CHICAGO—Leasing activity in the US office market slowed down considerably in the fourth quarter, resulting in just 6.5 million square feet of net absorption, according to an analysis from JLL. Researchers at the Chicago-based firm put much of the blame on a lower number of leases larger than 500,000 square feet.

There were no leases of this size signed during the fourth quarter, and 2016 saw a 43% drop in these “mega leases.” However, JLL expects the overall office market to bounce back in 2017, and giant leases will probably play an important role.

“This was likely a short-term blip,” Scott Homa, director of US office research, JLL, tells GlobeSt.com. “I don't want to overstate the importance of the election,” but along with concerns about Brexit and other international worries, “it could have delayed the decision-making process.” As a result, several leases that ordinarily would have been signed got pushed into 2017. But since the “equity markets seem to have taken the election in stride, these deals which had been at the goal line will now move toward execution.”

He adds that the company is tracking several firms that already have letters of intent for spaces larger than 500,000 square feet. Most of these mammoth deals have been and will continue to be in the top gateway markets such as New York, Chicago and San Francisco., and involve a relative diversity of sectors ranging from legal services, financial services, government and tech.

But it is tech which will probably carry the market forward. Although near-full employment and a shortage of skilled talent has suppressed leasing activity in several major technology hubs, tech represented 24.4% of national leasing activity. That helped offset the desire among legal and financial services tenants to downsize their offices through the more efficient use of space, and in some cases, reduced employment.

“Clearly, we are in a digital age,”Homa says. “Tech is starting to pervade all sectors of the economy and our lives.” Jobs once handles by legal and financial clerks have been transformed into tech jobs, “and that shows no sign of slowing down.”

One thing that hasn't slowed down is the rate of new construction. In the fourth quarter, volumes rose once again and now stand at a cyclical high of 110.5 million square feet, JLL found. Furthermore, projected completions for 2017 will probably exceed demand. But even though that will almost certainly push vacancy rates higher and slow rent growth, Homa remains confident that the market can sustain these changes and continue to expand.

“There is a tremendous amount of new construction in the pipeline,” he says, and in that aspect “we may have hit a peak.” But that new supply is also “relatively well-aligned with demand.”

The amount of new construction activity in Chicago is a good example of what is happening in the nation's gateway markets. As reported in GlobeSt.com, office developers will soon put the finishing touches on several trophy towers in the West Loop, adding millions of square feet to the CBD's inventory. Although leasing activity at these properties has been robust, this flight to quality will open up a lot of vacancies elsewhere in the downtown, and experts believe getting those spaces filled will take a couple of years.

Still, developers have added less new inventory than was built during the last building boom, one that was followed by a deep recession. And with the economy expected to expand in 2017, Homa “doesn't think any alarm bells should go off.”

Instant Insights /

Mega Leases Fall Off, But Should Return in 2017

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