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The combination of an improving job market, the continued technology boom and a limited pipeline of new supply has allowed landlords to take back control of the U.S. office sector, with just about every major city, and some secondary markets, experiencing sustained rent growth.
Office rents in the major U.S. markets now average $28.37 per sq. ft., a high point not seen since before the recession. That figure might climb by another 4 percent this year, says Alan Pontius, national director for office and industrial with brokerage firm Marcus & Millichap, in large part due to the slow ramp-up in new construction. On a national basis office space absorption has outpaced completions each year for the past five years, Pontius notes.
“This year, we’re forecasting a little shy of 80 million square feet of new additions to the marketplace,” he says. “But at the same time, we should see almost 87 million square feet of positive absorption. It just makes sense that will lead to higher rents.”
Office tenants, seeing their talent pool tighten as unemployment drops below 6.0 percent, are now realizing they need to work harder at attracting the best job candidates than on cutting occupancy expenses, according to Pontius. A global outlook released this month by commercial real estate services firm CBRE singled out five U.S. cities that are likely to see rental growth above 5.5 percent in 2016.
A sub-market of San Francisco’s tech empire, San Jose, with about 101 million sq. ft. of office space, experienced an 11.8 percent increase in average office rents in 2015, Pontius says. He’s predicting the current average rent of $43.18 per sq. ft. for the market, which includes the Apple headquarters in Cupertino, will grow another 7.7 percent this year.
“The region is adding a whopping 6.4 million square feet of new space in 2016, and the vacancy rate is only at 8.1 percent. Plus, we’re forecasting that absorption will go even higher than supply, to 6.6. million square feet this year.”
Boston has ensured its status as a global leader in research and technology and attracted Bay Area tech firms, which leased 1.8 million sq. ft. of office space in the market since 2012. The city boasts a unique concentration of some of the world’s leading research institutions and human capital. With leading rankings for education infrastructure and impact, the city is among the most prolific sources of patent applications globally.
Many people currently associate Texas with lost jobs and empty offices due to low oil prices, but Dallas’ economy is highly diversified, as energy and mining make up just slightly more than 1.0 percent of total regional employment. As a result, jobs here are plentiful, and the unemployment rate is at 4.1 percent. Office rents in the Dallas-Ft. Worth are at a high of $24.15 per sq. ft. on average. The region is a major draw for relocations and consolidations, with more than 70 new headquarters locating in Dallas in the past three years, according to Foster says—more than half of them coming from California.
“People look at Dallas like they want to look at New York City, and they perceive Dallas as a soft market—but it’s just not true,” says Spencer Levy, Americas head of research for CBRE. “There might be vacancy of about 16.0 percent, but for the new space, there’s very, very tight demand.”
The lack of large blocks of space is a big story in Philadelphia, as a 2015 year-end CBRE report ranks the city as having only six blocks of 100,000 sq. ft. available, the least of any U.S. market. Vacancy in the city is down to 9.4 percent, average rents have hit a high of $28.16 in the fourth quarter, and the city saw a 33.0 percent increase in leasing activity in the past two years, according to a report from Cushman & Wakefield.
The figures are somewhat skewed, analysts say, because about 500,000 sq. ft. of space was taken off the market while One Franklin Tower undergoes a retrofit into a mixed-use complex. However, experts say the city has grown in popularity because of tech clusters growing around its universities, and one of the best rail services in the country. “Just think, you can live in moderately priced Philadelphia and it’s an hour by train to either the beach or Manhattan,” Foster says.
The areas that attract garden-style apartment developers may be older cities, like Columbus, which is the third on the list of metropolitan areas with the highest number of units under construction relative to the size of the local population, according to CoStar. Columbus still has relatively inexpensive sites on which to build.
"These are chiefly markets with plenty of land," says CoStar’s Rybczynski.
