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. As markets move closer to the 3:00 position, rent levels in those markets are moving closer towards a pricing bottom with near-term price stabilization likely.
Substantial cost-cutting measures throughout 2008 and 2009 helped many corporates report upbeat earnings and provided many companies with an initial sense of where their overall business is headed. Additionally, over the past 60 days, employment levels have appeared to stabilize, while businesses have started to restock inventories and allocate investment dollars. As a result, during the fourth quarter, many markets shifted downward on the clock, closer to the 3:00 position, which signals markets are at or very close to stabilization levels.
During the fourth quarter, we witnessed two markets shift towards the “stabilizing market” position. Washington, DC has been the chief beneficiary of the ballooning of the government, posting more than a million square feet of occupancy gains in recent quarters to meet the growing federal agenda and payrolls. Pittsburgh, on the other hand, has been driven by private sector diversification and growth. Pittsburgh, once a blue-collar manufacturing dominated city, has transformed into a cutting-edge city where clean and green technologies have sprouted and flourished and as a result, provided demand within the office market. While segments of both of those market could still fall in 2010, prospects for stabilization have been rooted.
Based on diversified economies based more on energy, healthcare and education, Raleigh / Durham, Baltimore, San Antonio and Minneapolis are next likely markets to approach stabilization levels and recover the earliest. Development-heavy markets like Atlanta and Miami, vacancy-laden markets like West Palm Beach, Tampa and Orlando and demand-dry markets like Detroit and Cleveland have the longest road to stabilization and recovery ahead as supply-demand fundamentals remained out of sync.
We expect leasing activity levels to continue to rise and sublease space to continue to fall throughout 2010, however, enhanced space options will present tenants with continued leverage throughout the year in nearly every geography and product class. Rents in the vast majority of office markets fell further in the fourth quarter and will continue to fall through the first half of 2010, at a minimum, before rents hit stabilization levels.