Western U. S. dominates gains; high-tech and energy still driving demand

The U.S. office market absorbed approximately 9.4 million square feet of space in the third quarter of 2011, bringing the year-to-date total to more than 24.5 million square feet, according to Jones Lang LaSalle’s Third Quarter 2011 United States Office Outlook.

That number eclipses 2010 levels by more than 75 percent. While vacancy levels continue to decline, the 2011 Office Outlook says that a job slowdown could impact the spike in occupancy growth.

Jones Lang LaSalle’s quarterly outlook tracks 43 U.S. markets and provides an overview of supply and demand, pricing conditions, a statistical analysis and an outlook on future performance.

Third-quarter office performance highlights

• Vacancy levels continue to decline, falling 30 basis points to 17.8 percent in the third quarter; it’s the first time vacancy dipped below 18 percent since the second quarter of 2009.

• Absorption gains and momentum continue to be driven in areas with high-tech and energy companies. The western half of the U.S. has seen the most absorption.

• Third-quarter 2011 leasing activity levels have fallen 12 percent compared with 2010 third-quarter leasing activity.

• Rents continue to increase marginally; however, concessions also have ticked upwards for the first time in several years, showing that landlords increasingly try to lure tenants.

“We are starting to see a lag develop between office market performance and the current economic volatility,” says John Sikaitis, director of office research, Jones Lang LaSalle. “We typically see transactions slow during the summer months; however, this slowdown in leasing volume was compounded by the declining confidence levels of senior executives who have once again put hiring and growth plans on the sidelines.”

Stable rents

Overall, rents across the United States remained stable in the third quarter, inching up approximately 30 cents to $27.74 per square foot. The growth was largely driven by rent increases in only a few markets rather than movement across all markets. The San Francisco Peninsula, San Francisco, San Antonio, Miami, New York, Philadelphia and Austin markets displayed the largest quarter-over-quarter rental increases, with the San Francisco Peninsula and San Francisco markets commanding premiums greater than 3 percent compared to the second-quarter 2011.

In contrast, the industrial Midwest markets of Detroit, Cleveland and Cincinnati, along with the Sunbelt markets of Phoenix, Jacksonville and Tampa Bay, displayed the largest declines over the quarter. Each market demonstrated rents moving downward at rates greater than 1 percent for the quarter.

“The increased uncertainty in the global economy, combined with smaller amounts of near-term lease rolls due to ‘blend and extend’ leases undertaken in 2010, have pushed leasing activity levels down substantially from prior periods,” says Sikaitis. “While we continue to see positive absorption overall, only select markets are seeing real rental rate increases.”

Source: INFORMATION, INC.