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​United States Office Outlook | Q4 2016

Decelerating leasing velocity and a lower level of “mega leasing” over the course of 2016 resulted in just 6.5 million square feet of net absorption during Q4 across US office markets. Workforce constraints in tech hubs were a primary factor in the slowdown, but the industry remains the main driver of leasing activity nationwide.

No leases surpassed the 500,000-square-foot mark in Q4, and 2016 altogether saw a 43 percent dip in large leases. A bounce back is likely on the horizon in 2017—several large letters of intent are signed and nearing execution.

Despite the leasing slowdown, construction volume continued its upward trend in 2016. It now sits at a cyclical high of 110.5 million square feet. As these deliveries hit the market in 2017, vacancy rates will likely edge higher as rent growth slows.

Nevertheless, broader economic trends remain favorable for the office sector. Consumer confidence hit a 13-year high in December 2016, the dollar is strengthening and a rise in 10-year U.S. Treasury bonds provide key indicators of higher growth expectations.
 

Here are three things to keep an eye on in the coming months:

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Rental rates ($)

Mid-sized and tech-focused geographies continue to register the fastest acceleration in pricing despite quarterly rent growth of 0.2 percent. High-priced blocks delivering in 2017 will provide further upward momentum before flattening as supply matches demand.

Market Rental rates ($)
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YTD net absorption (s.f.)

Q4’s 6.5 m.s.f. of absorption fell well below previous quarterly levels. Slower and smaller leasing activity earlier in the year and a lack of very large deals reduced occupancy growth.

Market YTD net absorption (s.f.)
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Vacancy (%)

Vacancy remained stable at 14.5 percent in Q4 as 11.2 m.s.f. of new product delivered, offsetting further tightening. Sublease vacancy increased for the second consecutive quarter to 1.2 percent.

Market Vacancy (%)
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Under construction (s.f.)

Construction volumes rose again during the final three months of 2016, surpassing pre-recession highs. As of Q4, nearly 111 m.s.f. of space is under construction nationally.

Market Under construction (s.f.)
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United States office property clock

JLL Office Outlook clock (image)

Source: JLL



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