June 24, 2016
Skyline Micromarkets Across the Country Outperform U.S. Office Market
Demand for creative space may have shifted the market’s landscape, but quality and location remain key drivers in real estate decision making. As a result, Skyline micromarkets across the country remain coveted locations that outperform the office market in general.
Skyline buildings, defined as the top-tier (Trophy, A+ and A) office buildings within CBDs and urban cores, comprise approximately 42 percent of the CBD marketplace across the U.S. These iconic and high rent properties are the true drivers of leasing supply, demand, rents and development, and serve as the building wish list for institutional investors.
Supply: Gone today, here tomorrow
Limited supply paired with sustained allure means availability in these Trophy and A+ assets is persistently low. Vacancy in Trophy buildings is 9.6 percent with the most single-digit rates of vacancy in secondary Skylines. Supply conditions may be constrained, but many markets across the country are about to enter a new era of availability. More than 34 million square feet of U.S. office development is Skyline standard, which may shift the balance in some markets from landlord favorable, easing the leasing environment for tenants.
Demand: Economic strength drives expanding tenant demand
Skyline buildings remain the top choice for traditional companies in law and finance, but a growing contingent of technology companies are looking to Skyline micromarkets for their central location and accessibility. In 2015, Skyline buildings captured 24 percent of occupancy gains in the U.S.
- Occupancy of Trophy Skyline assets = 88.2%
- Occupancy of general U.S. office market = 85.3%
Tenants are increasingly discerning toward their workspace. Their appetite for updated lobbies, building systems and amenities has given way to heightened demand for top tier office space. To continue to capture the demand of the marketplace, landlords remain attuned to the shifting attitudes toward workspace and have responded to these trends by reinvesting in buildings as a way to elevate their profile and amenity base.
Rents: Limited rent growth on the horizon as U.S. markets begin to peak
Rents in Skyline buildings across the U.S. are rising in lockstep with lessening supply and increased demand. Skyline rents jumped into record territory in 2016, with an average of $43.79 per square foot, more than 7 percent higher than the first quarter of 2015. However, JLL’s 2016 Skyline report shows that rent growth may be moderating especially in high-growth markets that have recorded consistent rent appreciation in recent years. Rent growth has also varied by asset class, with sentiment among non-trophy skyline landlords much more positive, leading to rent growth of 3.2 percent annually compared to virtually no growth in the trophy segment of the market. Annualized Skyline rent growth in 2015 is expected to reach 3.6 percent, well below the 6.4 percent in 2015. Since 2010, rent growth has been particularly strong in secondary skyline markets, led by a huge spike of 68.1 percent in the Oakland CBD and followed by a spike of 40.3 percent in Austin.
Investment: Scarcity leads to secondary
Peak pricing and scare investment opportunities will continue to lead investors to highly desirable secondary markets, where rent growth is still achievable and tenant demand will persist in the months to come. Atlanta, Portland and Miami among others, have all benefited from this interest.
Overall, investment volumes in the Skyline declined in 2015. Heightened liquidity in recent years and six consecutive years of cap rate compression will continue to impact transaction volumes, with 2016 activity expected to show modest declines as well.
For more information about the characteristics driving U.S. Skyline markets and for floor-by-floor details about these market-moving buildings, view the JLL Skyline: 2016 Mid-Year Update.