U.S. Office Market Ends 2011 Up 34.6 Million SF; Similar Pace of Recovery Expected in 2012

CHICAGO, Jan. 6, 2012 /PRNewswire/ -- The Year of the Rabbit in 2011 wasn't as peaceful and tranquil as the Chinese zodiac predicted, but the U.S. office markets did end the year on a high note.  A total of 10.3 million square feet of space was absorbed in the fourth quarter of 2011, posting the seventh consecutive quarter of occupancy gains and bringing the total amount of space absorbed in 2011 to 34.6 million square feet, nearly three times the amount of occupancy gained the previous year. Many hope the Chinese zodiac holds true in 2012 for the Year of the Dragon, which is an auspicious sign of power and good fortune. In its Fourth Quarter 2011 United States Office Outlook, Jones Lang LaSalle predicts continued upward momentum, but with minor change in rents or concessions and occupancy growth similar to 2011 as euro discord and the U.S. political stalemate continue to hinder strong employment growth and true economic expansion across vast parts of the country.  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.

Fourth-quarter/Year-end office performance highlights

• Office job creation grew at an annualized rate of 1.2 percent with approximately 1.6 million jobs created over the past 12 months across the U.S. However, office jobs grew at a much faster clip (increasing at a rate of 1.8 percent year over year), fueling about 475,000 new office-using jobs.
• More than 34.6 million square feet of space was absorbed in 2011 compared with 13.4 million square feet in 2010. Nearly 86 percent of the markets Jones Lang LaSalle tracks posted positive net absorption. Five markets posted negative absorption for the year.
• Total vacancy levels closed 2011 at their lowest level since Q2 2009; total U.S. vacancy levels dipped to 17.6 percent in the fourth quarter, 20 basis points below the previous quarter and 90 basis points below the Q4 2010 level of 18.5 percent.
• CBD rents led the gains throughout the course of the year increasing 4.8 percent year over year, while suburban rents remain highly segmented and only rose a minute 1.1 percent in 2011 pulling back 0.2 percent in the fourth quarter

"The year ended on a positive note, but the pace and scale of the recovery definitely remained highly segmented by both location and product type," said John Sikaitis, Director of Office Research, Jones Lang LaSalle. "We expect a continuation of slow, methodical growth in 2012 with the November elections being a possible inflection point in the continued recovery. Space options will continue to diminish especially across energy-and technology-rich locations, fueling measureable rent growth in those geographies, but minimal rent appreciation will be realized outside of those specific locations due to more contained expansion and growth prospects."

Major disparity between CBD and suburban recovery

Current vacancies remain elevated and rents are still nearly 10.0 percent from their 2007 peak, but momentum is gaining and a bottom looks near for those markets that are still on the downward trajectory. At the end of 2011, total vacancy levels across the U.S. dipped to 17.6 percent, 20 basis points below the third quarter level and 90 basis points below the fourth quarter 2010 level of 18.5 percent. National Central Business District (CBD) vacancy rates ended the year at 14.2 percent compared with the national suburban vacancy rate of 19.6 percent. This discrepancy in recovery is manifesting itself in rents as well.

On a national basis, U.S. office rents rose a mere 2.8 percent over the course of 2011, driven largely by bargains in primary coastal urban markets and pockets of the markets dominated by the technology and energy sectors. In the fourth quarter, office rents rose.0.9 percent overall; however, the disparity between CBDs and suburban office markets was clearly evident with fourth quarter rental rates rising in the CBD by 2.7 percent and declining by 0.2 percent in the suburbs.

As of the end of the fourth quarter, 30 percent of the markets Jones Lang LaSalle tracks were landlord-favorable, 23.3 percent were neutral and nearly 47 percent continued to offer tenant-enhanced leverage. The CBD markets recovering most quickly include Austin, Tex., Midtown South in Manhattan and San Francisco. Suburban gains were  focused in the Northern California markets of East Bay, San Francisco and the San Francisco Peninsula, while Cambridge, Mass., exhibited notable gains  fueled by tech and biotech.

California and Texas go big

In total, 10.3 million square feet of space was absorbed in the fourth quarter of 2011, besting the third quarter total by nearly one million square feet and almost outpacing the annualized 2010 totals. For year-end 2011, 34.6 million square feet of space was absorbed across the 43 office markets tracked. This compares with a total of 13.4 million square feet absorbed in 2010. California and Texas dominated the occupancy gains recorded during 2011. California, which comprises 15.3 percent of the overall U.S. inventory, accounted for 25.7 percent of the total occupancy gains nationwide.

Colin Yasukochi, Director of Research for the Northwest region said, "High-tech industry growth during 2011 drove the best market performance in more than a decade. Rents grew by 20 percent and vacancies declined 2.5 percentage points on 1.8 million square feet of net absorption during the year. Some are raising concerns about the market trajectory and depth of high-tech based demand. Data indicates more growth ahead and another strong year in 2012, but posting numbers achieved in 2011 may prove challenging considering the lack of expansion from other industries and the amount of new supply expected to enter the market."

Meanwhile Texas, which accounts for 10.5 of the total U.S. inventory, registered 15.9 percent of all occupancy gains. These two states alone accounted for 41.6 percent of all absorption in 2011.

"Nearly 50 percent of the occupancy gains were driven by technology and energy-heavy markets segments despite those markets comprising just 23 percent of the office inventory and we expect the majority of gains in 2012 to take place in those same energy and tech markets clusters," said Sikaitis.

Housing bust markets appear to be bottoming

"We also saw some of the housing markets that took a beating make a comeback with Phoenix, Orange County and many major Florida markets moving to solid ground and starting to rebound at paces higher than the national average due to diversification of those regional economies away from the housing industry growth that dominated expansion in the last up cycle," said Sikaitis.

This bodes well for the recovery in the hardest hit markets. The Central Florida office markets, Tampa Bay and Orlando, began to tighten in 2011 and ended the year with a massive increase in absorption and tenant demand. While both regions saw strong demand from tenants looking for call center space, the nature of these tenants tended to be quite different. Stephen Siena, Research Analyst for Tampa and Orlando said, "Demand for new space in Tampa Bay was driven largely by healthcare services and providers, while Orlando's office sector saw increased demand as its tourism sector boomed. With the sector growing at an annualized rate above 6.0 percent, the year saw many leases from call centers supporting hotels, resorts and timeshare operators. Our forecasts anticipate another strong year for tourism in 2012 as Brazilian tourist visits, which increased by nearly 20.0 percent in 2011, continue to flock to the region."

On the other side of the country in California, the nature of Orange County's recovery will continue to be highly localized as pockets within each submarket show signs of improvement that countywide market averages have yet to reveal. Bryce Mordoff, Research Analyst for Orange County adds, "The Airport Area and South County submarkets have generally outperformed the rest of the market, specifically in areas with quality space in close proximity to surrounding amenities. It is likely that this trend will continue into 2012 as the rest of the market churns before collectively showing tangible evidence that the recovery is taking place across the county. The single most important factor influencing the pace of the office sector's recovery is job growth, which is not expected to rebound until late-2012 and early 2013."

New York and Washington, DC will lag recovery in 2012

The nation's largest two markets, which comprise 20.0 percent of all national space across the country, New York and Washington DC, are likely to remain stagnant through 2012 due to European debt woes and subsequent effects on the financial sector and the negativity permeating Washington politics and surrounding environment. "Already, leasing  over the past four to five months in both markets has declined by approximately 25 to 35 percent, rents have leveled and absorption gains have all but stopped due to confidence of most tenants falling quickly from  the beginning of last year due to uncertainty across the financial sector and discord across the political realm," Sikaitis said.

The Manhattan commercial office market, after beating expectations for most of the year, weakened in the fourth quarter under the weight of Wall Street uncertainty and a diminishing employment outlook. Despite the continued diversification of the New York City economy, the office market remains highly correlative to financial services employment. According to a report by the New York State Comptroller, approximately 10,000 securities industry workers could lose their jobs through 2012, bringing total reductions to 32,000 since January 2008.

Tristan Ashby, Research Director for Manhattan says, "Beyond Wall Street, recent employment projections have been positive, but modest. Private employment is expected to slow to 0.7 percent in 2012, followed by an average growth rate of just over one percent from 2012 through 2014. Still, Manhattan is ultimately a supply constrained market and even modest growth will spur vacancy lower and rents higher, especially in the most desirable submarkets including Midtown South -- New York City's technology and new media hub. Our current models suggest an uneven market through 2012, with disparate pricing and vacancy depending on the asset and location. Uniform and substantial increases in rent are unlikely until 2013."

The slow and indecisive leasing environment witnessed in Washington, DC over the past year appears destined to persist into 2012 as a result of looming austerity measures, a gridlocked Congress and pending election cycle.

The office market in the Washington, DC region wavered in late 2011 as leasing velocity plummeted and few new space requirements surfaced. Reduced tenant demand, combined with stable levels of office space, produced a modest uptick in vacancy rates and a downward shift in rents. Leasing activity throughout the region was characterized by increased renewal activity and moves by tenants to achieve greater operational efficiency. Submarkets benefitting from mass-transit accessibility and mixed-use amenities, like Rosslyn-Ballston, Bethesda-Chevy Chase and downtown Washington, DC, captured the majority of leasing activity, while outlying areas suffered from oversupply and a distinct lack of tenant demand.

Scott Homa, Director of Research for the Mid-Atlantic region said, "Without clear guidance on agency budgets – and an uncertain future in terms of government leadership – tenants across industry sectors in Washington, DC are likely to maintain their 'wait-and-see' approach to real estate decisions heading into the November 2012 Presidential election and potentially beyond."

The year ahead

Overall U.S. job creation, which slowed by approximately 25 percent in the second half of 2011, grew at an annualized rate of 1.2 percent. The last time the national economy experienced this rate of job creation was in the spring of 2007 when confidence levels were up. The private sector grew at an annualized rate of 1.7 percent creating about 1.9 million jobs in 2011. Of all of the jobs created over the past 12 months, more than 475,000 were office-using positions, representing an annualized rate of 1.8 percent, higher than the overall and private sector rates.

"The U.S. hasn't ever experienced this slow a recovery two years post recession," said Sikaitis. "In order for the U.S. to see substantial recovery in the months ahead, businesses must continue to amass confidence, invest in R&D, technology, expansion and most importantly people. Until then, expect a slow and arduous climb with industry pockets driving the majority of growth around the country."

Jones Lang LaSalle's statistics sourcebook

To review more detailed overview of Jones Lang LaSalle's third quarter research analysis, please link to the following statistics and charts:

• Q4 2011 National Office Statistics: Provides detailed real estate data for the metro area on a quarterly basis. Data includes stock, completions, vacancy, rents, absorption, and new construction for buildings at the overall metro and submarket level.
• Q4 2011 Office Clock: This analysis of the Jones Lang LaSalle office clock demonstrates where each market sits within its real estate cycle.
• Q4 2011 Local Office Highlights: Review a detailed, quarterly look at leasing, sales and construction activity for individual metro areas in the United States. The report includes details on specific lease transactions, new construction projects and sales transactions.
• Q4 2011 Local Office Statistics: Detailed real estate data for individual metro areas in the United States on a quarterly basis. Data includes stock, completions, vacancy, rents, absorption and new construction for class A and B (class C in limited markets) buildings at the overall metro and submarket levels.

About Jones Lang LaSalle

Jones Lang LaSalle (NYSE:JLL) is a financial and professional services firm specializing in real estate. The firm offers integrated services delivered by expert teams worldwide to clients seeking increased value by owning, occupying or investing in real estate. With 2010 global revenue of more than $2.9 billion, Jones Lang LaSalle serves clients in 70 countries from more than 1,000 locations worldwide, including 200 corporate offices.  The firm is an industry leader in property and corporate facility management services, with a portfolio of approximately 1.8 billion square feet worldwide. LaSalle Investment Management, the company's investment management business, is one of the world's largest and most diverse in real estate with $47.9 billion of assets under management. For further information, please visit our website, www.joneslanglasalle.com.

SOURCE Jones Lang LaSalle

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