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Tour volume up and vacancy down means net effective rents inching up
“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 noteThe 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 sectorsTechnology 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.
Forecast 2011Leasing 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:
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.
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