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August 4, 2016

For office real estate owners around the United States, cool and unique amenities are no longer up for debate:  they’re a “must have.” From outdoor space to tap rooms, employees are demanding more from their work space and owners are stepping up. According to JLL’s 2016 Skyline, several factors contribute to this amenity-driven mindset by the owners of those trophy properties that make up the skylines of America’s greatest cities:

Higher rental rates allow for more significant capital investments. 

During the past five quarters, investment opportunities are looking good as the national Skyline asking rents jumped by 7.4 percent to a record $43.79 per square foot (p.s.f.) and for Trophy space, the average rent is nearly one-third higher at $56.82 p.s.f.

Employers and owners are battling to recruit and retain

The average vacancy rate across the national Skyline is 12.7 percent but in primary markets, vacancy is at 11.2 percent and in secondary markets, many rates are single-digit. Companies are committed to attracting and retaining talent while landlords are committed to attracting and retaining tenants.

Check out the new buildings on the block

During this latest cycle, total construction volume is 25 percent higher than the last peak, and currently there are more than 32.4 million-square-feet being developed with the latest offerings. This is leading existing Class A and Trophy properties to renovate or reposition in order to remain competitive.

Although preferences vary among industries, demographics or specific companies, most tenants agree that collaborative spaces, updated conference rooms, bike storage and gyms are becoming the new baselines. Arguably, the amenity-du-jour is outdoor space, whether it is a rooftop, amphitheater, courtyard or food and beverage offering.

“Tenants are paying more attention than ever to what is being offered beyond the cubicle and they will pay for amenities that make employees want to be around the office,” says Kevin Kimbrough, a Senior Vice President in JLL’s Austin, Texas office. “It’s beyond a quick revamp – building owners want their property to align with their tenants’ culture and ability to recruit and keep talent.”

In Austin, where the vacancy rate is 4.3 percent and rent growth is up 40.3 percent since 2010, Kimbrough points to the rapid growth of the tech sector and influx of millennial employees as key factors shaping the skyline. For example, full catering kitchens, revolving food trucks and dog-friendly offices are just a few of the wish list items in the Live Music Capitol of the World.

In addition, location and surrounding commercial developments can be thought of as an amenity-extension. Though Skyline buildings have typically been associated with traditional industries like law and finance, an increasing number of tech tenants are pursuing Skyline assets due to their central location and accessibility.

“Landlords are looking at the surrounding streetscape and retail – they want to increase action and activity around their buildings,” says Mitch Marcus, a Managing Director in JLL’s Philadelphia office.  “Amenities outside and around the corner are becoming just as important as what is on site.”

Skyline building vacancy in Philadelphia stands at 7.4 percent and have a 4.9 percent rent premium on an asking basis.  Fueled largely by job growth, the market is slated to deliver 1.9 million square feet of new office supply. In response, Marcus notes that Class B inventory has been reduced due to conversion to residential and alternative uses and Class A properties are undergoing significant renovations to drive rent growth and enhance asset value.

It’s not about a one size fits all office – today’s buildings need to offer a few unique bells and whistles to keep space filled.

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