Office Landlords Struggle to Raise Rents Nationwide (Except West L.A.)

Office Landlords Struggle to Raise Rents Nationwide (Except West L.A.)

“West Los Angeles, on the other hand, has the best growth outlook of the country’s top 56 markets because of supply constraints”

2/22/17 Wall Street Journal https://www.wsj.com/articles/office-landlords-struggle-to-raise-rents-1487739601?emailToken=JRrzf/t+aX6fitY2a8w72lMpZaRND+aPSlfQNnzRf1PQrmHaruasgrkywsG+oHiiAFx34cwfqjdjFWKO2zs0BJY

Office landlords in many markets are having a harder time raising rents because of new supply and slowing job growth, according to a new report by a leading real-estate research firm.

Green Street Advisors, of Newport Beach, Calif., has revised its projections for rent increases through 2020 to about 3% annually from 4% annually.

The firm said that rent increases in 2016 also were less than expected.

Green Street Advisors said the largest slowdowns in office-rent increases are being seen in major East Coast cities such as Boston, seen here. 

 “We see no reason why the office markets are going to start delivering rent growth at a more meaningful pace,” said Jed Reagan, a Green Street analyst, in an interview. “If anything, we think as the decade wears on, job growth is likely to slow down a little bit and supply growth is expected to pick up a bit.”

Some cities, of course, are enjoying better conditions than others. Green Street said that the largest slowdowns are being seen in major East Coast cities such as New York, Boston and Washington, where developers are increasingly active.

West Los Angeles, on the other hand, has the best growth outlook of the country’s top 56 markets because of supply constraints, according to Green Street. “You don’t have new buildings going up on every corner,” Mr. Regan said. “That’s good news for landlords.”

 

Most office markets have been improving in recent years as the economy has grown.

But as rents have started to rise, developers in the hottest areas have begun delivering new supply.

Last year, for example, new supply equaled 1.2% of the total U.S. office space, compared with 0.3% in 2012, according to Green Street. Between this year and 2021, new supply is expected to equal 7.6% of total space, the firm said.

Meanwhile, job growth is slowing in some markets. In New York, office jobs grew by 21,700 in 2016 compared with 44,900 in 2015, according to the city’s Office of Management and Budget. The agency is projecting job growth of 1.3% and 0.9% in 2017 and 2018 respectively.

In Silicon Valley, vacancy is growing in some markets partly due to merger-and-acquisition activity, according to Phil Mahoney, vice chairman of Newmark Cornish & Carey, a real-estate services firm. Recent deals have included those between Broadcom and Brocade Communication Systems; Symantec and Blue Coat and Dell Technologies Inc. and EMC Corp.

“We have over 1 million square feet of sublease space in Santa Clara,” Mr. Mahoney said. “We really haven’t seen that much in this whole cycle.”

Some landlords disagree with Green Street’s conclusion that their markets are softening.

Job growth may be declining in New York, but it is coming off levels that were “blistering” by New York standards and it continues to be “robust,” said Marc Holliday, chief executive of SL Green Realty, the city’s largest office landlord.

Mr. Holliday said SL Green’s portfolio has an occupancy rate of over 97% and that average lease renewals are being done at rents that are over 20% higher than expiring rents.

“It can’t really get much better,” he said.

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