August 17, 2016

According to JLL’s Skyline, secondary markets continue to present opportunities for significant rent growth by having some of the lowest vacancies (nine of the 10 lowest vacancy markets are secondary), and, in many cases, historically low office development.

High pricing and limited offerings may make primary market office acquisitions challenging, but secondary markets garner plenty of institutional level investment interest on their own merit.

Here are the driving factors behind the momentum:

  • Job growth: The low cost of conducting business, high quality of life and low cost of living for the employee base is driving employers to enter or expand in secondary markets. The biggest winners? Cities with a tech presence as well as broad service industry opportunities.
  • Population growth: Jobs are following workers this cycle and many secondary markets are experiencing significant population growth, particularly among Millennials. Top secondary cities offer a walkable urban core and unique touches ranging from hip restaurants, cultural attractions, good public transit options, and bike-friendly infrastructures.
  • Room to run: Many investors view secondary market asset pricing as a comparative bargain to primary markets and an opportunity to secure yield. In addition, there are simply less available properties in primary markets. In response, investors are casting a wider net for value, growth-oriented acquisitions.

Atlanta and Portland are located on opposite coasts but share many common characteristics and are attracting significant investor and tenant interest. Here are three reasons why investors should vet office acquisition opportunities in each city:


  • Office fundamentals are as strong as they’ve been in more than three decades. Atlanta has experienced positive net absorption for the past four years and growing tenant demand due to modest rental rates, which are still approximately 10+ percent below peak pricing. In most cases, class A rents are still at least 12 to 25 percent below lease rates required to drive new speculative development. Across the Atlanta Skyline, only 510,000 square feet of un-committed space is under construction and this limited development bodes well for future absorption and investment sales pricing. Historically, when conditions have been this favorable, Atlanta has seen average new office development push from five to seven million square feet.
  • Local and regional economies are diverse and growing. A 40-year trend of inbound regional tenant expansion and high-profile headquarter relocations continue to add jobs to the market, with industry representation across the board including consumer services, education and financial technology.
  • There’s opportunity to acquire B product in A locations. The year-over-year increase in sales volumes is 121.3 percent and many recent trades have been value-add or core plus plays, given the spreads between A and B buildings is historically wide. Overall, average Skyline asset pricing in Atlanta is $248-per-square-foot (PSF), which is balanced compared to primary markets. Even for the trophy assets that have traded during the past 12 to 24 months, current pricing continues to fall well below replacement costs and in-place rent growth is having rapid and favorable impact on going-in cap rates.

“There continues to be a significant and likely ongoing pause in office development and that has aggressively shifted the dynamics in favor of office owners. The clear winners are submarkets and buildings that can offer the ‘live, work, play’ dynamic, or the ability to adapt and rebrand with a mixed-use, transit focus. Regardless if an investor is currently active in Atlanta, the office investment climate over the next several years is undeniably favorable and should be driving investors to the table. Anyone not digging beneath the surface is missing key opportunities in this rapidly transitioning market.” – JLL Managing Director David Tennery


  • There may be more room to run in Portland. Surrounding West Coast markets like San Francisco’s and Seattle’s average price PSF is $677 and $458, respectively, while Portland’s is $322 PSF. However, JLL pegs Portland’s new high watermark at more than $400 PSF and Skyline rents increased by 24.8 percent since 2010, but the market is a bargain compared to more actively traded markets.
  • Job growth and in-migration is significant. The base of companies has increased and major tech giants who acquire Portland-based companies are opting to keep business there. The city’s population is expected to grow nearly five percent from 2015 to 2020, while the millennial cohort increased 10.6 percent over the past five years.
  • There’s capital for all types of office product. Institutional investors are increasingly taking a larger position in the market, primarily targeting large Trophy and core assets. At the same time, creative office space caters to the city’s tech workforce and investors are considering value-add, repositioning strategies with these buildings.

“Portland’s fundamentals are strong and while we’re starting to see pricing and rents rise, the yields look good on a relative basis and investors believe the market will see more growth compared to other West Coast cities. Historically, Portland is a less actively traded market and investors are vetting how they can gain exposure. Plus it has the cool factor – at the end of the day, businesses and people want to be here.” – JLL Senior Vice President Paige Morgan

Investors and tenants alike can access JLL’s Skyline via a fully interactive website that features JLL’s proprietary market insights regarding office supply, demand, rents, leverage and investment into 52 markets across the United States and Canada, with the ability to compare and contrast individual markets or multiples of markets as well as individual properties or portfolios.


David Tennery and Paige Morgan

JLL Capital Markets

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