willing to pay more for the prestige of a skyline address, and they recognize that being downtown in a highly visible building is a tangible, powerful recruiting tool,” said Scott Homa, JLL Director of U.S. Office Research.
Rents in North America’s tallest office buildings have been climbing sky high for the past seven years. JLL’s Skyline report shows that since 2010, rent space within these coveted office spaces has increased more than 20 percent to a new peak of $44.55 per square foot on average.
But it’s a unique combination of exploding industries and talent pools that is setting Sun Belt cities apart.
Tenants look to swim in the talent pool
Companies are taking a head-first plunge into talent pools, recognizing that attracting and retaining top talent requires being in the central business district (CBD) near educational hubs.
The Sun Belt has that in spades: Vanderbilt in Nashville, University of Texas in Austin, and University of North Carolina at Chapel Hill and Duke just outside of Raleigh.
Much of that job growth is being driven by expanding technology, advertising, media and information (TAMI) companies.
In Raleigh-Durham, for instance, tech tenants such as LogMeIn, BitSight and Citrix all have large footprints. Demand there has led to preleasing (leasing prior to construction) of 50.8 percent and skyline vacancy of just 7.1 percent.
Austin is also seeing a huge tech push.
“There’s continued robust investor interest in the Austin market and employers continue to expand existing footprints and locate or relocate in and to the market,” said Jeff Coddington, Senior Vice President of JLL Capital Markets. “Just look at Merck’s recent announcement of a 600-person IT innovation center to be located in Austin.”
That has led to construction booms in all these markets, with more than 900,000 square feet in the pipeline in Nashville and Raleigh. Austin adds another 345,000 square feet to that total.
“Capital and developers are eyeing further spec development cautiously – perhaps too cautiously given strong early absorption statistics,” said Coddington.
Tick tock goes the Skyline Clock
So where does the Sun Belt go from here?
“If you look at our Skyline clock, you’ll notice the major Sun Belt markets are in the ‘peaking phase,’ though in different parts of it,” Homa notes. “With market fundamentals as solid as they are, it’s likely these markets have additional upside potential.”
Nashville in particular is primed to inch closer to midnight, as new deliveries will test rent growth and absorption of new space.
“Nationally, we still expect rents for skyline buildings to increase by an average of 4.9 percent this year,” said Homa. “Sun Belt markets should continue to exceed that average.”
Visit JLL’s Skyline for supply, demand, rent and investment data for top-tier office buildings across 57 urban core markets in the United States and Canada.
Senior Vice President, JLL Capital Markets