Muted Growth in Office Property Gives a Tepid Outlook

October 24, 2011
By Nicholas Ziegler, News Editor

Things certainly were working more smoothly a few months ago, but there’s been some turbulence lately. While some indicators – home sales, job numbers and manufacturing output, to name a few – have been up and down, a new report by Jones Lang LaSalle points to a marginal improvement in third-quarter 2011 commercial real estate markets both domestically and abroad. While hope is guarded, the report warns, a lack of job growth and continued economic uncertainty could signal a slowdown in absorption rates in the near future.

“Employers are being very cautious and deliberate about their hiring and business expansion plans right now,” Gregory Green, president of agency leasing, said. “Until the cloud lifts off the economic outlook, we will continue to expect a slow recovery.”

According to the real estate services firm, the U.S. office market absorbed approximately 9.4 million square feet of space in the third quarter of 2011, bringing the year-to-date total to more than 24.5 million square feet, eclipsing 2010 levels by more than 75 percent. Vacancy levels continued to decline, falling 30 basis points to 17.8 percent in the third quarter, while rents increased marginally. However, concessions have ticked upwards for the first time in several years, illustrating that landlords are increasingly trying to lure tenants.

The London office market, a traditional financial-services hub, has also seen a pickup in activity from the telecommunications, media and technology sectors, which accounted for 15 percent of total occupier take-up in Central London, according to Neil Prime, head office agency leasing for the United Kingdom. The services sector as a whole accounted for 43 percent of tenant demand.

“London will remain the key global financial center,” Prime said. “However, with the threat of over-regulation of the financial services arena and ongoing economic issues in the euro zone, there is a medium-term risk to its competiveness. That, coupled with the growth opportunities of the Asia Pacific region, could lead to the financial services sector focusing much of their investment and expansion away from mature existing markets in the short term. In the meantime, we will see occupier demand in London driven by the services sector, and we can expect to see that continue for the next 12 to 18 months.”

Additionally, New York continues to cater to financial-service firms as well, with six out of the top 10 leases in Downtown being within that industry. The media and technology sectors, however, are picking up steam.

“The diversification of tenants in New York, outside of the financial service industry, is being led by the media industry,” Peter Riguardi, president of JLL’s New York operations, said. “The other industry seeing growth is technology. Although tech companies have been in New York for quite some time, their primary purpose was for banking relationships and media connectivity. We are now seeing the tech companies expand here by adding programmers and engineers.”