Jones Lang LaSalle

Barometer Forecasts Demand for Space, Rent Increases
By Barbara Jarvie
Last updated: March 23, 2006 11:55am

NEW YORK CITY-Approximately 37 US markets will see an office space demand leading to rising rental rates, according to Cushman & Wakefield’s US Office Market Barometer. The barometer measures real estate performance and expectations in 55 downtown and suburban markets based on data compiled at year-end 2005.

The anticipated rental rate increase is based on a variety of factors such as the positive absorption of more than 55 million sf of office space last year and the less than 18 million sf of new office construction-completions. "An imbalance in the near-term between office-space demand and office development will lead to a spike in average rents of more than $2 per sf in several major downtown markets over the next two years," says Maria Sicola, senior managing director of research for Cushman.

Four regions that are doing particularly well are Northern California, Phoenix, the Washington, DC/Northern Virginia corridor and the New York City metro area. "San Francisco is building on momentum which began in 2003," Sicola says. For three consecutive years, leasing and absorption have improved as a result of moderate and employment growth and in-migration. Traditional office users in the financial and legal services industry have led this charge along with business services and technology companies. "Rents are now catching up with the demand and are rising dramatically, especially for class A space. Activity has also begun to spillover throughout the Bay Area, particularly to Oakland."

Sicola says Midtown Manhattan is also experiencing tight market conditions--most notably for large blocks of space--as construction has been very limited. "Currently, there are only five blocks of space over 200,000 sf available in the market. Rents are rising both on an asking and a taking basis."

The DC region remains strong and Northern Virginia is picking up steam as demand from the Federal government and the technology sector remains strong, she notes. "Phoenix' recent surge is the result of business space demand catching up to robust demographic growth. This will continue especially as this market presents a lower cost alternative to Los Angeles which had begun to see rents rise."

Sicola adds that office developers have signaled their belief in the strength of suburban markets, "where more office space is under construction today than during any period in the last four years." She points out that, in general, the Midwest lags the nation due to weak demographic and employment growth. Additionally, there are no strong industry sectors emerging at present. "Florida has had a number of markets leading the growth over the past year. It is interesting to now see other markets and regions growing at a more rapid pace. The southeast is still performing well but we now have clear evidence that leasing fundamentals are strengthening both in the Northeast and the West as well."