JLL Experts: Rust Belt Critical to Future U.S. Economy

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By: John Sikaitis, Managing Director and Christian Beaudoin, Senior Vice President – JLL

John Sikaitis at a recent speaking engagement.

John Sikaitis at a recent speaking engagement.

While there’s fluctuation across the globe, the overall outlook for the U.S. economy remains strong. Thanks to an economic environment characterized by the continued elevation of corporate profits, the strongest job market since the late 90s and economic growth that is roughly 15 to 20 percent above levels in 2013, the U.S. dollar is at its highest level in years.

That momentum, coupled with a substantial drop in oil prices, is energizing consumers, fueling the highest consumer confidence level in eight years, which will drive enhanced growth to economic prospects over the next 24 months.

The same optimism exists for the commercial real estate industry in the U.S.

Net absorption topped 50 million square feet in 2014, a 38 percent increase from 2013; vacancy fell below 16 percent for the first time since 2008 and the American corporate is demonstrating increased signs of growing their real estate footprint. In the third and fourth quarter of 2014, 46 percent of tenants greater than 20,000 square feet completed leases with a growing real estate footprint—double the rate of any other point in this cycle. Across the vast majority of markets, the recovery has gained substantial momentum, fueling enhanced confidence from landlords and rent growth across 85 percent of the markets JLL tracks in the United States.

Investors Take Interest in Secondary Markets

Nationwide, outlooks are looking up for both the economy and commercial real estate. Fortunately for those in the Rust Belt, we’re seeing the same positive outlook across Ohio, Pennsylvania and Michigan.

Ten years ago, cities like Cleveland or Pittsburgh may have not been considered viable investment markets for large investors. This is no longer the case. The amount of capital seeking investment opportunities is staggering. Some domestic institutions and investors are being priced out of primary markets and thus expanding their appetite for secondary markets. In fact, in the fourth quarter of 2014, 53 percent of office capital markets volume took place in secondary markets. Investors are looking increasingly at secondary but fundamentally sound markets around the country like Philadelphia, Pittsburgh, Columbus, Minneapolis and Portland, among others.

This momentum on the capital side is likely only to increase over the short term due to strong demographic shifts as well. Young professionals are migrating to urban environments and increasingly to smaller emerging submarkets. In fact, from 2010 to 2013, population growth in Columbus was the top across the Great Lakes and Midwest, growing by 3.4 percent and Cincinnati was right behind Minneapolis and Indianapolis, growing by 1.1 percent, ahead of Chicago and handful of other larger markets.

Traditional Markets Make a Comeback

Another trend we’re seeing: the return of more traditional markets.

The technology and energy industries took center stage from 2011 to 2014, but will shift back to a moderate pace this year as traditional markets move to the forefront. Industries like banking, finance, manufacturing and healthcare, which were embedded in real estate downsizing mode from 2009 through 2013, have taken the cue from the tech industry and are beginning to demonstrate strong economic and real estate growth.

Now that the rightsizing in the form of downsizing trend has hit a plateau, we’re forecasting that more traditional industries will move into right sizing in the form of expanding in 2015 and 2016.

Not Everyone Can Be Google

When it comes to office design, tech companies set the pace in 2014. Even traditional industries began opening their offices and moving away from the cubicle-style layout. In the last five years, Key Bank reduced their office space by roughly one million square feet to incorporate an open-office floor plan and save on real estate costs. Others made moves last year to bring the office home, touting significant environmental and business benefits. But, we can’t all be Google, and open space isn’t necessarily the best fit for all companies. It’s clear that some companies have moved too far on the pendulum. Not all private, enclosed office space is bad.

Moving forward, flexibility in the workplace will be the new normal.

Businesses will integrate a mix of closed and open space in their offices again. This is especially true if industries want to attract millennial employees, who will look for the opportunity to choose how they work. While they’re capable of working effectively via telecommute, millennials thrive on in-office camaraderie and an office space that fosters culture.

In 2015, various industries will diversify options and expectations for employees. There’s an appropriate need for each workspace format – private, open, remote, or virtual – throughout the workweek, and levels of use will vary from market to market.

This year, the need for mixed office space will be more important than ever.

What to Expect in 2015 and Beyond

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In major diversified markets, such as Chicago and Atlanta, the growth rate has doubled or tripled throughout the past six to nine months. Midwest markets will benefit from differentiated economies and they will increase their overall growth in 2015. It takes all elements of the economy to develop simultaneously to experience significant movement.

JLL is forecasting a decrease in vacancy in the Rust Belt. Traditional market businesses will likely seek new leasing opportunities. Others will expand their square footage to broaden office space and keep up with economic growth.

Cities in Michigan, Ohio and Pennsylvania are differentiating through business-friendly economies, prime national locations, and cost-friendly real estate. They will be critical to the overall development of the U.S. economy in the coming years.

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About the Authors
John Sikaitis is the Managing Director of Office and Local Markets Research of the Americas for JLL. Based out of Washington, DC, John and his team of more than 55 seasoned research analysts prepare in-depth customized research vehicles for clients including market trends and forecasts, strategic analyses, viability studies, economic updates and projections, demographic studies, competitive surveys, comparative location analyses and industry studies, among other types of research. View John’s bio or connect with John on LinkedIn.

 

Christian Beaudoin is a Senior Vice President of Corporate Strategy for JLL based out of Chicago. Christian advises many of the world’s largest organizations across multiple industries – including banking, consumer products, high-tech and government – on real estate strategy and operations. He has led several global studies for JLL and authored published papers on real estate trends, organizational governance, innovation, and strategy. Connect with Christian on LinkedIn.

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