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News release

Chicago,  IL

Robust Balance Sheets Position Corporate Occupiers for Growth in 2011 According to Jones Lang LaSalle’s National Office Occupier Outlook

Office footprints expand, but now with new focus on productivity via smart workplace strategies


CHICAGO, Feb. 28, 2011 — With the economic recovery underway, companies are showing renewed interest in expanding their office footprints in the United States, though with a more strategic, calculated approach and a strong emphasis on enhancing productivity, according to Jones Lang LaSalle’s latest National Office Occupier Outlook.  However, this renewed optimism will have a lag effect on the still weak national office market as companies absorb their high internal vacancies and resume robust hiring.

“The global financial crisis has left an indelible mark on corporate occupiers of space, who are wisely placing increased scrutiny on their real estate function and implementing programs that enhance the productivity of people, space and resources,” said Stuart Hicks, CEO of Corporate Solutions at Jones Lang LaSalle. “Since companies have seen their internal vacancy rates grow by nine percent over the last two years in light of reduced headcounts, rightsizing their portfolios is a mandate for corporate real estate executives and will be for the next 12 months.“

While the national office market will not return to pre-crisis levels for several years and tenant leverage remains strong, Jones Lang LaSalle’s Office Occupier Outlook revealed that time is running out and tenants seeking large blocks of space should move to lease in the next nine months. Though 94 percent of U.S. markets are tenant favorable now, only 31 percent will be in 2012.
 
 
Office occupier outlook highlights

• Unlike the early part of 2010, when market bottom rents were widely available, in the final months of 2010 some landlords tightened the reigns on rates. While the U.S. office market was still broadly tenant favorable, pockets of increased activity left some landlords feeling more confident. Net effective rents increased slightly as tenant improvement dollars and rent abatement levels tapered off.

• Though most of the markets tracked were tenant favorable at year-end 2010, 29 percent are expected to move toward “neutral” conditions in 2011. In 2012, a notable shift is expected and “neutral market” conditions lead with 49 percent. In 2013, the number of markets expected to exhibit “landlord favorable” conditions will double to 41 percent.

• Washington, DC is the only market with “landlord favorable” conditions expected in 2011. In 2012, it is joined by Pittsburgh, Denver, Houston, Raleigh/Durham, San Francisco, and Toronto.

• Tenant improvement allowances declined for the last few quarters of 2010 and were down 3.3 percent from 2009 levels.

• The average amount of free rent contracted for the first time in nearly three years.

• The average U.S. asking rent remained stable at $27.20 per square foot, due to the still broadly tenant favorable market.

Occupiers’ market choices highly dependent on geography and product type

The national vacancy rate declined in the final months of 2010 to 18.5 percent, from its peak of 18.7 percent in the third quarter of 2010, with continued downward pressure on vacancy rates predicted this year due to recent occupancy gains combined with a lack of new supply.

An increase in leasing activity in select markets and property types signaled that many occupiers continue to employ flight to quality and central location strategies to gain better visibility and access to public transit, among other benefits. The growing spread between CBD and suburban vacancy support this trend, with fourth quarter 2010 rates of 15.6 percent and 20.3 percent respectively.

Likewise, other companies consolidated several suburban satellite facilities into a central CBD location to improve efficiencies. Year-end U.S. net absorption provided evidence of this movement with class A absorption of 18 million square feet, compared to negative 3.4 million square feet in the class B market.

“Occupiers that need to be in key U.S. cities, especially those with large space requirements, will begin to see fewer and fewer choices and stronger competition,” said Lauren Picariello, Vice President of Occupier Research for Jones Lang LaSalle. “Markets leading the economic recovery such as New York City’s Midtown South, Raleigh-Durham and Washington, DC saw a considerable tightening in the final months of 2010, while overbuilt markets and those struggling to regain solid employment gains offered ample options and will do so for a longer term.”

In contrast, Las Vegas, Phoenix, and California’s Inland Empire continue to present many new construction options for companies seeking build-to-suit opportunities. Likewise, CBD markets in Dallas and Silicon Valley and the suburban market in West Palm Beach offer numerous space options, maintaining vacancy rates above 26.0 percent.

Leasing competition remains historically low, but driven by industry-specific growth

Companies looking to dispose of space through the sublease market need to carefully consider the level of competition among sub-landlords. Competition for sublease space was highest in markets home to leading industries such as technology, health and education and the federal government.

Conversely, in markets with a high concentration of lagging industries including housing, retail and manufacturing occupiers had very little leasing competition. The disparity of demand between markets resulted in 13.1 million square feet of net absorption at year end. 

• The federal government was the most active occupier of space last year, leasing nearly 4.5 million square feet of space in the Washington DC market. Other markets showcasing robust government leasing include Denver, Jacksonville, Chicago, and Texas.

• The technology sector sparked intense competition in certain pockets such as San Francisco’s submarkets south of Market Street, forcing some tenants to have to look elsewhere.

• Though the financial services sector remains depressed, high-end industry sub-sectors such as hedge funds and private equity has picked up competition in Midtown New York City’s trophy properties. 

• Markets without industry-driven growth such as South Florida, Sacramento, Detroit, and Chicago remain tenant favorable with their underlying low leasing competition.
 
“Though some markets will continue to see dampened tenant demand this year, we saw an increase in touring velocity at the end of 2010 in 65 percent of the 51 markets Jones Lang LaSalle tracks, indicating that 2011 will see stronger leasing competition nationwide,” added Picariello.

What’s ahead for 2011

Risk management, cash conservation and cost management will strongly influence 2011 business plans and the corporate demand for space in 2011. Corporate occupiers will allocate early dollars to equipment, software and other infrastructure before resuming robust hiring. Once hiring does resuming, shadow space and high internal vacancy rates will delay the impact on the office market. 

“As hiring continues to strengthen, companies will be poised to expand their office footprints again, but location decisions will be placed under more scrutiny than ever before and real estate will take on a more strategic role within the overall business,” said Ed Noha, Managing Director of Strategic Consulting at Jones Lang LaSalle. “Enhancing productivity will take center stage through workplace mobility programs that lower corporate real estate costs, increase collaboration, generate higher space utilization rates, and help companies meet their sustainability objectives.”

“The physical office is not going away anytime soon, but it will take on greater importance in defining corporate culture and enabling knowledge sharing and innovation with corporations upgrading their workplaces, shedding outdated unnecessary space, and incorporating the latest technologies to digitize work processes as much as possible,” added Noha.
 
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 2010 global revenue of more than $2.9 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 1.8 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.