Experts are saying that 2014 will be the year landlords see more opportunity for profit as office vacancies decrease and the U.S. economy continues to gain momentum. The combination of less workspace and the potential for more workers is encouraging brokers to tell tenants that now is the time to lock in low lease rates before they start to rise. An overall look at national markets for office space shows that most of them are in a rising phase of performance with only a few like Seattle, Houston and San Francisco in a peak phase, meaning top-level rents are already being won from tenants. For more on this continue reading the following article from National Real Estate Investor.
This year will be the year of the office landlord, brokers say, with vacancies dropping in many markets, slow-but-steady job growth and the continued economic recovery.
The U.S. office market has now registered occupancy gains for 14 consecutive quarters. Vacancy fell to 15.1 percent in the fourth quarter, 220 basis points lower than its recessionary peak of 17.3 percent, according to a recent report from commercial real estate services firm Cassidy Turley. Kevin Thorpe, chief economist and principal at the company, says rents are now rising in more than half the country.
“What I tell tenants is that today’s theme is that the window is closing to grab the historically low lease rates that will last long periods,” says Thorpe. “Of course it depends on the market and what kind of space, but there are a few markets where the window has closed already.”
About 13 million sq. ft. was absorbed in the fourth quarter, and 40 million sq. ft. was gained during 2013, according to a Jones Lang LaSalle fourth quarter report. The company says 80 percent of the country’s roughly 100 major downtown and suburban markets recorded positive absorption gains in the fourth quarter. This translated into cash, as almost 80 percent of the national markets also increased office rents during the period, with lease rates ending the year 3.5 percent higher than at the end of 2012.
Both Thorpe and John Sikaitis, managing director of local markets and office research with JLL, say barring an unexpected setback, 2014 should place the landlord firmly in the driver’s seat. Less than 10 percent of the national markets will be tenant-favorable by December, Sikaitis says.
“Unexpectedly, we got to hit the reset button,” Sikaitis says. “The resolution of the budget removed the last impediment to growth that was felt in 2013, and we expect the economic environment to continue to expand.”
Sikaitis says that for the first time since the recession began, JLL’s popular “overall office clock,” which is a visual way to compare the various markets’ performances, shows every market safely out of the “falling phase” and most markets at the end of the “bottoming phase” or in the “rising phase.” Only Seattle, Houston, San Francisco and Dallas are seen as possibly peaking, but those markets also show that the technology and energy markets still hold the most demand. San Francisco far outshines the rest of the country in rent growth and demand, and Texas markets absorbed 8.4 million sq. ft. in 2013.
However, New York City and Washington, D.C., are making a comeback, recording more than 5 million sq. ft. of absorption during last year. Sikaitis says financial and law firms will likely increase leasing this year, and new growth industries such as health care, will muscle into office space. The office properties that may still suffer vacancy in 2013, he says, are the suburban complexes that are not keeping up with new employee demands for a 24-hour urban environment.
“The sign-on-the-highway corporate park is becoming obsolete as Millennials replace the Baby Boomer generation as the stewards of the office market,” Sikaitis says. “New employees want walkable, transit-orientated workplaces. Those suburban markets that have pockets of new properties that are close to amenities and transit will compete aggressively with the highway properties.”
This article was republished with permission from National Real Estate Investor.