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News release

CHICAGO, IL

Moderate Shift in the U.S. Office Market Causes Tenants to Hit Pause

JLL’s U.S. Office Statistics reveals overall positive fundamentals for 2016


CHICAGO, April 5, 2016 – Office markets across the United States continued to tighten during the first quarter of 2016, but stock market volatility paired with concern over China and oil prices led to fears of a near-term recession, causing many tenants to take a step back and revaluate space needs.  According to JLL’s Q1 2016 U.S. Office Statistics, despite generally positive market indicators, leasing activity shifted with expansions taking a back seat—unlike the last several quarters.  Instead, a majority of tenants have opted to stay the same size, but that hasn’t stopped them from relocating within their existing metro areas. 

“Like the first quarter of 2015, which saw a significant slowdown in occupancy growth following a strong close to 2014, this quarter was very similar,” said Julia Georgules, Vice President of U.S. Office Research for JLL.  “Leasing activity has taken a ‘status quo’ approach for now, but we fully expect continued expansions to mount later in the year.” 

Vacancy Rises Slightly
Movement within the market and industry consolidations and expansions continue to drive office demand, but with new supply and some planned vacancies coming online, vacancy across the country increased slightly from 14.7 to 14.8 percent.   

Nashville, Portland, Salt Lake City and San Francisco all topped the list for markets with the lowest vacancy rates.  Each maintained single-digit vacancy rates as some of the most in-demand markets in the country, with activity driven by millennial and tech demand.   

“Portland’s urban core is seeing strong demand and growth from technology, digital media, and apparel companies.  These sectors are aggressively absorbing high-quality space that’s existing, adaptive reuse or new construction,” said Jake Lancaster, Managing Director with JLL Portland.  “The landscape of the CBD is quickly evolving for both landlords and tenants.”

Strong Preleasing Activity
New supply is expected to place only short-term upward pressure on market fundamentals this year.  While nearly 47 million square feet will come online in the next eight months, over 54 percent is already preleased. But preleasing is even higher in the top 10 development markets where it accounts for 57 percent of the activity.

While some markets expect supply to sufficiently meet demand, fast-moving markets may continue to see tightening conditions in advance of new deliveries.      

Markets like Austin, San Antonio and Silicon Valley demonstrate occupancy growth momentum.  All three recorded the highest rate of absorption during the quarter, at 1.6, 1.5 and 1.2 percent of total inventory, respectively —seven times higher than the U.S. rate of 0.2 percent.

Rate Pressure Remains
As strong tenant demand continued to consume available space and expensive deliveries came online in certain markets, average direct asking rents climbed to $32.28 per square foot.  This is the highest quarterly gain recorded in the cycle thus far, and represents a growth rate of 3.2 percent.

Comparatively, Silicon Valley posted a whopping 15.8 percent rent increase, and while not as dramatic, rents in Oakland-East Bay, Nashville and Austin increased by 9.7, 6.7 and 4.5 percent during the quarter.

“Market leverage shifted slightly during the quarter toward more balanced conditions in some markets, but where space is limited and demand is undeterred, landlords maintain significant leverage,” said Georgules.  “Tenants may continue to exercise some caution, but momentum will continue to build this year and the overall outlook is positive.”

About JLL
JLL (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. A Fortune 500 company with annual fee revenue of $5.2 billion and gross revenue of $6.0 billion, JLL has more than 230 corporate offices, operates in more than 80 countries and has a global workforce of more than 60,000. On behalf of its clients, the firm provides management and real estate outsourcing services for a property portfolio of 4.0 billion square feet, or 372 million square meters, and completed $138 billion in sales, acquisitions and finance transactions in 2015. Its investment management business, LaSalle Investment Management, has $56.4 billion of real estate assets under management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit www.jll.com.