JLL Sees Recovery Signs for Office Market

The national office vacancy rate rose by 20 basis points to 18.3% in Q1 2010, but this increase was relatively stable compared to the vast losses of space, more than 200 basis points, from quarter to quarter in 2009, said JLL officials. Also, the amount of available sublease space nationwide has dropped for the past two quarters, says John Sikaitis, JLL's director of national office research.

However, the amount of shadow space, offices leased by tenants but not used, has grown at large firms, Sikaitis tells GlobeSt.com. "Many large corporate tenants have excess space, in excess of 9%, that will absorb any new growth this year," he says. "For example, when company X goes out and hires 10 people in the next three-to-six months, they won't need more room. Because of this, we believe the first wave of growth is not going to result in much occupancy gains."

Some of the smaller firms are maxed out on space, so when expansion comes may need more floors, Sikaitis says. However, more than a few companies with leases expiring are looking to move into less space, even though headcounts haven't changed, he says. "What used to be a flight to quality is now a flight to efficiency."

Sikaitis says the other sign, rents hitting their lowest point, is a positive sign. "We believe we're seeing the bottom of rent prices in the primary gateway cities, such as New York City, Chicago, Boston, Washington, DC and San Francisco. Concession packages have also topped out, and landlords are starting to gain a little confidence," he says. This trend will likely take longer to appear in secondary markets which still haven't seen the full correction from 2009, Sikaitis says.

How quickly a market will recover is broken up into two categories, Sikaitis says. "Those markets that will see expansion and renewal in 2012-14 are those areas where demand will return easily and there has been a lack of new supply," he says. "Markets where excess space already exists are not going to be as quick."