The Jones Lang LaSalle office clock demonstrates where each market sits within its real estate cycle. Markets generally move clockwise around the clock. Geographies on the left side of the clock are generally landlord-favorable, while markets on the right side of the clock are typically tenant-favorable.
At the end of the second quarter of 2013, 24 markets were positioned beyond 6:00 and an additional 10 markets sat at 6:00 at the end of the quarter. What does that mean for landlords? More consistent rent growth and concession burn-off than we have seen in recent years. Overall across the country, asking rents for office product increased more than 1.5 percent during the quarter across CBDs driven by larger rent increased in New York, San Francisco, Los Angeles and Cleveland. Meanwhile the suburbs posted gains just shy of 1.0 percent led by rent growth in Northern California, Seattle, Austin and Denver. In total, rent gains topped 1.2 percent, the highest quarterly increase since the recovery began back in 2010. In addition to landlords pushing rent, they have also pulled back on concessions with tenant improvement allowances and free rent down 4.7 percent and 8.5 percent, respectively, over the past 12 months.
Even in the two most challenged demand markets of late, New York and Washington, we began to see the prime part of the market, the Trophy segment, start to show signs of stabilizing and even rent growth. In New York, there have been 25 leases signed at $100+ per square foot in 2013, 14 of which occurred in the second quarter. This compares to 21 at this point in 2012. In Washington, DC, the Trophy market is also gaining momentum with a number of leases signed in excess of $50.00 NNN (+$75 per square foot) with a new development, 900 16th Street, NW, recently setting a record for a new lease term with a tenant committing to lease the majority of the building for a low-$60s NNN rent, equating to a rent in the high-$80s per square foot full service. If this momentum holds in both these higher-end markets, we could see a broader-based recovery in the two largest markets nationally headed into 2014.
Overall, the scarcity of quality large quality blocks will help urbanized Trophy and A product continue to lead momentum and rent growth during the recovery. While this has led to new construction in some geographies, leverage will likely remain with landlords for the next 18 to 24 months at a minimum. The first markets to be tested with this new construction will be San Francisco, Austin, Houston, Dallas and Silicon Valley. While current demand levels support the level of construction underway, we will be watchful of dynamics over the next quarter or two as an overbuilding cycle in some market segments could develop and cap rent growth.
The near-term tightening in the top-end of the market should also trickle down to propel the commodity A and Class B markets in urbanized environments, while non-core suburban product still lags behind the rest of the market and is likely to languish for the next few quarters, at a minimum, based on a fundamental shift of tenants to migrate to efficiency, amenities and transit.