2011 Continues Tale of Two Office Markets

CHICAGO-According to Jones Lang LaSalle’s recent National Office Occupier Outlook, tenants have two theories to consider: Job fundamentals and consolidation trends continue to dog the tenant market for class B properties, but class A office owners are getting confident of demand, and large block space is becoming scarce in major markets.

Lauren Picariello, VP of occupier research for JLL, tells GlobeSt.com that landlords are starting to gain the upper hand in New York City; Raleigh-Durham, NC; San Francisco; and Washington, DC, thanks to government and technology jobs seeming untouched by the economic downturn. The federal government was the most active occupier of space, leasing nearly 4.5 million square feet in Washington, DC alone last year, according to JLL. Other pockets exist, Picariello says.

“It’s definitely a situation of being mindful of the market you’re in, and what property type,” she says. Class A space is starting to garner demand across all markets, as are large blocks, while smaller spaces and Class B buildings continue to suffer from too much competition. Year-end 2010 Class A net absorption was at 18 million square feet, compared to a negative 3.4 million square feet in the class B market, JLL researchers say.

Also, almost all of the absorption increases of the past six months have come from CBDs, Picariello says. “The gap between vacancy in the cities and suburbs is starting to spread further apart,” she says. The national vacancy rate declined to 18.5% in the fourth quarter, dropping 20 basis points from the previous quarter, while the average US asking rent remained stable at $27.20 per square foot.

Demand could even spark new development in select markets, the company says. According to JLL research, large-block-seeking tenants need to move to lease in the next nine months. Though 94% of US markets are tenant-favorable now, only 31% will be in 2012, according to the company. “Occupiers that need to be in key US cities, especially those with large space requirements, will begin to see fewer and fewer choices, and stronger competition,” Picariello says.