CHICAGO, Jan. 7, 2013 /PRNewswire/ -- The domestic office sector experienced steady but mild occupancy growth throughout 2012, buoyed by a few strong market sectors impacting leasing activity in a handful of states, according to a year-end analysis conducted by Jones Lang LaSalle (JLL). As the year drew to a close; however, several bright spots on the horizon suggested that the market expansion will broaden to other sectors and geographies in 2013.

(Photo: http://photos.prnewswire.com/prnh/20130107/CL37272-a )

(Photo: http://photos.prnewswire.com/prnh/20130107/CL37272-b )

"The vast majority of occupancy growth in 2012 was in energy-rich and technology-heavy markets in California, Texas and Colorado. Recently there's been lease activity and growth in healthcare and housing-related industries, suggesting that strong office absorption in 2013 may extend to Arizona, Nevada, Florida, Georgia and the Carolinas, among other geographies," said John Sikaitis, Director of Office Research at JLL. "However, the U.S. office market outlook is still very segmented by sector and geography, with some urban and most suburban markets facing a long road to recovery."

2012 Commercial Real Estate Fourth Quarter Highlights


    --  Leasing levels dip again: -6.8 percent from Q3; both Q4 and 2012 leasing
        below respective quarterly and annual levels since recovery began.
    --  Absorption levels continue with 11(th) consecutive quarter of occupancy
        growth, but vary widely by geography as the West grows and the East
        Coast disappears. Sunbelt markets are starting to add to the recovery. 
        Even with continued occupancy growth in Q4, 2012 absorption levels down
        19.4 percent from 2011.
    --  Vacancy drops, hits 17.0 percent. Vacancy levels remain near historical
        highs, and although CBDs are on track to reach historical vacancy rates
        faster than suburbs, CBD vacancy declines have slowed while suburban
        declines have sped up.
    --  Tenants have far less leverage across urbanized, core markets despite
        overall market pause, but rents have now inched up in nine of the past
        10 quarters. Class A continues to trump commodity across the board with
        rents growing more than four times faster in CBDs than suburbs.

National net absorption totaled 7.5 million square feet in the fourth quarter, bringing the total to 28.2 million square feet of space absorbed during all of 2012. Rents increased 3.1 percent over the course of the year, while rent abatement concessions fell by 10.8 percent and tenant improvement allowances decreased by 4.3 percent, Sikaitis said, indicating continued market tightening.

The national vacancy rate declined to 17 percent at the end of 2012 from 17.6 percent 12 months earlier, as the country experienced its 11(th) consecutive quarter of occupancy growth and its eighth straight quarter of average rental rate increases. Of the 44 U.S. office markets JLL tracks, 84.1 percent experienced occupancy growth during 2012.

Despite the slight tightening of overall occupancy levels; however, the pace of the office recovery declined 19.4 percent in 2012 compared to the vibrant market experienced in 2011. California and Texas alone accounted for 60.3 percent of the country's total net absorption, Sikaitis noted.

"While the technology and energy facets of the economic engine do not appear to be pulling back, they will be joined by some other burgeoning sectors and further supported by the slow-moving economic recovery," Sikaitis said. "If momentum does pick up across the board, tenants will eventually be confronted with a dwindling amount of large-block and quality space options as the development pipeline is thin and largely consists of build-to-suits."

Only 9.8 million square feet of supply was delivered in 2012, with another 40.7 million square feet of space currently under construction. Of the 44 top U.S. office markets, 17 have less than 100,000 square feet in the construction pipeline, Sikaitis observed. In a typical year, new office supply in the U.S. averages 50 million square feet.

Government Growth Sector

A major source of recent leasing activity and new requirements in nearly all geographies has come from the home mortgage industry. "If housing momentum keeps up, we expect homebuilders to return to growth and come back into the market for more space over the next 18 months," Sikaitis said. "Consequently, geographies throughout Florida as well as growing markets such as Phoenix, Atlanta, Orange County and Las Vegas are likely to be some of the leading office market segments over the next two years."

The conclusion of the 2012 presidential election also brought some certainty that has translated into office demand. The Affordable Care Act (Obamacare) and the Wall Street Reform and Consumer Protection Act (Dodd-Frank) seemed certain of implementation after the election, evidenced by a recent spurt of government office requirements on the market. Sikaitis calculated that the federal government leased more space in Metro D.C. in the six weeks following the election than in the preceding 10 months.

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.

"The U.S. is in a better economic position than most other developed countries, but for the office sector to return to historical growth norms like we saw in 2011, the private sector needs the confidence to reinvest the cash they have been sitting on, to fuel future growth," said Ben Breslau, Director of JLL's Americas Research.

"Suburban geographies from Boston to Chicago, New Jersey, Phoenix and Detroit have a long way back, not just to 2007 levels, but even 2001 levels, as most of these markets never fully recovered from the recession 10 years ago," Sikaitis said. "Some markets and submarkets will need to make major adjustments or even re-invent themselves to avoid becoming obsolete."

For more news, videos and research resources on Jones Lang LaSalle, please visit the firm's U.S. media center Web page. Bookmark it here: http://www.us.am.joneslanglasalle.com/UnitedStates/EN-US/Pages/News.aspx

About Jones Lang LaSalle

Jones Lang LaSalle (NYSE: JLL) is a financial and professional services firm specializing in real estate. The firm offers integrated services delivered by expert teams worldwide to clients seeking increased value by owning, occupying or investing in real estate. With 2011 global revenue of $3.6 billion, Jones Lang LaSalle serves clients in 70 countries from more than 1,000 locations worldwide, including 200 corporate offices. The firm is an industry leader in property and corporate facility management services, with a portfolio of approximately 2.1 billion square feet worldwide. LaSalle Investment Management, the company's investment management business, is one of the world's largest and most diverse in real estate with $47 billion of assets under management. For further information, please visit www.joneslanglasalle.com.

SOURCE Jones Lang LaSalle