Office Markets in Tech-Heavy Cities Lead 2015 Pack

By Eliot Brown 

The U.S. office market continued its slow-and-steady recovery in the first quarter, with technology-heavy markets leading an overall modest growth of rents and occupancies.

U.S. employers added 6.4 million square feet of space in the first quarter, causing the vacancy rate to tick down to 16.6% from 16.7% the previous quarter, according to real-estate-research service Reis Inc. That is still relatively close to the 17.6% vacancy rate reached after the recession in 2010, and significantly above historical norms.

Rents also showed modest improvement, with prices sought by landlords increasing by 0.9% to $30.21 a square foot, up from $27.50 in 2010, according to Reis, which surveyed 79 markets.

With the labor picture continuing to improve, four-plus years of incremental growth is adding up to a relatively healthy office market, giving landlords newfound optimism.

"It's not the best market I've ever seen, but it's certainly on its way, " said Ryan Severino, an economist at Reis. "All of the signs are really pointing to a better future."

As has been true for the past few years, the top-performing markets tended to be those where tech companies are fast-expanding. The San Jose, Calif., area, which includes Silicon Valley, saw rents sought by landlords jump 7.2% over the previous year to $28.03 a square foot, the fastest rent growth in the country. There, mature technology companies have been adding employees at a rapid clip. Facebook Inc., for instance, is in the process of opening a giant Frank Gehry-designed expansion at its headquarters in Menlo Park, Calif., complete with a sprawling roof garden.

San Jose was followed in the ranking by Seattle, which posted a 6.4% increase in rents over the first quarter of 2014 in large part because Amazon.com Inc. has been adding space at an unprecedented rate.

San Francisco, a city where companies that were startups a few years ago are now leasing large swaths of space, was next, with a 5.9% increase. Uber Technologies Inc., for instance, in March leased nearly 200,000 square feet in a downtown tower, the latest in a series of recent leases that expand the company's footprint.

Similar stories abound, as tech tenants anticipate years of future growth.

"They have very aspirational hiring projections and they will need a place for those people," said J.D. Lumpkin, a San Francisco-based executive director at real estate services firm Cushman & Wakefield Inc.

While the tech-heavy markets keep growing, there are signs of a slowdown in markets heavily dependent on oil. Houston, home to nearly one-sixth of the office space under construction in the U.S., has seen a jump in sublease space.as energy employers shed offices.

At the end of the first quarter, 6.3 million square feet of sublease space was available, up from 4.8 million at the end of 2014, according to real-estate brokerage Savills Studley. These listings "were dominated by large blocks of space posted by those directly affected from the new normal of oil prices," the company said in a report.

Write to Eliot Brown at [e-mail]

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