Urban 24-hour cities across the U.S. with global trade and cultural connectivity such as New York City, Los Angeles, and Miami continue to lead the nation in population and job growth - two key drivers for healthy office leasing activity.
While the appeal of suburbia is by no means disappearing, urban population growth has steadily continued to outpace that of suburbs nationally during the past five years, according to U.S. Census data. This is attributable to the increasing number of people across generational groups - from millennials to baby boomers - choosing to live in dense urban cities, opting for the live-work-play lifestyle, and inevitably affecting office leasing in these markets.
Although urban city populations are growing at a faster rate than suburban areas for the first time in a century, cities large and small report job growth in office sectors. According to the Urban Land Institute, office work accounts for two-fifths of new jobs and affects both central business districts and suburban offices. While office absorption has been brisk with vacancies down 0.9 percent year-over-year, the combination of high demand and narrowing supply gives landlords an advantage as shown by rising rents.
The transition into a balanced market since the Great Recession has been challenging. For example, during the downturn in Miami, there was an over-abundance of new office space developed in the central business district, which forced many landlords to offer below market rents or tremendous concessions to attract tenants, even at new buildings.
The competitive pressures created by the surge in supply of space led one of the Miami's iconic buildings, Southeast Financial Center, to invest $21.5 million in capital improvements to maintain its premier status in the market. During the recession years, Southeast Financial Center's asking rents remained steady. Today, rents at this property have surpassed the peak of the last cycle prior to the Great Recession.
In Los Angeles, economic factors such as growth in a wide range of industries - including finance, technology, and media - and declining unemployment have translated into heightened demand for office space as companies seek to expand. According to JLL, 2.3 million square feet of office space is currently under construction in the Greater Los Angeles area and is expected to merely help alleviate the tight market as supply is gradually delivered. At the same time, with nearly $150 million of current and future plaza and lobby renovations underway in downtown trophy assets, landlords of existing buildings are positioning their properties to compete and retain tenants.
The need to address better public transportation is a hot topic in the urban-versus-suburban debate regarding preferred locations of tenants and workers. A study conducted by INRIX and the Centre for Economics and Business Research revealed that traffic congestion costs U.S. individuals and businesses $124 billion a year. Minimizing this cost will positively affect office leasing within city cores and position commercial properties with shorter, easier commutes for workers or with high walkability scores for greater profitability.
As part of the nationwide effort to switch commuters in major regional cities from an inefficient dependence on cars to a model of mass transit, South Florida and Los Angeles have adopted projects that resemble European and Asian infrastructures.
After decades of huge investments to improve mass transit within a car-obsessed city, Los Angeles now has a network of nearly 200 bus lines, six rail lines, and an extensive regional commuter rail system. Likewise in South Florida, a $375 million rail project is underway to seamlessly connect Miami, Fort Lauderdale, Fla., West Palm Beach, Fla., and Orlando, Fla.
The model U.S. city for mass transit, New York City is avidly working to improve and modernize travel for New Yorkers and visitors by renovating its aging subway stations to shorten travel times.
Urban Office Users
Legal, professional services, and financial firms have traditionally been among the dominant industries in urban office leasing. While most of these firms are adopting more modern, efficient designs geared toward cost savings and collaboration, such as clustered conference rooms for meetings and individual glass-walled offices, they aren't completely adopting the open workstation concept of creative-focused companies.
Some businesses need the traditional office designs to be conducive to client confidentiality. Also, with millennials accounting for the majority of today's workforce, commercial building and workplace appeal for the top talent is more critical than ever. The ability for commercial buildings to project and accommodate evolving space requirements is crucial when it comes to attracting and retaining these tenants.
One example is Miami's oldest law firm Shutts & Bowen's recent move from Miami Center across the street to Southeast Financial Center, accommodating the firm's need for three contiguous floors. The new office includes a technologically advanced conference center, which enables its attorneys to work with clients worldwide. Shutts & Bowen took occupancy of 69,155 sf at the end of 2015 and has already committed to expand by an additional 6,500 sf.
Behind traditional firms' leasing activity within the urban office scene are technology, advertising, media, and information companies. In the Greater Los Angeles area, when Yahoo moved offices to Playa Vista at the end of 2014, a few large blocks of vacant space were left, both in Santa Monica and Burbank. In a relatively short timeframe, the Burbank portion was taken. Hasbro Studios, which previously occupied 45,000 sf of office space in a nearby office, took Yahoo's former space in Burbank's Media Studios North by signing an 80,000-sf lease. This shows the strength of the Los Angeles office market because even when one prominent tenant leaves, other organizations express interest swiftly.
High-quality, well-designed office space can be used as an important recruiting tool for employers. With tenants' office requirements becoming more dynamic and new office amenities targeted toward company culture, savvy office brokers recognize the benefits of working with property management and retail teams to illustrate how space and place can enhance a company's brand image.
To attract and retain more tenants, today's commercial teams work together to bring sophisticated solutions during lease transactions, so as not to compromise the economics of the deal. This is especially important in renewal-driven, low vacancy office markets like New York City, which is still experiencing growth for expanding and new-to-market tenants.
Between 2017 and 2020, an estimated 16 msf of new and returned blocks of office space will be available in the New York City market, according to JLL. Thanks to improved transportation options in Brooklyn, industrial buildings are being repositioned into office space as tenants are looking outside of the expensive Midtown area.
Due to the imminent influx of space options, many existing buildings are becoming efficient by eliminating columns in floorplans and increasing outdoor space through adaptive reuse. Particularly in large multi-tenant urban office buildings, retail and amenity offerings are paramount to the office experience for today's workforce.
Modern tenants covet low or no cost amenity options such as fitness facilities, salons, dry cleaners, food, and entertainment that offer on-site convenience and experiences - a sense of place. The ramping up of capital improvements are not only aesthetic but designed to create meaningful service options for tenants, differentiation from competitors, and exceptional office experiences.
The form urban buildings take - adding complementary, even community-serving uses by melding nonoffice and office work together to drive innovation - helps forge a strong identity to reinforce corporate culture for tenants and deeply affects office leasing. Therefore, the best investments commercial building owners can make to ensure their assets remain market leaders and top-of-mind for companies seeking office space are those that offer modernizations, conveniences, and flexibility. The ultimate result will be significant return on investment to the bottom line.