CHICAGO—As the US economy and overall office market continue toimprove, more cities have approached the tipping point between alandlord's market and a tenant's market, according toCBRE's latest quarterly OccupierView report, whichanalyzes the nation's office markets from the tenant perspective.Tenants in most downtown markets have begun to experiencetightening conditions that have curtailed availability and boostedcosts, the report finds, though suburban office markets haveexperienced little change.

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“There has been gradually improving demand,” ColinYasukochi, director of research and analysis for CBRE,tells GlobeSt.com. “Healthy job growth means that companies needmore space to put these employees.” In fact, “by virtually allmetrics, the second quarter of 2014 was one of the most robust inyears in the office market with more than 15-million-square-feet ofpositive net absorption—the highest quarterly figure since2007.”

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“And outside of the hot markets,” Yasukochi says, such as NewYork, San Francisco and Silicon Valley, “developers are notcreating any new supply.” Therefore, “we're now seeing asupply-demand imbalance in many key markets. This is very positivefor landlords, but challenging for tenants.”

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The US vacancy rate has declined over the past three years, andin the second quarter it hit 14.5%, the mid-point between itspre-recession low and recessionary peak. Downtown markets in citieswith a big focus on energy such as Denver and Houston, and coastalcities such as San Francisco, Manhattan, Boston and Seattle havealready hit the tipping point and become landlord-favorable. ButCBRE found a geographically diverse set of cities includingDallas-Ft. Worth, Los Angeles, Philadelphia, Chicago andWashington, DC, that, although still tenant-favorable, have movedup to that tipping point.

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And in the short-term, Yasukochi expects the tightening tocontinue. “By and large we're not expecting to see the ramp-up innew construction until 2015.”

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The high-tech sector has led leasing activity in almost everymarket, CBRE found. Its portion of the nation's office business“has steadily increased since 2010,” Yasukochi says. “That is whenthe tech industry started its current expansion.” In 2013, the techsector comprised 14% of the major office leasing activity in thetop 57 markets, but in 2014, that number increased to 19.9%. “It'sa big jump; it ramped up sharply.”

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All of this activity has changed the office markets in manycities, especially tech-heavy ones like San Francisco, New York,Boston and Chicago. “Tech firms have tended to be more attracted tohistoric or creative-type buildings, primarily low-rises withlarger floor plates,” Yasukochi says. But those spaces, onceplentiful in neighbourhoods like Chicago's River North or MidtownSouth in Manhattan, have become scarce. Tech firms “have respondedby adapting to the high-rise format,” further increasingcompetition in downtown areas, especially the prime locations witheasy access to great transportation and desirable amenities.

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The shift toward landlords and rising rents has tenants puttingmore emphasis on cost-cutting. This can include using space moreefficiently and cutting down on their footprints, he says. Inaddition, “we're seeing more tenants look at markets from a costperspective.” Some may even decide to relocate from theincreasingly expensive CBDs to the suburbs. Or as an alternative,some could break off sections or activities such as finance and“stick it in Phoenix or similarly low-cost market.”

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Brian J. Rogal

Brian J. Rogal is a Chicago-based freelance writer with years of experience as an investigative reporter and editor, most notably at The Chicago Reporter, where he concentrated on housing issues. He also has written extensively on alternative energy and the payments card industry for national trade publications.