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Absorption starts off the year slowly, but still positive nationally
CHICAGO, April 11, 2011 — As an indication that the commercial real estate sector is in a slow but steady recovery, the U.S. office market recorded its fourth consecutive quarter of occupancy gains with 4.5 million square feet of space absorbed in the first quarter of 2011. Markets with heavy energy and high-tech sectors continue to lead the recovery with Boston, Houston, Seattle and Silicon Valley recording the most activity during first three months of the year. Additionally, after trailing the overall U.S. office market recovery, demand levels and occupancy gains were as high in the suburbs around the country as they were in the Central Business Districts (CBDs) in the first quarter, a sign that a full throttle recovery is underway, according to Jones Lang LaSalle’s First Quarter 2011 United States Office Outlook. Jones Lang LaSalle’s quarterly outlook tracks 43 U.S. markets and provides an overview of supply, demand and pricing conditions, statistical analysis and an outlook.
Office outlook highlights
“Renewed business confidence, strong corporate balance sheets and near-record profit margins have led to substantial employment gains in recent months,” said John Sikaitis, Director of Office Research, Jones Lang LaSalle.
“Employment in the professional and business service sector, which comprises the largest share of office-using employment, has more than tripled its gains in the overall employment markets in recent months, growing at an annual rate of just above 3 percent. We expect this to continue and get stronger throughout the year, which will lead to enhanced demand for office space in coming quarters.”
Full year of recoveryThe U.S. office market recovery is now entering its first full year, driven by organic growth of technology, biotech, energy firms and the start of some expansions within the financial services sector. The U.S. office market continued to perform well with vacancy levels decreasing for the second consecutive quarter to 18.4 percent on average with more than 4.5 million square feet absorbed nationwide. This brings the nation’s total occupancy gains to more than 25 million square feet over the past four quarters (the equivalent of filling the entire San Antonio office market up). Richmond, Virginia, has the lowest total vacancy rate at 11.4 percent and Phoenix the highest at 26.9 percent.
Occupancy gains were driven by heightened absorption in Baltimore, Boston, Jacksonville, Seattle and Silicon Valley, while the two markets driving most of the occupancy gains in 2010 (Washington, DC and NYC), saw occupancy decline moderately quarter over quarter. However, previously leased space in those two markets will help future occupancy as tenants begin to fill that empty space. The recovery can be seen in all markets Jones Lang LaSalle tracks by either a leveled or increased tour velocity. This tour velocity is translating into increased transaction volume with 17 of the markets Jones Lang LaSalle tracks indicating increased leasing volume quarter over quarter (despite first quarter usually being the slowest quarter of the year).
While tour velocity and leasing velocity are on the upswing, rents have stabilized in most markets as asking rents were up in 19 of the 43 markets the firm tracks and tenant improvement allowances and rent abatement declined 3.8 percent and 8.8 percent, respectively, over the quarter, while overall asking rents were up 0.7 percent quarter over quarter.
“The overall sentiment nationwide is positive with most markets showing quarter over quarter signs of recovery,” said Sikaitis. “Last year we saw a handful of markets tightening up but now we are seeing it nationwide in markets with heavy tech, energy and biotech showing the strongest signs of recovery. The professional and business sector employment growth rate of 3 percent also makes us bullish overall.”
Forecast 2011Despite shocks to the global economy in the Middle East and Japan, businesses in the U.S. are gaining confidence and starting to hire again as employment fundamentals start to solidify. Employment growth will continue to increase from its overall 1.0 percent growth rate, fueling heightened demand in the latter part of this year and into 2012.
Absorption rates will continue to be positive for 2011; however, slow leasing activity at the start of 2011, combined with lower levels of immediate lease rollover in 2011 due to tenants renegotiating their leases early, will mean that most of the absorption gains will be a result of the hiring of more people and not as a result of pending lease expiration dates.
Concessions across nearly all market segments have now peaked. However, leverage with net rent growth will continue to be segmented in 2011 with higher leverage for landlords in core CBD gateway locations with large blocks of space, whereas mid-sized and small-sized tenants will continue to have leverage in most market segments, as well as tenants in most suburban, secondary and tertiary urban locations.
“While 2011 has started off slowly, all the fundamentals are in place for this to be a strong year,” said Sikaitis. “We still anticipate absorption to triple over last year and to end this year with a national vacancy rate just north of 17 percent.”
Jones Lang LaSalle’s statistics sourcebook To review more detailed overview of Jones Lang LaSalle’s 1Q research analysis, please link to the following statistics and charts:
About Jones Lang LaSalleJones Lang LaSalle (NYSE:JLL) is a financial and professional services firm specializing in real estate. The firm offers integrated services delivered by expert teams worldwide to clients seeking increased value by owning, occupying or investing in real estate. With 2010 global revenue of more than $2.9 billion, Jones Lang LaSalle serves clients in 60 countries from more than 1,000 locations worldwide, including 185 corporate offices. The firm is an industry leader in property and corporate facility management services, with a portfolio of approximately 1.8 billion square feet worldwide. LaSalle Investment Management, the company’s investment management business, is one of the world’s largest and most diverse in real estate with more than $41 billion of assets under management. For further information, please visit our website, www.joneslanglasalle.com.
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