Reading the clock

The Jones Lang LaSalle office clock demonstrates where each market sits within its real estate cycle. Markets generally move clockwise around the clock, with markets on the left side of the clock generally landlord-favorable and markets on the right side of the clock generally tenant-favorable.

After shifting to the 6:00 position at the midway point of 2011, the U.S. office market has remained at the 6:00 position for the past two quarters, closing 2011 in a better position than at the end of 2010 (4:30 position), but remaining heavily segmented across geographies as we head into 2012. On a national basis, U.S. office rents jumped 2.8 percent over the course of 2011, driven largely by gains in primary coastal urban markets and pockets of the market dominated by the technology and energy sectors. Overall, at the end of 2011, 30.2 percent of geographies Jones Lang LaSalle tracks were landlord-favorable markets; 23.3 percent of markets were at the bottom of the cycle in a neutral position and 46.5 percent of markets continued to offer tenants enhanced leverage. From a sheer inventory standpoint, most of the larger markets have reached bottom or shifted to the left-hand side of the clock, whereas the secondary and tertiary market segments, in most cases, have yet to reach the bottom of the market.

CBD rents have led the gains throughout the course of the year, demonstrating increases of 4.8 percent in 2011 with more than half of that increase realized in the fourth quarter (2.7 percent quarterly increase). Leading the gain in the fourth quarter was Midtown South in Manhattan, driven by the very strong technology demand and expansion, fueling tighter market conditions and thus an 8.1 percent jump in rents over the past three months. Other CBD markets segments demonstrating growth both over the quarter and the year were San Francisco (16.7 percent annual increase), Boston (8.0 percent annual increase), New York (7.6 percent annual increase) and Austin (4.8 percent annual increase).

The suburbs remain highly segmented from a rent and recovery standpoint with rent growth only being realized in those aforementioned tech and energy clusters for the most part. Overall, the suburbs saw rents grow by 1.1 percent over the course of the year, but pulled back 0.2 percent in the fourth quarter. The suburban gains for the year were largely driven by Northern California market segments: San Francisco (26.2 percent increase), San Francisco Peninsula (15.6 percent) and the East Bay Suburbs (4.4 percent). Another market to post notable gains was also driven by tech and biotech: Cambridge, MA, exhibiting gains of 19.6 percent over the year.

2012 will yield further rent increases nationally as segments of the market like Houston, Dallas, Denver, Austin, Silicon Valley, San Francisco, Boston and others demonstrate continued tightening and rent growth. We expect the U.S. office market to shift to the landlord-favorable side of the clock in the late spring to early summer of next year; however challenges still remain for landlords across numerous market segments. Most suburban geographies will remain tenant-favorable for the foreseeable future due to unaligned supply and demand fundamentals and the two largest markets, New York and Washington, DC, are likely to remain stagnant through most of 2012 due to the respective European debt woes and subsequent effects on the financial sector and the toxicity permeating Washington politics and the surrounding environment.