Competition for tenants in markets with an oversupply problem is pushing concessions higher, according to real estate services firm JLL.
With new office construction currently topping 100 million sq. ft., the office market is beginning to turn in favor of tenants in some markets. “The pendulum is swinging toward tenants in cities with a supply-demand imbalance driven by new construction,” says Scott Homa, senior vice president and director of U.S. office research with real estate services firm JLL. Homa notes that high levels of new construction are creating weakness for lower quality buildings, as well as overhang in new deliveries.
“Deceleration in the broader U.S. office market has occurred over the past 36 months with reduced absorption, and expansion now more confined than in 2016,” Homa says. “If you strip away co-working market, the office market has actually contracted in first quarter 2018.”
Competition for tenants in markets with an oversupply problem is pushing concessions higher, according to a first quarter 2018 JLL office report, which noted that while office rents grew overall by 1.6 percent in the first quarter, rent gains were outstripped by tenant concession packages. Allowances for tenant improvements (TIs) rose 3.5 percent in the first quarter to an average of $75 per sq. ft. That figure was even higher in markets where there is a lot of competition for tenants—up to $150 per sq. ft. for trophy properties.
The exceptions include Seattle and Los Angeles, where net effective rents are outperforming markets like New York, Chicago and the District of Columbia. Net effective rents are flat or diminished by aggressive concessions in these three markets, which also account for more than one-third of all new construction underway, with 15.4 million sq. ft. rising in New York, 7.3 million sq. ft. in Chicago and 7.6 million sq. ft. under construction in Washington, D.C. The JLL report notes that any new office deliveries will exacerbate oversupply in these gateway markets, which are already being negatively impacted by rightsizing and consolidating firms.