By: Andrew Batson, Manager of Research & Analysis, JLL
Last year was strong for the U.S. economy. Markets large and small saw expansion in both employment and output.
In fact, according to JLL’s newly released Office Outlook report, secondary and tertiary markets are positioned to gain speed this year as economic expansion diversifies.
Across the board, two sectors drove domestic economic success in 2015. Technology and financial services were responsible for roughly 33% of total U.S. leasing activity in Q4. What’s more, since Q2 2014, about 50% of leasing activity represented companies undergoing expansion.
The good news doesn’t stop there. Even with the addition of 44.2 million-square-feet of new supply across the U.S., 2015 saw the lowest vacancy level in eight years.
According to the report, companies are “looking to new markets across the country as more than 1.7 million square feet of new-to-market leases were signed during the fourth quarter.” JLL experts have high expectations for growth this year, suggesting there is “no sign of a slowdown for [the] U.S. office market.”
How does the Great Lakes region stack up to national trends? Read on for highlights in your market from the Q4 2015 Office Outlook Report.
Great Lakes Office Market Highlights
From Cincinnati to Pittsburgh, office trends are looking optimistic across Great Lakes cities for 2016. Check out a recap from the report for each market below.
- Kenwood is booming. The Midtown submarket saw significant leasing activity last year with CDK Global leasing more than 161,000 square feet. Major companies, including Merrill Lynch and Roundtower Technologies, also leased office spaces at Kenwood Collection.
- High quality office space is in demand. Tenants have high expectations in today’s marketplace, and Cincinnati saw Class A outpacing Class B product in vacancy throughout 2015. This, however, should change in 2016 as Class A vacancy tightens and rates go up, forcing tenants to seek out Class B offices.
- Rents are on the uptick. Asking rents for Class A space in Cincinnati increased to $21.91 per square foot. Class B space reached $15.94 per square foot. These improvements can be attributed to “new development in the long-time sought after suburban submarket,” according to the report.
- Downtown remains tenant-favorable. Corporate rightsizings caused a major market shift in 2015. Vacancy increased 9.2 percentage points year-over-year, according to the report. Despite a downturn, Cleveland’s urban core continues to drive renewed interest.
- Rents will likely remain unchanged. With fixed levels of supply and demand, Cleveland’s office rents have “historically been less volatile than in primary markets,” according to the report. Due to tenant-favorable conditions and increased vacancy, landlords are limited in raising rents.
- Cleveland’s renaissance continues. In the current cycle primary markets are picked over, and investors are finding opportunities (with attractive returns) in Cleveland. Value-add and core assets are available for purchase—one example being the Key Center complex in downtown Cleveland.
- Vacancy continued to drop in 2015. Steady demand remained across Class A and Class B assets throughout the Columbus office market last year. Class A vacancy stands at 8.4%. Class B vacancy declined six basis points from the prior quarter to 14.4%. Overall, this continued improvement is attributed to companies moving downtown to attract a millennial workforce.
- Rents will likely plateau this year. Multiple large office users, including Nationwide and Verizon, are planning to consolidate into corporate campuses this year. Available space is projected to increase significantly, driving rents down.
- Construction will remain active. Mixed-use and owner-occupied projects are driving construction across the market. From Dublin’s Bridge Park project to Amazon’s evolving two data centers, among other projects, Columbus will see significant construction activity through 2016.
- Detroit is making a comeback. A year after Detroit’s bankruptcy, the city is emerging “financially stronger than it was,” according to the report. The improvement has been holistic—from improving overall services, upping construction efforts and providing the local police force with a raise. And, finally, the real estate market is seeing improvements. New investors have been attracted to the high rates of return throughout the city.
- The city resets with technology. As the report points out “Detroit has always brought together the heavyweight sectors of transportation, information and energy.” Detroit is a tech city. Now, Detroit is focused on creating connectivity, fostering a shared-economy, and creating opportunities for this millennia.
- Opportunities emerge outside the urban core. The suburbs offer easy access to parking, cheaper rents and attractive commute times. This year, tenants and investors will need to compare benefits of the urban versus suburban centers prior to making a real estate move. As the report suggests, “there are attributes about the CBD that either make sense for your company or do not.”
- Pittsburgh’s skyline hangs on a major decision. U.S. Steel announced plans for a new 268,000-square-foot headquarters to the Lower Hill District in November 2014. One year later, the company reversed its plans and signed a short-term extension at the U.S. Steel Tower downtown. The city now waits on the company’s final decision, which will have a “dramatic effect on the long-term outlook for the Pittsburgh Skyline,” according to the report.
- Strip District project catches attention. The 3 Crossings development project, an estimated $160 million cost, will bring office, apartment, retail and parking space to the Strip District—scheduled for completion in March of 2017. The project will include four buildings that will bring a total 363,000-square-feet of office space to the area.
For more details, download the full Q4 2015 Office Outlook Report below!
About the Author
Andrew Batson is a Manager for Research & Analysis in the Great Lakes region of JLL. Andrew is responsible for building and continuing to elevate a best-in-class research program that differentiates JLL and drives a competitive advantage in the marketplace through market expertise, analysis and insight. View Andrew’s bio or connect with Andrew on LinkedIn.