We are strongly optimistic about the continued improvement in commercial real estate in 2011.
CHICAGO, IL (PRWeb UK) January 12, 2011
Three consecutive quarters of positive net absorption has leveled the playing field slightly for landlords with net effective rents on the rise. The market recovery remains segmented by geography and product type; however, the gap is lessening with the national average vacancy rate standing at lower today than it did a year ago at the same time and down slightly from the end of the third quarter 2010. Additionally, the market recovery pace is quickening with an uptick in tenant demand and leasing velocity with approximately eight million square feet absorbed in the fourth quarter, according to Jones Lang LaSalle’s Fourth Quarter 2010 United States Office Outlook. Jones Lang LaSalle’s quarterly outlook tracks 41 U.S. markets and provides an overview of supply, demand and pricing conditions, statistical analyses and an outlook.
Office outlook highlights
- After hitting the bottom of the market in the first quarter 2010, the recovery throughout the U.S. office market has continued over the past three quarters and even gained momentum at the end of 2010 with respect to supply, demand and pricing.
- Tenants have stepped up activity levels and for the third consecutive quarter, both tour velocity and leasing activity increased across the vast majority of office markets.
- Absorption gains continued for the third consecutive quarter, with 8.0 million square feet absorbed in the fourth quarter and more than 13.1 million square feet throughout 2010. Nearly 70 percent of the markets Jones Lang LaSalle track finished the year with occupancy gains.
- Increased rates of absorption pushed vacancy levels down to 18.5 percent from 18.7 percent in the third quarter, and below the 18.6 percent rate at year-end 2009.
“We are strongly optimistic about the continued improvement in commercial real estate in 2011,” said John Sikaitis, Director of Office Research, Jones Lang LaSalle. “A key indicator of the industry’s recovery is the overall health of U.S. companies which have more cash on hand now than at any other time since 1952 when cash levels were being tracked. As a result, corporate balance sheets are strong and we expect M&A activity to increase, continued investment in R&D and technology, as well as most importantly for the office sector, an increase in employment which is the critical component to an overall economic recovery.”
2010 ends on a strong note
The U.S. office markets ended on a strong note which is directly related to employment upticks. Job openings in the United States. are up 32 percent year-over-year and layoffs are down nearly 19 percent from last year. This swing has impacted the office markets positively with 80 percent of the markets Jones Lang LaSalle tracks seeing an increase in tour velocity. This increase in tour velocity netted occupancy gains in 27 markets and upward pressure on net effective rental rates, as national average levels of both rent abatement and tenant improvement allowances fell. The drop in incentives and stabilization of asking rents, prompted net effective rents to rise 1.2 percent in the fourth quarter.
Absorption gains continued for the third consecutive quarter, checking in at 8.0 million square feet in the fourth quarter and more than 13.1 million square feet throughout 2010. Nearly 70 percent of the markets Jones Lang LaSalle tracks finished the year with occupancy gains with New York and Washington D.C. showing the strongest traction. Many of the Midwest markets – Chicago, Cleveland and Detroit – showed negative absorption due to trailing employment markets. The increased rates of absorption pushed vacancy levels down to 18.5 percent from 18.7 percent in the third quarter (and below the 18.6 percent rate at year-end 2009).
“The U.S. office market recovery continues to be segmented by geography with the coastal cities continuing to improve at a faster clip; however, nearly all markets are seeing signs of recovery,” said Sikaitis. “Markets that have strong technology, for-profit education systems and energy – both clean and traditional – are showing marked signs of recovery.”
Industry demand drivers continue to be atypical office sectors
Technology is back with demand levels heating up significantly from tech firms focused largely in social media, gaming, mobile technology and cloud computing. Markets that have experienced the biggest boom so far have been Austin, the San Francisco Bay Area, Boston, Seattle and Washington, DC. Denver, Houston and San Antonio are experiencing increased demand due to their saturation in the energy field, whereas markets positioned closer to major military bases like San Diego and Atlanta are benefitting from veterans coming home and enrolling in advanced coursework at for-profit education systems.
“For-profit education systems have never registered as a driver on the national leasing front, but in 2010, they represented 15.0 percent of the total national occupancy gains,” said Sikaitis. “Because this sector is facing possible regulation in 2011, new, long-term demand remains questionable, but until then, the expansions continue to add up.”
Leasing activity and demand will gain steam in 2011 enhanced by corporate confidence, increasingly strong balance sheets and companies' productivity levels approaching peaks will prompt hiring across industries. Jones Lang LaSalle anticipates continued absorption, vacancy to further their downward trajectory and demand levels to increase stemming from the technology, financial and service sector.
“The fundamentals are all aligned and we expect absorption to more than triple in 2011, pushing vacancy levels down closer to 17.0 percent from 18.5 percent today,” predicts Sikaitis.
Next year, users looking for large blocks of space will be at a disadvantage as blocks of space 75,000 square feet or more are becoming rare, giving owners the opportunity to raise rents and decrease concessions. Look for net effective rents among large blocks to increase in the 7.0 to 10.0 percent range in 2011. However, the tenant that needs smaller to mid-size space needs still opportunity in most market segments. As a result, rents will likely remain somewhat stable, increasing by no more than 1.5 percent in this market segment.