New JLL report shows glimmers of hope for US office market
According to JLL’s new Office Outlook search for the first quarter of 2022. JLL found that the average lease term in the first quarter increased to 8.2 years, up 30 basis points from the fourth quarter of 2021. Leases of 10 years or plus now account for 51% of all business, the first time these transactions have accounted for more than half of office rental volume since the start of the pandemic.
JLL’s report indicates that new office supply continues to capture inordinate demand. More than 20% of rentals in the first quarter of 2022 concerned buildings delivered since 2015, even if these new buildings represent only 12.8% of inventory. Older buildings (1970-1999) represent 60.4% of the national inventory but capture 38.6% of rentals.
A major theme of JLL’s report was that the flight to quality is not slowing down. The total vacancy rate rose another 20 basis points in the first quarter of 2022, bringing it to a new high of 19.9%. But that’s not exactly what happens in new buildings. New supply vacancy fell 10 basis points to 18.8%, and it has lost almost 100 basis points since the third quarter of 2021.
Along with the flight to quality, office concessions also remain high. Asking rents were 0.2% above pre-pandemic levels in Class A buildings in the central business district in the first quarter. But JLL reports that effective rents in this segment are still 5.1% below their level at the end of 2019.
The office market still faces great uncertainty, but there are glimmers of hope. Clarity around hybrid working is forming, allowing tenants to better predict long-term space needs. Market momentum is also strengthening, with gross rental volume increasing by 5.4% in the first three months of 2022. This is the 5and consecutive quarter of improved demand from office tenants. The office market still has a long way to go to regain its full health, but it does not appear to be in the dire straits that some have predicted.