July 28, 2017
The Skyline market is at a turning point
Skyline real estate nationally is at a turning point due to increasing new supply, slowing job growth and movement toward safe investments. As a result, rent growth is likely to slow and even plateau for Trophy assets, and vacancy declines will stall as well.
Cranes and construction equipment have been a common sight within the nation’s Skyline for the last several years, but those sightings will soon be less plentiful. While there’s a healthy pipeline of office space currently under development, construction is slowing. That being said, the more than 15 million square feet of office space to be delivered this year will improve options for tenants who are less cost-sensitive, while availability of previously used space will make non-Trophy rents less pricey.
The highest Skyline rents are exactly where you’d expect them to be: New York, Washington, DC, San Francisco and Boston. But it’s the Sun Belt cities where rents are growing the fastest. Rents in Nashville, Austin, San Antonio and Raleigh all surged during the past year.
While traditional tenants drive leasing, new ones are growing
The Skyline market has traditionally been home to financial, legal and professional services firms. While these tenants are still responsible for 53.4 percent of gross leasing volumes, the vast majority of this leasing activity is stable or decreasing. Today, tech, media, co-working and similar industries are the ones driving expansionary leasing.
Creative companies have typically been drawn to nontraditional spaces off the beaten path and in trendy neighborhoods. But a lack of available unique space and soaring rents for eclectic buildings, have been driving these tenants to more traditional buildings in the Skyline.
Sales volumes healthy, but lack of assets keeping pricing cool
After record years in 2014, 2015 and 2016, sales pricing cooled off in 2017 because most top-tier assets have recently traded. The $6.9 billion in sales so far in 2017 was healthy, but a 23.8 percent drop in pricing indicates the remaining Skyline product is currently selling at lower rates due to lower rent expectations and the likelihood of slowing occupancy growth in a maturing cycle.
Skyline acquisitions were up more than $1.2 billion in 2016, while sales in the broader office market fell by nearly 10 percent. Investors are taking a defensive position on their Skyline acquisitions and that has increasingly benefited secondary markets. Foreign dollars are also making their mark on U.S. Skylines, with offshore capital buying more than 40 percent of all Skyline assets traded in the first quarter of 2017.
About the Skyline
JLL’s Skyline is an annual look at office space within some of the most sought-after buildings in 57 markets across North America. The interactive website features JLL’s exclusive market insights regarding office supply, demand, rents, leverage and investment. Get started exploring your Skyline here.