Signs of Confidence in U.S. Office Space

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Confidence in the U.S. office market is building, boosted by strong results in many cities.

During the third quarter, the nation's office market recorded a rent growth of 1.4 percent, the highest quarterly jump of the recovery, annualizing at a rate of 5.6 percent, according to a new market report from Jones Lang LaSalle. 

A separate report from JLL showed average office rents in Menlo Park's Sand Hill Road reached $111 per square foot, the highest in the nation.

Absorption levels continued upward momentum, increasing for the 14th consecutive month and reaching 9.6 million square feet during the third quarter. 

"This quarter, more than 87 percent of markets have posted positive absorption through October," John Sikaitis, director of office research for the Americas, JLL said in the report. "We expect these gains to move higher into 2014 as more than half of the markets reported stronger tour activity this quarter.

Several of the markets that posted the strongest moves were laggards during the domestic recovery over the last two years: Atlanta, Chicago, and Florida. Even though technology-centric markets like Silicon Valley, San Francisco, Seattle-Bellevue and Austin and energy-rich markets like Houston, Denver and Dallas-Fort Worth still lead the recovery, confidence is spreading to other demographics. 

"In recent quarters, as the economic recovery has gained momentum nationally, most other office markets have jumped into the fray of the market comeback, experiencing tightening market conditions and enhanced prospects for 2014 and 2015," JLL states. 

Leasing activity across all states reached 65.4 million square feet during the third quarter, jumping 5.9 percent from the previous quarter and 11.4 percent from last year. 

As the market recovers, tenants are facing limited leverage for office space. 

Total vacancy in the U.S. office market dropped to 16.8 percent during the third quarter, the lowest since the first quarter of 2009. As a sign of increased landlord confidence, concession packages, including free rent, dropped to 2009 levels during the third quarter, a 20 percent decrease from the market's peak. 

Riding on the positive numbers of the U.S. office market, the office construction pipeline is also beginning to pick up, exceeding the 50-million-square-foot mark for the first time since 2007. The high-tech and energy-centric regions are leading construction activity, as the sector led the office recovery in recent years. 

"The U.S. office market is poised to maintain its recovery as the geographic spread widens," Mr. Sikaitis said. "Keep an eye on external economic influences particularly on the U.S. political front as potential thwarts to the current momentum."