Office Recovery in Full Motion

CHICAGO-The tale of two office markets, the cities with strong fundamentals and the secondary markets that are still struggling, is starting to balance more toward positive territory, according to Jones Lang LaSalle’s first quarter national office report. With strong showings by areas such as Silicon Valley in California, Boston, Seattle and Houston, the US office market has sustained four consecutive quarters of occupancy gains, the company says, and national vacancy decreased to 18.4%.

About 4.5 million square feet was absorbed in the first quarter 2011, according to JLL. Washington, DC, New York City and San Francisco have continued extensive gains in occupancy since the country started its upward trend from the recession, says John Sikaitis, director of office research. The first two cities have gained from location, quality product and demand, but he says the technology market has seen significant gains in the past few months. “The tech sector is on fire, those markets have completely turned in to landlords’ markets,” he says.  Sikaitis says double-digit rent growth has been realized in submarkets like Palo Alto, Century City in Los Angeles, South of Market in San Francisco, Uptown in Dallas, Capitol Hill in Washington, DC and the Back Bay in Boston.

Even though employment for the country has only increased by a lackluster 1%, Sikaitis tells GlobeSt.com that the professional sector employment figures have jumped 3%, with strong growth coming from key markets. “The financial services sector has seen its light turned on, there’s expansion there,” he says.

It’s true that office product in cities such as Chicago, Miami, Phoenix, Atlanta, Dallas and Philadelphia have been bouncing along the bottom, he says. However, he says rents have stabilized in most of the secondary markets. “Last year, we only saw a handful of markets tightening,” he says. “About 70% of the markets saw tightening in the first quarter of 2011. Tour activity is up, and there’s deals in the marketplace, even though not a lot closed in the first quarter.”

According to JLL, the national office market is fully underway and will gain momentum in the coming quarters due to record corporate profits generating new demand levels and organic growth from the corporate sector. There’s some lag still from the secondary markets, but the strong showings by the coastal cities will lead the momentum, Sikaitis tells GlobeSt.com. “I don’t see a flat 2011. The flight to quality will continue, as companies move up from class B to class A space, or move from the suburbs to the CBD, as firms see the window of opportunity start to close.”