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Richmond’s premier office properties are brightest spot in the market says Jones Lang LaSalle
RICHMOND, Va. April 22, 2013 — Constrained construction and heated demand for office space in the most active segments of the United States office market are already fueling prospects of rental increases and new office property development in 2013 and into 2014. An expansion period is approaching for the high-quality urbanized office sector of trophy skyscrapers known as the Skyline, according to Jones Lang LaSalle’s Spring 2013 United States Skyline Review.
“In all but a handful of the Skyline markets, large tenants will have few existing options to consider and thus will be forced to look at proposed development options if they desire to explore relocation options,” said John Sikaitis, Senior Vice President of Research at Jones Lang LaSalle.
Richmond part of Jones Lang LaSalle Skyline MarketsRichmond is one of 34 city centers across the nation in which Jones Lang LaSalle tracks Class A and Trophy office properties for its proprietary Skyline Markets report. Its researchers identify and track the hottest office micro-segments where tenants and investors alike have focused demand for office space in a flight to quality and efficiency throughout the recent recovery.
“These are the segments of the markets that always lead the rest of the office sector in trends of leasing, rent and ultimately investment growth,” Sikaitis said.
“The reason behind that is that these core micro-markets are increasingly where demographics are shifting and thus where tenants most want to be, allowing supply fundamentals to be tightest, giving investors the ability to capture tenants, grow rents, shrink yield and even construct new buildings.”Richmond’s downtown Skyline inventory by the numbers:
“Lack of speculative construction and a flight to quality have definitely helped Richmond’s Skyline recover,” Charlie Polk, Managing Director, Jones Lang LaSalle, said. “But there are several large firm downsizings and relocations which could cause vacancy rates to markedly increase in 2014.”As with the rest of the Richmond market, concession packages for Skyline properties remained strong. In 2012, tenant improvement allowances averaged above $20.00 per square foot and six to eight months of free rent for a 10-year term. This is unchanged from 2011 but down slightly from 2010 when improvement allowances averaged $40.00 per square foot.
Landlords will continue to reach farther to attract or retain tenants. Those landlords that are willing to Invest In their properties and offer attractive or robust improvement and concession packages will succeed. Leasing highlights indicate most Skyline markets will reach equilibrium by mid-2014
Vacancy rates are in the single digits in 10 Skyline markets, including Pittsburgh, Richmond, Bellevue, Houston, Portland, the New Jersey Hudson Waterfront, Raleigh, San Francisco, Philadelphia and Boston. Additions to supply are only beginning to appear, with office construction in eight, or 24.2 percent, of the Skyline markets, including speculative construction in three markets. By mid-2014, all of the Skyline markets will have reached equilibrium, where the balance of supply and demand has historically made rents pop and new construction feasible, Jones Lang LaSalle’s researchers predict.
Three large office tenants that returned space to the market in 2012 skewed overall leasing totals across the Skyline, with a minimal net change from the previous year. Excluding those deals, however, Skyline absorption would have tipped the scales at more than 4.6 million square feet. Energy and tech companies will continue leading absorption in 2013, counterbalanced by right-sizing among law, financial and consulting firms that seek greater efficiency by cutting back space, typically between 15 percent and 20 percent.
Landlords offered fewer concessions to tenants in 2012, increasing effective rents by 4.5 percent, compared with just 1.6 percent effective rent growth the previous year. More than 85 percent of Skyline markets will see rent increase in 2013, with compression of tenant incentives in 90 percent of markets as landlords gain pricing control. In some Skyline markets, asking rents even surpassed prior market cycles’ peaks in four markets (San Francisco; the New Jersey Hudson Waterfront; Washington, D.C.; and Cincinnati).
Investment sales slowly migrate to pre-recessionary peaks in select top Skyline marketsSkyline sales volume fell to less than 40 million square feet in 2012, down 29.3 percent from 55.7 million square feet sold the previous year, chiefly due to limited Skyline Trophy activity in New York. Despite reduced volume, investor appetite for the high-quality product and favorable fundamentals is pushing sales prices nearer to pre-recessionary peaks in the top five Skyline markets (New York, San Francisco, Washington D.C., Boston, and Seattle-Bellevue), and even in top energy markets like Houston and Denver.
In Richmond, capital markets activity was limited to refinances in the central business district, however investors outside of the Richmond market have been testing the waters. Landlords of several fully leased Class A assets have been shopping for investors which may energize Richmond’s capital markets in 2013.Real estate investment trusts topped the list of buyers in 2012, accounting for 29.6 percent of sales transactions, closely followed by institutional domestic buyers at 29.1 percent, with global buyers coming in a distant third at 11.9 percent. An increasingly diversified economic and leasing recovery are expected to push activity levels up more than 20 percent in 2013 for the “Super Seven” primary markets (Boston, Chicago, Los Angeles, New York, San Francisco, Seattle-Bellevue and Washington, D.C.). Stronger investment activity will be based on increasingly difficult barriers to entry.
“Look for markets like Denver, Indianapolis, Minneapolis, Orlando and Portland, among others, to capture enhanced institutional demand over the next few years based on aligned supply and demand and an increased institutional focus,” said Marisha Clinton, Director of Capital Markets Research, Jones Lang LaSalle.
Major market highlights
To request a copy of the Skyline report, please visit our Skyline webpage. Jones Lang LaSalle’s research team delivers intelligence, analysis, and insight through market-leading reports and services that illuminate today’s commercial real estate dynamics and identify tomorrow’s challenges and opportunities. Our 350 professional researchers track and analyze economic and property trends and forecast future conditions in over 70 countries, producing unrivalled local and global perspectives. Our research and expertise, fueled by real-time information and innovative thinking around the world, creates a competitive advantage for our clients and drives successful strategies and optimal real estate decisions. For greater detail on Jones Lang LaSalle’s research, visit the firm’s reports at: www.us.jll.com.About Jones Lang LaSalleJones Lang LaSalle (NYSE:JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. With annual revenue of $3.9 billion, Jones Lang LaSalle operates in 70 countries from more than 1,000 locations worldwide. On behalf of its clients, the firm provides management and real estate outsourcing services to a property portfolio of 2.6 billion square feet. Its investment management business, LaSalle Investment Management, has $47.0 billion of real estate assets under management. For further information, visit www.jll.com.
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