Office Rents Show Strong Growth in Q2, Thanks to New Jobs

Office Rents Show Strong Growth in Q2, Thanks to New Jobs

Preliminary reports for the second quarter show that office rents are experiencing strong, steady increases in most U.S. markets due to a lack of new construction and renewed hiring in the professional services sector. Experts say this trend should continue as long as current world events don’t get out of control.

According to real estate services firm DTZ, U.S. office rents increased 2.7 percent in the second quarter, the strongest quarterly gain since 2008. Office rents rose in 59 out of 80 metropolitan areas tracked, and just more than 20 million sq. ft. was absorbed in the second quarter, up 15.3 percent from the same period a year ago.

Rebecca Rockey, an economist with DTZ, says rent growth has hovered around 2 percent for the past six quarters, but this is the first time since the recession that rent growth has gone over 2.5 percent. The company’s full report will be available on July 17.

Ken McCarthy, senior managing director with real estate services firm Cushman & Wakefield, said in a recent report that U.S. job growth points to stronger demand for office-using industries. The U.S. economy added 223,000 jobs in June, with 91,000 of those jobs in the financial, professional and business services sectors, the largest increase in those sectors in eight months, McCarthy said.

The job growth is expected to continue despite turbulence in the broader economy due to the Greek debt crisis and China’s plunging stock market, Rockey notes.

“We’re still seeing office tenant demand way outpace what’s being built in the market, and it’s not just the technology industry anymore,” Rockey says. “The professional sector in general is adding jobs in most CBDs. For example, law firms are starting to turn around; they hit a point where they’ve downsized enough. And though square footage per worker has been shrinking to about 170 square feet, we see that stabilizing in the next 12 to 18 months.”

A second quarter report released this week by real estate services firm JLL lists the current average rental rate at nearly $30 per sq. ft. Julia Georgules, vice president of U.S. office research for JLL, said in a statement that more than 40 percent of second quarter transactions totaling 20,000 sq. ft. and larger represented expansions. This rise in leasing activity justifies the nearly 19 million sq. ft. of new development expected to be delivered to the market by the end of the year, she said.

“However, this space is only pre-leased at 48 percent and even less for spec developments at 30 percent, providing more options to tenants while simultaneously encouraging them to expand within their building, their market or into other markets.”

Office rents have shown enough growth that some U.S. markets broke into the top 10 markets on CBRE’s Global Prime Office Occupancy Costs list. Midtown Manhattan moved up one spot in this year’s survey, and is now ranked as the 10th highest priced office market in the world, at $127 per sq. ft. The most expensive global market right now is London’s West End, which averages $267.14 per sq. ft. in office occupancy costs. Downtown San Francisco ranked as 12th at $114 per sq. ft.

Richard Barkham, global chief economist with CBRE, notes that 19 of the 22 costliest office markets have experienced rent increases this year due to strong demand for office space. There are also not enough modern office buildings available in CBDs, he adds.

“Occupier caution has declined and corporate confidence has been on the rise and this confidence is starting to translate into a degree of expansionary momentum,” Barkham says.

TAGS: News Leasing
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