With only four regional markets adding minimal new developments, leasing demands continue to outpace supply, allowing landlords to scale back tenant improvement allowances by five percent while increasing rents by nearly three percent at top office properties. The Boston tower market followed the national trend, displaying strong demand in 2011 and limited new supply which delivered almost fully occupied. The annual North American Skyline Review from JLL also reports that heightened investor interest for this type of product caused activity to expand beyond gateways into secondary markets.
Boston tower market story is bifurcated with each downtown submarket displaying unique characteristics. The Back Bay tower market has reached full occupancy, with rents eclipsing the $65 mark in high rise space. The Financial District is trailing but exhibiting some bright spots. Lastly the Seaport District which only has low rise space in its tower market segment is seeing asking rents that are similar to those in the Back Bay low rise segment. “Vacancy levels continue to drop in Trophy and Class A properties; yet, with the exception of markets spurred by technology, energy and healthcare demands, they have a way to go before witnessing the lows of 2006,” said John Sikaitis
, Director of U.S. Office Research, Jones Lang LaSalle. “However, net-effective rents in the U.S. increased with some markets witnessing double-digit growth. With limited supply in the pipeline, we anticipate to see this upsurge trend continue.”
Jones Lang LaSalle Skyline Markets
Jones Lang LaSalle’s annual proprietary Skyline Report provides a unique perspective of office market trends across a select group of Class A and Trophy buildings in urban areas. This top tier of buildings, representing 30 percent of total CBD office space, historically has been the market-moving segment of the office sector, leading the overall market through downturns and expansions. The North American Skyline Review combines data from 26 U.S. and five Canadian markets to gain a broader insight into near-term market trends.
Demand within the Skyline segment continued to outpace that of the overall U.S. office sector through the end of 2011 and into 2012. In total, the Skyline market absorbed 6.5 million square feet of space in 2011 and outshined overall market rates by 40 percent. Vacancy levels also dropped from a high of 15.7 percent to the current level of 14.7.
In addition, only four markets – Boston, Houston, Miami and Washington, DC – delivered a total of seven new buildings compared with the 2007-2010 annual averages of 17 new buildings across the U.S. Skyline. Looking ahead, the development pipeline appears just as equally barren with a total of eight buildings under construction, measuring 6.1 million square feet with New York and Washington, DC accounting for nearly 90 percent of the space currently under construction driven by the World Trade Center and CityCenter developments, respectively. Looking forward, large blocks of space will continue to come at a premium across most geographies and tenant leverage will continue to slip with almost no new supply.
Overall, asking rents jumped 2.9 percent in 2011 to an average full service rate of $37.35 per square foot while tenant concessions packages have lowered with improvement allowances down 5.0 percent in 2011 and rent abatement down 5.1 percent.
Investors continued to flood capital into core stabilized assets in 2011 with sales of Skyline assets increasing at nearly double the rate of overall U.S. office sales volume. In total, Skyline sales volume jumped 66.4 percent with New York, Houston, Chicago, Boston and Washington, DC registering sales volumes greater than $1 billion throughout the year.
Major Market Highlights
• Back Bay asking rents in the trophy market are close to $60, almost $10 above the submarket average and representing new highs in this cycle.
• Of the 16 deals larger than 100,000 square feet signed in the CBD during the year, 15 were in Skyline buildings primarily resulting from relocations or expansions seeking quality upgrades.
• While Midtown registered an 11.3 percent Class A vacancy rate at the close of 2011, the vacancy rate for floors 25 and higher registered at 3.8 percent.
• The Downtown Skyline continued to outperform the rest of the Class A office market despite rising vacancy in key Trophy assets hit hard by the downsizing in the large energy, financial and legal services tenants.
• Rental rates outperformed the overall market averaging $48.28 per square feet versus the market’s $43.39 per square foot. Additionally, technology leasing activity continued as the driving force behind investment activity as sales volume reached its highest level since 2007.
• The completion of the election cycle and more certainty surrounding the federal budget should help tenant demand