Archives for May 2024

During a NAIOP luncheon on May 30, New Mexico Governor Michelle Lujan Grisham emphasized the need to modernize the state’s zoning and permitting processes to foster economic growth and meet the increasing demand for housing.

Drawing attention to successful local partnerships, Lujan Grisham cited the rapid completion of a new fire station at the Pueblo of Sandia.

The 11,300-square-foot project, funded and built in less than a year, exemplifies the efficiency that can be achieved through collaborative efforts, Lujan Grisham said. Station 39, which broke ground last August, was constructed by Albuquerque-based Jaynes Corp. It opened May 30.

“[The station] is a model that we should be undertaking everywhere [and it represents] an effective state, federal [and] local government partnership,” she said.

When speaking about the importance of good partnerships, Lujan Grisham also alluded to the future construction of a new high school in Rio Rancho and plans to open a new behavioral health triage center near 2400 Marble Ave. NE.

“We are investing in the things that create the development and vision for a state that we need,” Lujan Grisham said.

Grisham also talked about the urgent need for more housing, especially workforce housing.

In February, the state legislature approved House Bill 195, which amended the Opportunity Enterprise Revolving Loan Fund (OERF), a loan program that provides financing for building or renovation projects, to allow for workforce development housing projects. As a result of the bill, a total of $125 million was appropriated toward the development of housing, according to a news release from the governor’s office.

Currently, New Mexico has a shortage of 32,000 homes, Lujan Grisham said.

“The legislature did five times more funding in this last legislative session than they’ve ever done for housing,” she said. “Using the Opportunity Enterprise Fund and other vehicles, we are thinking out of the box about making sure that workforce housing gets built.”

The governor highlighted the potential for ways to better utilize New Mexico’s 9 million acres of state-owned land for commercial or residential purposes through improved infrastructure and streamlined procedures.

Last summer, the City of Albuquerque began implementing measures to improve its own permitting processes by teaming up with Tyler Technologies Inc. (NYSE: TYL) to create a geographical information system (GIS) where developers and citizens can apply for development approvals, building permits, access electronic plan reviews and receive digitally issued permits. The new software is expected to be released this fall.

“Imagine the power of the state to demonstrate that you can have fair, safe [and] good environmental standards, that you can get a building from start to finish up in a year, or even better, a fire station in eight and a half months.” Grisham said. “We need to modernize our zoning and permitting processes.”

 

Source: “Gov. Lujan Grisham calls to modernize permitting practices at NAIOP luncheon”

As companies continue to view their office real estate as a recruitment and retention tool, the cost to build out those spaces keeps climbing.

That’s according to a recent analysis by Jones Lang LaSalle Inc. (NYSE: JLL), which found the average office fit-out cost is up 2.7% year-over-year for a moderate-style build out of medium-quality finishes. Although an increase, that annual uptick is significantly less than the double-digit cost growth observed the past two years.

The cost to upfit an office in 2024 varies by office type, complexity and quality, as well as geography. Among the major metro areas tracked by JLL, 96% saw costs grow less than 6%. JLL’s analysis took into account 4,900 projects completed by the firm in 58 North American markets.

Across the U.S. and Canada, the average fit-out cost for a medium-quality, moderate office style — which features an open floorplan with small to medium-size workstations, fewer than 20% offices and a 70/30 split between office/workstations and collaborative space — totals $264 per square foot this year. That’s compared to $257 per square foot in 2023, $233 per square foot in 2022 and $190 per square foot in 2021.

Louis Molinini, Americas market lead of project and development services at JLL, said costs have leveled off from the surges observed the past couple of years as inflation more broadly has subsided. While costs haven’t necessarily come down, they’re no longer growing as much or as quickly as they had been.

“The past two years, it’s been sticker shock on a daily basis, but we’re at a point where [tenants] are able to plan and budget accordingly,” Molinini said. “More and more of our clients are coming to us with realistic schedules and budget expectations. It’s a much better situation today than it has been in prior years, when costs were changing so dramatically … [even] on a month-by-month basis.”

Still, even if cost increases have abated, companies today are investing more in their real estate at a time when many also are reducing their footprint or exiting leases entirely. For the offices companies continue to occupy, it’s become typical for them to be replete with amenities, flexible workspaces and the latest technology.

Since so many companies are operating in a hybrid model, it’s become imperative, for example, for virtual meetings to take place in the office, Molinini said. A workplace-design survey by JLL found 19% of workplace activities involved virtual collaboration. It found surveyed workers are in the office on average 3.1 days a week, with Tuesdays and Wednesdays seeing the highest share of in-office work, at 53% and 54%, respectively.

The flight-to-quality trend happening in office-leasing decisions is also rippling down to space design and buildouts, Molinini said.

“Companies want to build spaces that their employees want to come back to work to, whether it’s human-led design, focusing on wellness or sustainability or amenities or technology,” he said. “The challenge is, when people come into the office, they need to have the flexibility to have focus work, in-person collaboration, and they still need to have the virtual collaboration. Designing office space today is a lot more complicated when you’re trying to balance those themes.”

Landlord tenant-improvement allowances are shifting

In the tenant-favorable office market that’s been pervasive since the pandemic, landlords have attempted to retain and sign on tenants by offering lofty concessions, including beefed-up tenant-improvement allowances.

And, thanks to inflation, more elaborate build-outs and a much smaller pool of tenants in the market, owners have gotten more aggressive at their offerings, even when it eats into their income.

A separate analysis by JLL found office REITs — which own about 15% of the U.S. office market — saw their highest concessions ratio ever in 2023, with only slight declines so far this year. Open-ended diversified core funds, which own roughly 10% of U.S. office space, spent $2.2 billion on TI allowances in 2023. That’s 20% lower than the highest 12-month total of TI spend by those funds in 2019, and their concessions spending has also moderated somewhat this year.

According to JLL, 10-year equivalent TI packages have fallen 6% on an annual basis and have averaged about $75 per square foot in the past year.

Still, Molinini said, on the whole, the delta between office landlords’ TI packages and the cost of building out a tenant’s space is growing.

“There are certain markets and certain building types where the gap is much closer than in other markets and in other buildings types, where landlords may not have the ability to offer the tenant-improvement allowance that closes the gap,” he said. “Landlord concessions vary on a market-by-market basis, I would say, a lot more than the project costs vary. But, on average, the gap has been growing. Project costs increased faster than landlord concessions have increased.”

Molinini said landlord concessions are substantially more than they have been in prior years but added much of what tenants are choosing to spend their money on in their buildouts today aren’t necessarily covered by TI allowances, such as furniture and technology.

Source: “Office-Upfit costs continue to rise but have leveled off from inflation spikes”

The national rent index saw both one and two-bedrooms increase 1.2% this May to medians of $1,504 and $1,865, respectively, marking the first time there has been monthly growth rates of over 1% in 20 months, according to Zumper.

Syracuse and Columbus rents were the fastest growing nationwide, both climbing over 20% since this time last year, while demand has shrunk in some of the biggest California cities as the majority of this state’s markets experienced declining annual rent rates.

On an annual basis, the national one-bedroom rate was flat while two-bedrooms inched up 0.5%. Although the annual rates have cooled significantly from the price hikes experienced in the last few years, they have not offset those large increases. As a result, the national one-bedroom rent is still $287 more expensive than it was 4 years ago and the national two-bedroom rent is nearly $400 pricier.

Seven of the 11 California cities in the report had negative annual rent rates for one-bedroom units and of those 7 declining markets, nearly all are located in the top 20th percentile in terms of price and population. Oakland and Sacramento led the pack with rents down between 8% – 9% since this time last year. Los Angeles, San Jose, San Francisco, San Diego, and Long Beach followed suit.

Declining demand – as opposed to increased supply – seems to be the main reason why rents are diving in California, Zumper concludes. Of the top 50 largest markets, the Bay Area and the Los Angeles metro area have seen some of the largest population losses in the last few years. Also these two areas have not recovered from COVID-related job losses Meanwhile, San Diego experienced net move-outs in nearly every submarket and experienced the worst demand performance of the nation’s 150 largest cities, while Sacramento’s occupancy rate has continued to decline every quarter between 2021 through 2023.

On the other end of the spectrum, Syracuse and Columbus had the fastest growing rents nationwide, both climbing over 20% annually.

Syracuse saw one-bedroom rent jump 28.6%, while Columbus rent climbed 22.5%. Notably, Syracuse rent also had the biggest monthly growth rate nationwide as well, Zumper pointed out. Syracuse has recently seen historic population growth, it houses a large national university, and many homes are owned, rather than for rentals, so the demand and competition in this city have swelled considerably, it said. Meanwhile, Columbus has been rapidly developing, drawing many people in for a more affordable cost of living and employment opportunities – the city actually saw the largest population growth among major US metropolitan areas at the end of 2023. With the rising demand in both Syracuse and Columbus, rent rates will likely continue to increase throughout the year in both cities until new apartment supply is built, Zumper said.

Source: “Apartment Rents Post National Monthly Growth of Over 1% in May“

The number of law firms choosing to relocate their offices instead of renew existing leases is growing, and amenities have become a critical factor in relocation decisions, Colliers concluded in its 2024 spotlight report on North American law firm practice groups.

“Law firms seek buildings that provide modern, efficient workspaces,” Colliers stated, noting that firms are hunting for universal office designs that enable both privacy and collaboration. “These designs are more easily implemented in newer buildings with flexible floor plates and modern infrastructure supporting the latest technological needs. Relocations can be opportunities to rebrand the firm’s physical presence in line with contemporary standards, portraying a forward-thinking, adaptive culture.”

Underlying this effort is the belief that a high-quality work environment can help attract top talent, encourage staff productivity and well-being, and enhance a firm’s prestige. This is happening even as “the slow and deliberate return-to-office pace appears to be moderating.”

Even though many tenants require employees to work in office at least three days a week, a tight labor market favors workers, and significant cultural shifts are occurring. These shifts are affecting office design, space utilization, and employee expectations. Law firms are also demanding more flexible lease agreements, including new termination options.

All this is happening as the U.S. office market has recorded over 245 million SF of negative absorption since the pandemic, more than double the negative 93 million SF during the Global Financial Crisis (GFC), Colliers noted. It predicted the trend will continue “firmly in the red” for 2024.

“At the start of 2024, the U.S. office vacancy rate climbed to 17.5%, 40 basis points higher than in Q4 2023. Absorption is expected to remain firmly in the red for 2024…The trend of structural vacancy could intensify as evolving demands and higher ESG standards render many older buildings functionally obsolete.”

In addition, spaces with state-of-the-art amenities will command a premium, especially as new developments dry up. Even though demand for Class A facilities remained strong, projects under construction fell 55% because of higher construction and financing costs and interest rate uncertainty.

Law firms are also demanding more flexible lease agreements, including new termination options. Nevertheless, 86% plan to sign long-term leases of 10 years or more. At the same time, Colliers noted, overall, most occupiers are cutting space by 20% to 30%. It found that 56.5% of law firms that are relocating intend to reduce their square footage, 34.5% intend to maintain it, and 9% will increase their space.

In spite of all these challenges, Colliers found that gross asking rents have generally continued to rise, with the average for the 20 markets it covers at $44.83 – 5.1% more than in its previous report. The flight to quality at the expense of Class B and C buildings has encouraged higher rents for Class A properties.

Meanwhile, Class A vacancy rates rose in the same markets throughout 2023 and into 1Q 2024, driven by higher taxes and operating expenses. The gap between suburban Class A and CBD vacancy rates narrowed, with suburban rates up 60 bps to 20.4% and CBD rates up 20 bps to 19.5%.

But even though landlords are raising asking rents for law firms, they are also being pushed into increasing tenant improvement (TI) allowances, expanding the gap between asking and effective rents. On a national basis, the survey showed an average tenant allowance of $122 per SF and 10 ½ months of free rent. In the West, the average TI allowance was $155 per SF, with 9.1 months of free rent. For the Northeast, it was $140 per SF and 13.2 months of free rent. In the South, the figures were $104 and 10 months, and in the Midwest $92 and 10 months. In Gateway markets, the average was $148 and 13.4 months, in large markets $96 and nine months, and in medium markets $130 and 10.5 months.

Among cities, the highest rent for Class A law firm space was in Manhattan where average asking rent was $80.43/SF with a TI of $150 and 14 months of rent abatement. San Francisco came second, with $77.27 asking rent, a TI of $200 and 12 months of free rent. In Austin, asking rent stood at $60.53 with a TI of $125 and eight months free rent. In Washington, DC, asking rent stood at $59.07 with a TI of $150 and 18-20 months free rent.

“The significant increase in TI allowances requires law firms to explore various financing options, potentially impacting financial health and operational flexibility,” Colliers noted. “Concurrently, landlords’ scrutiny of firms’ financial stability complicates lease negotiations, compelling firms to secure leases with protections against market volatility and unforeseen financial challenges.”

 

Source: “More Law Firms Opt to Relocate Instead of Renewing”