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News release

Chicago, IL

U.S. office market tightening with third consecutive quarter of net absorption according to Jones Lang LaSalle’s fourth quarter United States Office Outlook

Tour volume up and vacancy down means net effective rents inching up


CHICAGO, Jan. 12, 2011— Three consecutive quarters of positive net absorption has leveled the playing field slightly for landlords with net effective rents on the rise.  The market recovery remains segmented by geography and product type; however, the gap is lessening with the national average vacancy rate standing at lower today than it did a year ago at the same time and down slightly from the end of the third quarter 2010.  Additionally, the market recovery pace is quickening with an uptick in tenant demand and leasing velocity with approximately eight million square feet absorbed in the fourth quarter, according to Jones Lang LaSalle’s Fourth Quarter 2010 United States Office Outlook. Jones Lang LaSalle’s quarterly outlook tracks 41 U.S. markets and provides an overview of supply, demand and pricing conditions, statistical analyses and an outlook.

Office outlook highlights
  • After hitting the bottom of the market in the first quarter 2010, the recovery throughout the U.S. office market has continued over the past three quarters and even gained momentum at the end of 2010 with respect to supply, demand and pricing.
  • Tenants have stepped up activity levels and for the third consecutive quarter, both tour velocity and leasing activity increased across the vast majority of office markets.
  • Absorption gains continued for the third consecutive quarter, with 8.0 million square feet absorbed in the fourth quarter and more than 13.1 million square feet throughout 2010. Nearly 70 percent of the markets Jones Lang LaSalle tracks finished the year with occupancy gains.
  • Increased rates of absorption pushed vacancy levels down to 18.5 percent from 18.7 percent in the third quarter, and below the 18.6 percent rate at year-end 2009.

“We are strongly optimistic about the continued improvement in commercial real estate in 2011,” said John Sikaitis, Director of Office Research, Jones Lang LaSalle.  “A key indicator of the industry’s recovery is the overall health of U.S. companies that have more cash on hand now than at any other time since 1952 when cash levels were being tracked. As a result, corporate balance sheets are strong and we expect M&A activity to increase, continued investment in R&D and technology, as well as most importantly for the office sector, an increase in employment that is the critical component to an overall economic recovery.”

2010  ends on a strong note

The U.S. office markets ended on a strong note which is directly related to employment upticks.  Job openings in the United States are up 32 percent year-over-year and layoffs are down nearly 19 percent from last year.  This swing has impacted the office markets positively with 80 percent of the markets Jones Lang LaSalle tracks seeing an increase in tour velocity.  This increase in tour velocity netted occupancy gains in 27 markets and upward pressure on net effective rental rates, as national average levels of both rent abatement and tenant improvement allowances fell. The drop in incentives and stabilization of asking rents, prompted net effective rents to rise 1.2 percent in the fourth quarter.

Absorption gains continued for the third consecutive quarter, checking in at 8.0 million square feet in the fourth quarter and more than 13.1 million square feet throughout 2010.  Nearly 70 percent of the markets Jones Lang LaSalle tracks finished the year with occupancy gains with New York and Washington D.C. showing the strongest traction.  Many of the Midwest markets – Chicago, Cleveland and Detroit – showed negative absorption due to trailing employment markets.  The increased rates of absorption pushed vacancy levels down to 18.5 percent from 18.7 percent in the third quarter (and below the 18.6 percent rate at year-end 2009).

“The U.S. office market recovery continues to be segmented by geography with the coastal cities continuing to improve at a faster clip; however, nearly all markets are seeing signs of recovery,” said Sikaitis.  “Markets that have strong technology, for-profit education systems and energy – both clean and traditional – are showing marked signs of recovery.” 

Industry demand drivers continue to be atypical office sectors

Technology is back with demand levels heating up significantly from tech firms focused largely in social media, gaming, mobile technology and cloud computing. Markets that have experienced the biggest boom so far have been Austin, the San Francisco Bay Area, Boston, Seattle and Washington, DC.  Denver, Houston and San Antonio are experiencing increased demand due to their saturation in the energy field, whereas markets positioned closer to major military bases like San Diego and Atlanta are benefitting from veterans coming home and enrolling in advanced coursework at for-profit education systems.   

“For-profit education systems have never registered as a driver on the national leasing front, but in 2010, they represented 15.0 percent of the total national occupancy gains,” said Sikaitis. “Because this sector is facing possible regulation in 2011, new, long-term demand remains questionable, but until then, the expansions continue to add up.”

Regional outlook: Most markets picked up steam in the fourth quarter
 
  • Atlanta: Many building owners continue to discount rental rates or offer generous concessions to lure tenants and backfill the empty space generated here in 2008 and 2009 by the economic collapse and 3.6 million square feet of brand new inventory. “Although moderate, the positive absorption netted here in 2010, along with reported upticks in leasing activity and tour velocity, might indicate that Atlanta will see an improved pace of vacancy reductions in upcoming quarters. At year-end, with development on pause for the foreseeable future and business owners less tightfisted than they were this time last year, Atlanta’s office fundamentals are on track to begin to see recovery, albeit slowly, in 2011,” said Lanie Rea, Jones Lang LaSalle’s Research Manager for Atlanta.

  • Boston: Office fundamentals should tighten further as the local economy continues to strengthen. However, due to many large tenants choosing to transact earlier than expected last year, there will likely be a dearth in requirements to begin the year. Over the mid-term, the local economy will continue to grow faster than the nation over the next two years, which should bode well for the Boston office market. “Job growth during this recovery is expected to be much stronger than the expansion between 2004 to 2008. After losing 5.1 percent of our office-using jobs during the recession, Massachusetts is expected to add 81,600 office jobs, a 10.8 percent increase over the next five years,” said Paul Leonard, Jones Lang LaSalle’s Research Manager for Boston.

  • Chicago: Cautious optimism will remain in effect until sustainable growth returns to the local economy. “Office sector expectations will be tempered as 2011 employment projections include only weak gains. Near-term demand will be driven by expirations, consolidations and opportunistic users translating into moderately negative net absorption. Once economic recovery takes hold, however, the elevated vacancy rate will begin its descent aided by a construction-free landscape,” said Rena Christofidis, Jones Lang LaSalle’s Director of Research for the Midwest, Texas and Denver.

  • New York: “The trends that characterized the last half of 2010 are likely to continue into the beginning of 2011,” said James Delmonte, Vice President and Director of Research for Jones Lang LaSalle’s New York office. It now seems clear that Downtown will lag the rest of Manhattan in the first stages of the recovery. Both asking and taking rents Downtown will remain under pressure in 2011 even as both Midtown and Midtown South see gains. Over the short-term, vacancy levels will flatten as some space is likely to come back to the market from relocating tenants. The second half of 2011 could to be the turning point as employment levels improve, leading to new demand and sustained absorption of space.”

  • Washington, D.C.: Market conditions in Metro D.C. underwent a dramatic shift in 2010, with submarkets located inside the Beltway stabilizing, and in many cases resuming significant growth. Rental rates largely recovered in well-located submarkets, although tenant improvement allowances and free rent remained elevated by historical standards. Leverage in many submarkets shifted back to landlords, and the lack of quality space options raised the prospect of rent spikes in 12 to 24 months. “Developers are now mobilizing for speculative construction in areas such as Rosslyn-Ballston, NoMa, Southeast, CBD and East End. Double-digit net effective rent growth is likely in the interim, as tenants continue to get squeezed out of large-block space options,” said Scott Homa, Jones Lang LaSalle’s Research Manager for the Mid-Atlantic.

Forecast 2011
Leasing activity and demand will gain steam in 2011 enhanced by corporate confidence, increasingly strong balance sheets and companies' productivity levels approaching peaks will prompt hiring across industries. Jones Lang LaSalle anticipates continued absorption, vacancy to further their downward trajectory and demand levels to increase stemming from the technology, financial and service sector.

“The fundamentals are all aligned and we expect absorption to more than triple in 2011, pushing vacancy levels down closer to 17.0 percent from 18.5 percent today,” predicts Sikaitis.

Next year, users looking for large blocks of space will be at a disadvantage as blocks of space 75,000 square feet or more are becoming rare, giving owners the opportunity to raise rents and decrease concessions. Look for net effective rents among large blocks to increase in the 7.0 to 10.0 percent range in 2011. However, the tenant that needs smaller to mid-size space still has opportunity in most market segments. As a result, rents will likely remain somewhat stable, increasing by no more than 1.5 percent in this market segment.

Jones Lang LaSalle’s statistics sourcebook

To review more detailed overview of Jones Lang LaSalle’s 4Q research analysis, please link to the following statistics and charts:

  • Q4 2010 National Office Statistics:  Provides detailed real estate data for the metro area on a quarterly basis. Data includes stock, completions, vacancy, rents, absorption, and new construction for buildings at the overall metro and submarket level.

  • Q4 2010 Office Property Clock:  This analysis of the Jones Lang LaSalle office clock demonstrates where each market sits within its real estate cycle

  • Q4 2010 Local Office Highlights: Review a detailed, quarterly look at leasing, sales and construction activity for individual metro areas in the United States. The report includes details on specific lease transactions, new construction projects and sales transactions.

  • Q4 2010 Local Office Statistics: Detailed real estate data for individual metro areas in the United States on a quarterly basis. Data includes stock, completions, vacancy, rents, absorption and new construction for class A and B (class C in limited markets) buildings at the overall metro and at the submarket level.

About Jones Lang LaSalle

Jones 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 2008 global revenue of $2.7 billion, Jones Lang LaSalle serves clients in 60 countries from 750 locations worldwide, including 180 corporate offices.  The firm is an industry leader in property and corporate facility management services, with a portfolio of approximately 1.4 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 $37 billion of assets under management. For further information, please visit our website, www.joneslanglasalle.com.