Third Quarter Brings an Uptick in Office Leasing in Tech-Heavy Markets

Strong tenant demand in the third quarter of the year caused leasing activity to spike 11.1 percent to a two-year volume high of 62.4 million sq. ft., according to a third quarter 2017 office report from real estate services firm JLL, which attributes the bump largely to new product coming online in supply-constrained markets. Leases larger than 250,000 sq. ft. accounted for 17.5 percent of all leasing activity during the period.

The majority of leasing activity occurred in markets where there is a strong presence of technology companies or knowledge-intensive industries nearing full employment. In fact, a Cushman & Wakefield third quarter office market report noted that 28 percent of all leasing activity in the third quarter occurred in just five of the 87 markets it tracks, including the Silicon Valley, Raleigh/Durham, N.C., Brooklyn, N.Y., Seattle, and San Diego.

JLL researchers report that office rents grew in the third quarter to an average asking rate of $24.81 per sq. ft. Asking rents at class-A buildings rose by about $1 per sq. ft., or 3.3 percent, to roughly $31.00 per sq. ft.

However, rent growth was skewed by the injection of new product into the marketplace, as new space commands a 41.7 percent rent premium, notes Scott Homa, JLL’s director of U.S. office research. “Statistically, we’re seeing year-over-year rent growth, but there is underlying distortion by concession packages that are less visible,” he points out, explaining that there’s been an uptick in concessions, especially in the way of tenant improvement allowances.

This is true for new product as well as second-generation office stock. Initially, tenants going into new office space may suffer “sticker shock,” but Homa says that “concessions make it more palatable.”

Second-generation buildings are still experiencing healthy leasing velocity, he adds. They may have less attractive features than new construction, including inferior column spacing and less natural light, but tenants can find value in older office space in desirable locations. These buildings may not be their top choice, but rents are flat or even discounted in some markets, Homa notes.

Meanwhile, new office construction tends to be concentrated in select markets, according to JLL. For instance, completions of significant new projects in New York’s Hudson Yards; Seattle’s CBD and Lake Union area; Washington, D.C.’s CBD, and Dallas’ Uptown district and far north submarkets will have far-reaching effects on supply and demand dynamics in those markets.

Space availability increased by 1 million sq. ft. or more in 12 of the 87 markets tracked by Cushman & Wakefield. Led by Chicago (with 5.5 million sq. ft.), Silicon Valley (with 4.1 million sq. ft.) and Denver (with 3.8 million sq. ft.), total available space in those 12 markets has increased by 30.7 million sq. ft.

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