Originally published on GlobeSt.com by Brian J. Rogal
Despite global economic uncertainty, the U.S. 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 U.S. 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.”