CHICAGO, April 19, 2012 – Although the United States office market witnessed continued recovery in the first quarter 2012, it was at a more modest pace than the recovery seen in 2010 and 2011— hindering commercial landlords in a multitude of markets across the country from experiencing entirely favorable leasing conditions.
“Still, it’s important to remember that we’re on an overall upswing, it’s just at a slower pace than anticipated due to inconsistencies in leasing conditions across the U.S,” said Gregory Green
, President of Agency Leasing
for Jones Lang LaSalle.
The U.S. office market absorbed nearly 1 million square feet during the first quarter of 2012 as compared to the 8.6 million square feet average seen in the prior six quarters. Leasing volumes also indicated stagnancies in the market: of Jones Lang LaSalle’s 45 tracked markets, nearly two thirds demonstrated stable or declining leasing volumes.
Despite modest growth through the first quarter, Jones Lang LaSalle won 20 million square feet of leasing assignments and 7 million square feet in property management assignments; furthermore, the group expanded its workforce by adding 12 landlord leasing professionals and 33 property managers to its roster, proving impressive growth to juxtapose the market’s leasing activity.
The Boston market is one of the strongest in the nation, benefitting from its diversified economy with strength in health care, education, science and technology. The city proved a hub for such leasing activity in the first quarter, as Genzyme renewed its 82,490 square foot lease and numerous health care and life sciences companies, such as Alpha Simplex, Sprigwell and Medical Specialty Distributors, expanded across the metro area. Despite such activity, not all leases are working to the advantage of landlords.
“The high-tech and life science sectors continue to benefit from increased venture capital investment and have bolstered demand,” said William Barrack, Managing Director of Jones Lang LaSalle’s Boston market. “While class A high-rise space in downtown is leasing, low-rise space, most notably in the Financial District, is struggling. Tenants tend to have more leverage in certain segments of the market versus others, such as the very tight Back Bay, with a 4.0 percent vacancy rate.”
High-tech industries drive growth in San Francisco and San Diego as well. In addition to tech companies, San Diego is currently anticipating a measurable impact on the office market outlook because of life sciences, healthcare and education requirements that have recently signed or are active in the market. However, rollover in the San Diego market is still below historical averages as blend and extends that were completed in 2009, 2010 and 2011 were for leases that would have otherwise expired in 2012. Therefore, 2012 rollover is about 1/3 less than rollover in the previous year, said Bess Wakeman
, Jones Lang LaSalle Executive Vice President.
“Certain San Diego submarkets are seeing rent growth and the monthly ‘free rent’ offerings shortening,” she said. “Last year’s average was between one and one-and-a-half months free per year of lease term for signing a lease, and this is expected to drop in half by the end of 2012. This combination of limited rollover, rising rents and a restriction on concession are creating murky waters in determining whether the landlord or the tenant currently holds the market’s upper-hand—making strong representation pivotal to maximizing value for landlords.”
Rollover from large tenants in Chicago was also tempered by long-term leases and deals that were already cut, said Steve Smith
, Regional Leasing Director for Jones Lang LaSalle’s Chicago Agency Leasing team. Many large users with expirations extending to 2017 signed leases several years ago to capitalize on the tenant favorable market.
Smith states that activity from expanding mid-size tenants and technology picked up: “No new buildings are under development; there is no new additional supply; vacancy has slowly come down; and fewer large blocks of Class A space in great locations exist. The market is improving but it has still yet to shift to being a landlord’s market.”
In Washington, D.C., a move toward landlord-favorable leasing conditions came to a halt at the end of last year due to weakened demand, which has continued thus far in 2012. Budgetary stalemate between the houses of Congress and the pending election cycle uncertainty capped organic growth, reduced confidence among private sector tenants and slowed the federal activity that carried the market through the recession.
As a result, Trip Howell
, Managing Director of Agency Leasing the firm’s Washington, D.C. market, believes the current conditions will continue for the foreseeable future: “In the past, you could assume higher commissions for outside brokers, generous giveaways for tours, lower rents and higher concessions could help secure tenants,” Howell said. “But now, decreased demand permits competition to offer tenants even more. In today’s market, a high-credit tenant with pending lease expiration can expect owners and landlords to offer unprecedented, enticing offers and incentives.”
Green believes that despite some national setbacks and slowed recovery, signs of a stabilizing, strengthening market point to more favorable conditions for landlords.
“Markets will continue to recover at differing rates of speed for the remainder of 2012,” Green said. “Rents across most markets will grow, but at slow and measured paces unless technology or energy industries are prominent in the area. We are optimistic the market will continue to improve, though, just at a slow and steady pace.”
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 2011 global revenue of $3.6 billion, Jones Lang LaSalle serves clients in 70 countries from more than 1,000 locations worldwide, including 200 corporate offices. The firm is an industry leader in property and corporate facility management services, with a portfolio of approximately 2.1 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 $47.7 billion of assets under management. For further information, please visit our website, www.joneslanglasalle.com