SAN FRANCISCO-San Francisco is clearly leading a national trend toward lower office vacancies. Stronger leasing volume and more tenants growing pumped up the volume of occupied space by more than 10 million square feet nationwide during the quarter, the largest quarterly increase since the end of 2011, researchers report in Jones Lang LaSalle's Second Quarter 2013 Office Outlook.

The San Francisco vacancy rate is now 11.3%, the lowest of any major metro.  Rental rates have responded in tandem, increasing by 62.8% since the bottom of the market in 2010, surpassing the previous peak and expected to climb further as demand remains strong.

Nationally, absorption reined in the overall vacancy rate to 16.9%, marking the first time that vacancy has ducked below 17% in five years.

San Francisco remains a high-growth economy with the booming technology industry driving the market out of a recession and into an expansionary cycle that has led to significant vacancy depletion, investment sales activity, and speculative developments.

With more than 34 million square feet leased since the depths of the recession, much of which was leased to accommodate expansions, San Francisco will continue to see vacancy decline as many of the largest leases signed in 2011 and 2012 begin to take occupancy.

“The expanding U.S. private sector is driving office occupancy gains to geographies that have lagged the domestic recovery for more than two years, including Atlanta, New Jersey, Chicago, Orange County, and Sacramento, among other markets,” said John Sikaitis, senior vice president and director of office research for the Americas at Jones Lang LaSalle.

After several years in which Houston and Dallas seemed to capture the lion's share of growth in the U.S. office sector, tenants soaked up space and pressured down vacancy rates not just in those two markets, but in markets across the nation during the second quarter.

Even in New York and Washington, the two markets where tenant demand has been most sluggish of late, the highest quality office segment started to show signs of stabilizing demand and even rent growth, said Sikaitis, who also directs local markets research. “If this momentum holds, we could see a broader-based recovery in the two largest markets headed into 2014.”

Improving occupancy has enabled landlords in many markets to demand more rent. National average asking rent shot up 1.2% since the end of March, the highest quarterly increase since the recovery began in 2010. Asking rent surged 5.5% in lower Manhattan contributing to a 1.9% rent increase in New York, while Silicon Valley posted the second-largest rent increase at 4.9%. Tenant improvement allowances and free rent were down 4.7% and 8.5%, respectively, in the quarter from a year ago.

Other significant findings from Second Quarter U.S. Office Outlook:

·       Demand is finally returning to suburbs where amenities are greatest or where transit is present. This office subset still lags the overall market, but could see the most tightening in coming quarters.

·       A fundamental shift of tenants to efficiency, amenities and transit suggests that non-core suburban offices will continue to lag the rest of the market for the next few quarters, at a minimum.

·       Construction has picked up quickly in San Francisco, Austin, Houston, Dallas, Silicon Valley and a few other markets, while New York leads the nation in construction with 9.1 million square feet under way. Some market segments could enter an overbuilding cycle by the end of 2013.

·       Investors stepped up office acquisitions in many markets during the second quarter. The $1,700 per square foot paid for 767 Fifth Avenue in New York set a high water mark for sale prices in the past year.

·       The energy sector powered several office acquisitions in Denver. Los Angeles, Chicago, and Washington D.C. logged significant office transactions as well.

Jones Lang LaSalle is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. With annual revenue of $3.9 billion, Jones Lang LaSalle operates in 70 countries from more than 1,000 locations worldwide.