U.S. office market sees higher rents, continued growth in Q1 2017

The U.S. office market saw higher rents and continued growth in the first quarter of 2017, according to JLL research.

The current development boom and demand for upgraded, efficient space is driving average asking rents higher, according to JLL. Class A rents are up 3.5 percent year-over-year, and since 2010, class A rents have increased by 21.5 percent — nearly 2.7 times faster than class B rent growth.

Construction activity is topping out as well. Although new groundbreakings were cut in half during first quarter 2017, more than 90 million square feet is expected to deliver in the next two years, compared to fourth quarter 2016 when construction volumes stood at a cyclical high of 110.5 million square feet.

Vacancy rates increased from 14.5 percent in the fourth quarter to 14.7 percent in first quarter 2017, breaking a multi-year trend of market tightening as new, quality supply hit the U.S. office market.

Tech remains the office sector’s dominant industry driver, capturing the largest share of leasing volume in first quarter at 24.2 percent. In comparison, the financial sector took the second-largest share at 14.2 percent.

The U.S. office market recorded its 28th consecutive quarter of positive net absorption as well, according to JLL. Despite the continued expansion, the pace of occupancy gains slowed over the past six months due to shortages of skilled labor in many cities.

JLL predicts that through the end of 2018, supply will still likely outpace demand, leading to a slight uptick in vacancy.

In recent commercial real estate transactions in the U.S. office market sector, Brookfield Asset Management acquired a portfolio of industrial and office properties located across 12 states for a total of $854.5 million. TA Realty sold the portfolio to Brookfield on behalf of its TA Realty Associates Fund IX.

Comprising a mix of high-quality industrial and office properties totaling 8.6 million square feet, the portfolio is nationally diversified, with assets located across 12 states. The vast majority of the properties are leased to investment-grade tenants and situated in high-barrier-to-entry markets, including Chicago, Dallas, Los Angeles and Washington, D.C.