By: Andrew Batson, Manager of Research & Analysis, JLL
From coast to coast, our city skylines are a source of pride and community. It’s not surprising that top-tier office buildings in our urban cores continue to report lower vacancies, higher rents and more developer interest.
The anticipated Skyline Review is back, and more advanced than ever before.
In case you missed it in years past, the Skyline Review features JLL’s proprietary market insights (regarding office supply, demand, rents, leverage and investment) across 52 markets in the U.S. and Canada. With the report, viewers can compare and contrast individual markets or multiples of markets, as well as individual properties or portfolios.
Register for free to access the floor-by-floor data in roughly 1,200 of our nation’s most prominent towers, including Class A buildings in Cincinnati, Cleveland, Columbus, Detroit and Pittsburgh.
Read on for the top five trends affecting U.S. skylines in 2016.
1. Substantial Office Availability on the Rise
Rents for premium office space are sky high. In fact, they’ve hit record-highs—at an average of $43.79 per square foot. However, with the delivery of nearly 34.4 million square feet of Skyline office space, the market will inevitably begin to shift into tenant-favorable conditions. JLL research expects that rents will even out … but not for a few quarters.
Closer to home in Cleveland, there is a buzz of potential new developments to accommodate high demand and increased leasing activity. The leasing success of the Ernst & Young Tower and two of Cleveland’s largest occupants—Sherwin Williams and Medical Mutual—have sparked talk of a new multi-tenant office tower. Combined, Sherwin Williams and Medical Mutual account for more than 950,000 square feet in future requirements; signing just one would be enough to kick start production.
Similarly, Pittsburgh’s JLL Center at Tower Two-Sixty delivered in early 2016 and has been greeted with positive tenant interest. The building is 65.4% leased with a remaining 37,000 square feet of contiguous space available.
2. Tenants Feeling the Pressure from Premium Pricing
Thanks to the abundant delivery of new Trophy buildings, premium pricing for Skyline assets will be slightly magnified in the short term. High prices may even force tenants to look elsewhere for less expensive leasing options. Ultra-premium spaces (Trophies) are averaging $56.82 per square foot across the U.S.
As rent figures reach new heights, it’s no wonder that the demand for non-Trophy buildings is beginning to climb. The average asking price for a non-Trophy space is $33.73—markedly lower than the Trophy space, which has begun to flatten in demand.
Tenants are looking to secondary Skylines to fulfill their demands. A wave of new leases has swept over the Detroit skyline, including Fifth Third’s new downtown office in the One Woodward building’s top floors. The 31,000-square-foot workspace is now populated with 90 bank employees. Similarly, Ally Financial revamped its upgraded office space, now known as Ally Detroit Center. More than 1,500 Ally employees, along with third-party contractors, occupy the space.
3. Global Economy Weighs on Minds of Investors
Although the U.S. economy is projected to remain steady for the next two years, the global economy has investors concerned. Technology in real estate expansion is enough cause for some investors to hold off on any sudden moves; however, others are confident in the market as sales volumes are on track to meet 2015 levels.
But, many investors are still taking the leap. Pittsburgh, for instance, has a diverse economy on the upswing. With low vacancy rates in the single digits and office rents gaining momentum with annual increases of 3%, the Pittsburgh Skyline is performing exceptionally well. All the while, landlords have continued to hold negotiating leverage. These landlord-favorable conditions have particularly caught the attention of investors and several high-profile trades have occurred over the last several years. The most recent acquisition was by Shorenstein, which purchased the 1.0 million-square-foot One Oxford Center for $148.8 million.
4. Investors Shifting to Secondary Markets
Hikes in price and competition are making Skyline assets in primary markets difficult to find, and even harder to acquire. In turn, investors are turning to hot secondary markets, like Columbus, where there is consistent tenant demand and room for rent growth.
Based on the success of its 250 S. High mixed-use project in 2015, Daimler and Kaufman Development announced another speculative mixed-use development for Columbus named Two25 Commons. The project will include 134,000 square feet of office space, as well as street-level retail and apartments.
The city continues to grow with an influx of new businesses setting up shop downtown. Technology and creative firms have flocked to downtown Columbus, as seen in leases signed by CoverMyMeds and Aver over the course of 2015.
Other secondary skylines that are benefitting from lower costs include Cincinnati and Pittsburgh.
5. Owners Must Learn to Compete
The interest in creative spaces and fringe markets may be rising, but primary skyline spaces still have advantages. To remain competitive, owners and landlords will need to meet the ever-changing demands of tenants by investing in perks like common areas, creative spaces and building systems.
In Pittsburgh, our firm’s new office in JLL Center at Tower Two-Sixty incorporates cutting-edge workplace design, with the perfect blend of collaboration, innovation and new technology.
Related read >> First Look: The New JLL Center at Tower Two-Sixty
Similarly, within the Cincinnati Skyline, demand has been focused on Class A product, which can be attributed to the lively employment picture in Cincinnati throughout 2015. That said, tenant demand is gravitating toward users seeking creative space in 2016. Coming soon to Cincinnati: a $75 million mixed-use project including a hotel, retail space and apartments is in the works at the corner of West McMillan and Vine streets. To compete with new developments in Over-the-Rhine and redevelopments in the CBD Peripheral submarkets, Skyline landlords will need to adjust their tenant packages and rates.
Skylines continue to prove their worth and remain successful with more overall interest from developers higher rent costs and lower vacancy among primary markets. For an up-close view of your Skyline, visit JLL’s 2016 Digital Skyline.
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.