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JLL Reports U.S. Office Market Makes Mild Gains In Absorption And Rent In 2012, With Stage Set For Broader Recovery In 2013

New requirements for space to operate state-sponsored healthcare exchanges have emerged in Sacramento, Baltimore, Central Florida and other markets. "When all is said and done, these state and federal exchanges will likely span several million square feet across the country," Sikaitis said. "To administer and enforce healthcare reform, government agencies such as the Health Resources and Services Administration and the IRS also may take extra space in Washington, D.C. and regional economies."

Washington, D.C. has already seen one financial regulatory engine expand and another come into the market for growth, while two more appear likely to grow over the next 18 months. "Greater certainty around Dodd-Frank will lead to increased momentum and activity in New York and Washington, D.C., 2012's most depressed large markets," Sikaitis said. "The floodgates will not necessarily open right away with significant growth, but the 30 to 40 percent declines in leasing volume we have seen over the past 18 months are likely behind us."

Despite New Demand Opportunities, Landlords Face Challenges

Despite the recent gains in rent and occupancy, the U.S. office sector faces significant challenges to demand that threaten long-term growth prospects, JLL's research team found.

"Traditional office tenants-- banks, law firms, accounting and consulting firms --are adding headcount, but their real estate footprints are shrinking as they move to increasingly efficient floor plates and spaces," Sikaitis said. He pointed to a recent JLL study showing that banks and law firms that relocate reduce their space needs by an average of 15 percent. "This trend will continue in the market for the next several years as we are only about 20 percent through the rightsizing trend."

In addition, U.S. companies have not been investing in technology, equipment, real estate or human capital to the extent that they have in previous recoveries, Sikaitis continued. This trend contributes to the dampening of the office sector recovery in the short run, but it may also affect the larger economic picture over the longer term.

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