JLL Q2 2017 U.S. Office Outlook: Occupancy Growth Rebounds as Office Market Braces for New Supply

After a slow start to the year, the U.S. office market rebounded during the second quarter thanks to sustained tenant demand, consistent economic fundamentals and a raft of new supply. According to JLL’s Q2 2017 U.S. Office Outlook, there were 11.7 million square feet of new deliveries in Q2, which helped push vacancy up to 14.8 percent. Even as demand stabilizes, asking rents for new product have risen 3.2 percent over the year and by 4.9 percent for CBD Class A space. As for uptake of all this new space, net absorption totaled 8.8 million square feet in Q2, bringing year-to-date occupancy growth to 9.9 million square feet. 55.4 percent of that growth has come from two markets alone – Seattle-Bellevue and Dallas – powered by organic tech and corporate expansion.

The report also noted that while tech is still a leader in leasing volume, its share of transactions (17.4 percent) has dampened compared to previous quarters due to M&A activity and uncertainty over immigration policy.

JLL noted three key trends in the U.S. office market during the quarter:

-Concession packages are rising as landlords entice tenants to new developments and repositioned assets. Tenant improvement allowances have jumped 10.5% since 2014 as landlords face a more competitive leasing environment. Increased concessions are helping reduce the pain tenants are feeling as a result of rising face rates.

-Vacancy rose slightly once again as a result of speculative construction. With 11.7 m.s.f. of new deliveries in Q2, total vacancy rose for the third consecutive quarter to 14.8%. Increases were found across property types and geographies, particularly within the Class B segment, as tenants opted for newer product.

-Absorption is up, but will remain subdued over the near term. After a slow Q1, net absorption rose to a healthier 8.4 m.s.f. during Q2. This is still below levels seen in 2014, 2015 and 2016. Growth is expected to remain muted as relocations to new supply and give-backs of second-generation space occur.

Moving into the second half of 2017 and into 2018, JLL expects the wave of new supply to deliver over the next six quarters will markedly alter the office landscape, increasing competition among landlords for tenants and stabilizing rents in the process. And as tenants flock to new quality supply, we’ll continue to see slightly higher vacancy and subdued absorption of second-generation space.

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