JLL: Downtown Core Office Space Commands Top Dollar, But Rent Growth Expected to Moderate

Rents for downtown core office buildings jumped 7 percent year-over-year into record territory, reported JLL, Chicago.

So-called “skyline” rents now average $43.79 per square foot, with premium properties garnering $56.82 per square foot, JLL said.

“Tightening conditions mean that tenants won’t see a reprieve for a few more quarters, but we do anticipate rents in the Skyline will begin to moderate,” said JLL Research Vice President Julia Georgules. “We expect annualized Skyline rent growth this year to rise by just half the rate of 2015, which is welcome news to tenants in markets such as Oakland and Austin, where Skyline rents are up by more than 68 and 43 percent, respectively, since 2010.”

Georgules said property owners–especially those with Skyline properties currently under construction–still hold the upper hand. Rents for those rising towers now exceed $61 per square foot, a nearly 40 percent premium over average Skyline asking rents. “And in some places like New York Hudson Yards and San Francisco Salesforce Tower, landlords are asking more than $100 per square foot,” she said. 

Overall investment volumes in Skyline properties fell slightly last year, JLL reported. Only 9.5 percent of the Skyline across North America traded in 2015, down from 10.7 percent that changed hands in 2014. First quarter investment volume declined 72 percent in primary markets and nearly 47 percent in secondary markets.

“We’ve seen six consecutive years of cap rate compression and heightened liquidity across the Skyline, which has led to strong pricing gains for investors,” said JLL Capital Markets President Jonathan Geanakos. “But volatility in the macro markets, current record pricing levels and an increasing sensitivity to risk caused investors to take a more cautious position in the first quarter.”

Geanakos noted that he expects to see “modest” declines in overall transaction volume this year, “but new investor demand–especially from foreign capital–will drive near-term price stability and leave room for further modest cap rate compression,” he said.

Foreign investors now own more than 14 percent of downtown core office properties, with Canadian and German investors claiming more than 60 percent of that total, JLL said. In 2015, those cross-border buyers remained mostly focused on the biggest and the best; more than 60 percent of those dollars targeted the most expensive assets. Nearly 95 percent of their investment dollars went into primary markets such as New York ($4.6 billion), Boston ($1.4 billion) and Seattle-Bellevue ($700 million).

But JLL predicted this trend to change. Challenged by peak pricing and scarce investment opportunities, both foreign and domestic buyers will target hot secondary markets where rent growth is still achievable and tenant demand will persist in the months to come. “Atlanta, Portland, Miami and even Cincinnati, Phoenix and Pittsburgh have all benefitted from that interest,” the report said.