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Houston Leads Nation with a 70 Percent Increase in Office Rental Rates in Recent Years, JLL Reports

by Realty News ReportMarch 12, 2014
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Skyline of downtown Houston. Photo by Ralph Bivins, RealtyNewsReport
Skyline of downtown Houston. Photo by Ralph Bivins, RealtyNewsReport

HOUSTON – Houston has led the nation in skyscraper rental increases, with its trophy office properties rents rising 70 percent since 2005, according to a new report by JLL.

San Francisco was second with a 69 percent trophy-office rental increase, followed by Austin at 54 percent, Denver at 52 percent and Salt Lake City at 50 percent.

“Bottom line: It’s a good time to be a landlord,” according to JLL’s Spring 2014 U.S. Skyline Review. The report, which focuses on Class A and trophy office buildings, was produced by JLL, the real estate company formerly known as Jones Lang LaSalle.

Houston ‘s growth amongst energy and energy service companies pushed vacancy rates to low level and rental rates rose 5 percent over the last year, to their current average of $44.50 per sf full service gross, JLL reported.

“Houston landlords are on the favored side in the near and middle term as vacancy rates are tightening at the same time rents are rising,” said Chrissy Wilson, Senior Vice President at JLL.  Rents will continue to rise until new office towers are completed in downtown Houston in 2016 or 2017, Wilson said.

Hines recently started a 1 million sf spec building at 609 Main in downtown Houston. RealtyNewsReport.com has reported that this is believed to be the largest spec office project under construction in the world.  Crescent also recently announced a 600,000-sf project 6 Houston Center on Block 95 in downtown. Crescent CEO John Goff told RealtyNewsReport that he is preparing will start that building on a spec basis  also in 2014.

Among major cities in 2013, Houston led the nation with a 6.1 percent direct vacancy rate in trophy properties, the JLL report said.  Houston was followed by San Francisco with a 9 percent vacancy, Washington at 10 percent and Boston at 11 percent. The also-rans were New York, Seattle and Chicago, all less than 15 percent, but not exceptional.

Across the nation, construction of new office remains limited, In spite of tightening market fundamentals, JLL said. Ten of the 43 cities included in the JLL report have vacancy levels below 10 percent, with seven showing no current development and two seeing just one proposed project.

The constrained development pipeline has led to climbing rents: over the past three years, rates in the skylines increased 17.1 percent compared to the 9.8 percent increase seen by the broader market.

“The lack of development is causing a space crunch on each end of the spectrum,” said John Sikaitis, Managing Director of Research at JLL. “Trophy properties are far outperforming the broader market with respect to occupancy levels and rents and a similar tightening exists in value-add properties. This squeeze from both ends is expected to have a significant impact on the properties in the middle as tenants are being priced out of their former go-to options.”

JLL said 16 markets around the nation have spec office projects in progress. Houston, Fort Worth, Boston, Washington DC and Bellevue, Wash. Are projected to have two specs break ground in the next 12 months.

 — Ralph Bivins, Editor, RealtyNewsReport

 

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