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U.S. office space rent rises at fastest clip in a decade: report

Members of the media tour an open unfinished floor space on the north side of the Durst Organization's newly unveiled marketing center in the One World Trade Center tower in New York during a press preview of the space, October 31, 2013. REUTERS/Mike Segar

By Herbert Lash

NEW YORK (Reuters) - Stepped-up business hiring pushed the rental price of U.S. office space up 3.1 percent in the first quarter, the highest quarterly gain in a decade, as demand for commercial real estate accelerated, according to Jones Lang LaSalle Inc (JLL.N).

Though occupancy growth in office space slowed to just over 6 million square feet from about double that pace throughout 2014, development activity and rental growth in particular sped up, JLL said in a report to be released on Wednesday.

The commercial real estate expansion is being driven by technology companies looking for the best office space in the central business districts of key U.S. cities.

New York City, in particular the midtown area south of 34th Street, has the lowest vacancy rate across the United States and one of the highest growth rates in rental prices, said JLL, a global commercial real estate firm.

Cambridge in Massachusetts, Austin in Texas, Palo Alto in California and the South Lake Union district in Seattle also are experiencing high demand, while lower quality buildings in suburban areas are seeing the lowest demand.

"The Midtown South section of New York City is demonstrating some of the tightest fundamentals in the market as a whole around the country," said John Sitkaitis, managing director of office research at JLL.

"Those types of markets which cater heavily toward technology tenants are showing way-below market vacancy rates and way-above market rental rates."

The need for modern infrastructure is a major reason why "Class A" buildings are in demand by the so-called TAMI companies - technology, advertising, media or information - according to Dara McQuillan, chief marketing officer at Silverstein Properties Inc.

"These tech companies rely on heavy infrastructure, and they only have that in new buildings," McQuillan said. "That's the sector that's driving New York real estate today."

Increasing constraints in the supply of office space in U.S. city centers resulted in a 6.1 percent quarterly jump in rents compared to a 0.9 percent increase in the suburbs, said JLL.

What JLL called a massive uptick in leasing activity and rising rental prices will result in a tighter market for office space, and will give landlords further reason to aggressively push up rental prices at double-digit rates over the next 18 months.

Vacancy levels remained unchanged across the United States at 15.6 percent in the first quarter, but they are expected to fall below 15.0 percent by year end as corporate expansions boost occupancy over the next several quarters.

JLL said in its U.S. Office Outlook report that it is "consistently seeing rent growth, quarter in and quarter out, across 90 percent of markets JLL tracks."

Major areas that are not participating in the rising market are the New York suburbs, parts of the Great Lakes region and Houston, where rents have declined over the past two quarters as energy prices tumbled, JLL said.

(Reporting by Herbert Lash; Editing by Ted Botha)