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Technology, Energy Sectors Drive Dwindling Office Recovery As Tenants Move Into A Holding Pattern, Says Jones Lang LaSalle

Stocks in this article: JLL

CHICAGO, Oct. 9, 2012 /PRNewswire/ -- The U.S. office recovery continued to slow in the third quarter and stalled out in many metros, with a handful of mostly West Coast and Texas markets accounting for slight overall gains in absorption, occupancy and rental rates since midyear. Tenants soaked up a scant 7.4 million square feet of office space, a quarterly gain of 0.5 percent that nudged year-to-date absorption to 19.5 million square feet, or 20.5 percent less than a year ago, according to Jones Lang LaSalle's Third-Quarter 2012 Office Highlights Report.

"As troubles continued to spread across Europe and global growth expectations reset, corporates across the U.S. have responded and increasingly moved to the sidelines when dealing with longer-term growth and real estate decisions," said John Sikaitis, Senior Vice President of Research at Jones Lang LaSalle. "As a result, leasing activity levels throughout the U.S. have steadily declined as these problems have spiraled outward and onward."

Sikaitis continued, "That steady decline is most evident in East Coast markets as they have almost completely disappeared from the recovery after being the main driver in 2010. So far this year, the tech and energy sectors along with markets in the Sun Belt have been the primary drivers of recovery."

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Third-Quarter 2012 Commercial Real Estate Highlights

  • Office vacancy fell 20 basis points to 17.1 percent, its lowest level since early 2009.
  • Leasing activity declined across 44.7 percent of markets Jones Lang LaSalle tracks, while 21.3 percent of markets displayed stable leasing levels from the previous quarter. Uncertainty and a dearth of lease expirations combined to suppress activity, which fell 16.0 percent in the first three quarters of 2012 from a year ago.
  • The 10th consecutive quarter of positive net absorption reflects activity concentrated in some of the strongest – and hardest-hit – metros. Atlanta is at the bottom of its recovery cycle, yet its 1.17 million square feet in quarterly absorption was second only to Dallas' 1.27 million square feet.
  • Technology centers including Silicon Valley, Portland, Seattle, San Francisco, Austin and Boston experienced robust absorption, with 1 million square feet absorbed in Silicon Valley alone. Rent shot up 9.0 percent from the previous quarter in Silicon Valley, and was up 7.9 percent in San Francisco. Energy helped to drive up rents by 5.7 percent in Houston, and 3.4 percent in Denver.
  • Of the East Coast markets, from Boston to Washington, DC, only Philadelphia and New York posted minor absorption gains in the third quarter. The remaining six markets posted occupancy contractions.
  • Average rent increased 1.3 percent, with rental rates increasing for about a third of the country and unchanged in most other markets. Only New Jersey; Washington, D.C., and Hampton Roads, Va., reported declining rents.
  • Landlords are holding their ground on concessions, offering fewer tenant incentives in 21.3 percent of markets, while tenants gained concessions in Northern Virginia, suburban Maryland and Washington, D.C.
  • Tenants may be preparing for lease decisions when economic conditions improve: Despite the decline in leasing volume, property tours increased in 42.6 percent of markets.

Leasing momentum, together with absorption and rent growth, will likely be muted through the remainder of 2012, Sikaitis predicted.

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