Perspectives on
the U.S. office sector
February 2012
Sunbelt economies across the U.S. starting to demonstrate
considerable signs of life in the economy and office sector
• Sunbelt office markets are recovering with the pace of the
recovery even surpassing the U.S. as a whole from an occupancy
growth perspective of late
• Employment gains in multiple sectors are consistently on par with
or better than the national jobs recovery over the past six months
• Population growth and increasing net migration are shifting back
to positive territory, bringing new residents to the region
• The last major piece of the recovery – housing – is beginning to
reach its low throughout the Sunbelt and beginning to rebound
• Even with recovery, markets remain far off from 2006 peaks
Within the past year, the number of geographies demonstrating signs of
economic and market recovery is beginning to expand. Although nearly
all areas of the U.S. were negatively impacted by the recession,
nowhere was the result more dramatic than or as well-covered as the
Sunbelt markets: Fort Lauderdale, Jacksonville, Las Vegas, Los
Individual market segments at the end of 2010 and the beginning of
2011 in places like Orange County, Tampa and Phoenix remained soft
with occupancy declines, increases in space options and the continued
decline in office rents and increase in concessions.
Fast forward 12 months and nearly all markets posted substantial
upticks in occupancy, declines in vacancy and moved closer to seeing
office rents and concession levels hit bottom. In 2011, occupancy gains
in these beaten-down housing economies totaled nearly 6.0 million
square feet and provided evidence that as we move forward in 2012,
most of these geographies will start to outpace the national recovery due
to strengthening employment, migration and housing market shifts with
absorption rates in the 1.5 percent to 2.0 percent range across most the
Sunbelt geographies.
Angeles, Miami, Orange County, Orlando, Phoenix, San Diego, Tampa
and West Palm Beach.
The perception in many of these markets is that the recovery still
appears lethargic and remain quarters, if not years, away from
bottoming. However, recent economic and real estate indicators
demonstrate that most of these geographies have already hit their
cyclical low and are poised to grow at even quicker speeds moving
forward. Over the next six to 12 months, that growth is even likely to
surpass national rates of growth related to overall employment
fundamentals, economic activity and office market indicators.
Office net absorption rates as percent of inventory – 2011
Orange County
2.4%
Tampa Bay
2.1%
Miami
1.6%
Orlando
1.5%
Phoenix
1.4%
U.S.
1.0%
Office recovery indicates future gains that will eventually surpass the
national recovery in 2012
Rates of net absorption (per inventory) 2010 , 2011, 2012 (projected)
Unlike previous cycles, where demographic changes altered office
patterns, the Sunbelt is demonstrating what appears to be the reverse:
allowing office market trends to guide recovery in some cases. Overall,
the Sunbelt seems to be faring relatively well with respect to office
market demand within the past six months. Saying that, throughout the
course of 2010, the 11 Sunbelt markets we are analyzing posted
occupancy losses in the office sector totaling 260,116 square feet,
equating to approximately -0.1 percent of total inventory.
2010
-0.1%
2011
+1.0%
2012*
+1.7%
Jones Lang LaSalle • Perspectives on the U.S. office sector • February 2012 2
Sunbelt-wide employment almost uniformly outperforming national
Other areas are not necessarily trending above the national
averages across key sectors
employment growth rates, however, some positive dynamics are
Employment trends across the Sunbelt markets are beginning to
occurring throughout the key sectors and subsectors in recent months.
demonstrate heightened levels of growth as well, outpacing the national
recovery of late and picking up speed month by month. Markets such as
Phoenix’s employment growth is on par with the U.S. in total non-farm
Jacksonville, Miami, Orange County, San Diego, Tampa and West Palm
and private employment, but is one of the few cities to have lost PBS
Beach have surpassed the national average in total non-farm, total
jobs. PBS jobs in Phoenix have been steadily declining for four years
private and professional and business services (PBS) job growth, driving
straight. However, declines in this key office-using sector have started
aforementioned office absorption patterns. Orange County, Tampa and
to stabilize over the past nine months and appear to be heading close
Jacksonville have led the way in employment recovery, besting the
to bottom. Despite continued losses in the PBS sector, higher-than-
annualized national rates of growth in all three key categories.
expected growth in the education and health services (5.1 percent
Meanwhile Miami, San Diego and West Palm Beach have experienced
annual increase) and leisure and hospitality sectors (2.4 percent annual
greater than 2.0 to 3.0 percent annual increases in key employment
increase) have counteracted the PBS loss. This growth is an indication
sectors over the past several months with rates of growth accelerating.
that the area is beginning to diversify more into the healthcare, biotech
Further, Orange County and West Palm Beach saw nearly 4.0 percent
and for-profit education sectors, three areas that have driven high
annualized growth in PBS employment, while Jacksonville and Tampa
levels of growth of late in the office sector.
outperformed both at 5.9 percent and 4.1 percent respectively, even
surpassing the strong national growth rate of 3.5 percent.
Orlando is underperforming the national employment recovery in the
three key sectors of total nonfarm, private employment and PBS
Floridian markets have dominated the jobs
recovery of late: Jacksonville’s 5.9 percent
annual increase in PBS jobs is among the
largest in the nation, while Tampa’s 2.5+
percent annual growth in all measures shows
signs of revival and diversification. Miami
also surpasses both national expectations,
increasing at around 1.9 percent
overall annually.
employment. However, Orlando’s 5.9 percent annual average gain in
leisure and hospitality (L&H) employment helps to balance stagnant
growth in other sectors. More importantly, L&H in Orlando is almost
always a leading indicator. Las Vegas, Los Angeles and Fort
Lauderdale also registered below-average rates of growth, but all three
of these geographies have seen growth in nearly all employment
sectors turn into positive territory at the end of 2011 and gain traction
in recent months, a sign that these geographies are finally joining
the recovery.
Employment growth rates across three key sectors starting to heat up across the Sunbelt
Phoenix
Los Angeles
Orange County
San Diego
Fort Lauderdale
Jacksonville
Miami
Orlando
Tampa
West Palm Beach
Las Vegas
U.S.
Total nonfarm 12-month
employment growth
1.7%
0.4%
1.8%
2.2%
0.5%
1.8%
1.8%
0.9%
2.6%
1.0%
0.6%
1.5%
Green signifies > national average; red signifies < national average
Private 12-month
employment growth
1.9%
0.6%
1.9%
2.6%
0.7%
2.2%
2.0%
0.9%
2.6%
1.6%
1.1%
2.1%
PBS 12-month
employment growth
-1.1%
1.4%
3.9%
3.7%
-2.9%
5.9%
3.6%
0.2%
4.1%
3.9%
1.4%
3.5%
Jones Lang LaSalle • Perspectives on the U.S. office sector • February 2012 3
After several years of net migration away from the Sunbelt markets,
Average Sunbelt migration pattern
migration trends starting to shift back to positive territory
8
produce enhanced occupancy gains across the office market. After
6
shifting significantly over the past several years, net migration trends to
4
the Sunbelt markets finally appear to be approaching levels that have
been common over the past several decades: consistent annual net
migration to these various geographies.
In terms of domestic migration, the majority of Sunbelt cities display a
common pattern: a net loss of residents in 2007, shifting to an inflow of
residents in 2008 or 2009 and then stable, yet increasing, population
People (thousands)
Increased migration to areas drive jobs and in turn, increased jobs
2
0
-2
-4
-6
2007
2008
2009
2010
growth in 2010 and through 2011. While most Sunbelt cities adhere to
this common trend, a number of outliers still remain. Jacksonville,
charge due to strong immigration trends from Latin America driving not
Orlando and Tampa never saw a net outflow of residents, while Los
only population, but also business and economic growth as well as being
Angeles never saw a net influx.
the hub for Latin American investment.
However, markets that adhered to this trend are seeing optimistic
Population growth in most cities should continue to increase, although
population gains. In fact from 2009 to 2010, eight of the 11 Sunbelt
some cities may fluctuate, such as Orange County (although conforming
markets we are tracking showed significant positive migration, while
to the Sunbelt migration pattern in most cases, it saw a slight decrease
only three demonstrated shifts downward in migration trends. Nowhere
in population in 2010) and more so Los Angeles.
is this trend more apparent than in Florida where all markets posted net
migration increases of at least 20.0 percent (almost 30.0 percent in
Orange County has seen consistent net decreases in population since
South Florida) with Miami and Fort Lauderdale, in particular, leading the
the early 2000s, yet has been one of the leaders in the recent office and
economic recovery. However, the county’s contraction in outflow from
Overall net migration – 2010
over 40,000 people per year before the recession to 8,000 in 2010
net migrants
growth
Tampa
21,451
60.7%
Miami
17,367
83.2%
into technology and other industry segments..
Orlando
16,035
34.7%
Los Angeles is the notable outlier, showing constant losses of around
Phoenix
15,117
24.8%
San Diego
14,888
35.1%
West Palm Beach
14,677
29.0%
Fort Lauderdale
12,207
78.4%
Jacksonville
6,752
27.0%
Orange County
6,068
-11.0%
Los Angeles
-43,354
-31.0%
Sunbelt markets
81,357
31.0%
indicates that there is more economic incentive to stay in or migrate to
Orange County than in past years based on the region’s diversification
100,000 people per year, meaning that its growth was and still is
comprised solely of international immigration. In fact, its pre-recession
outward migration was greater than its current levels, but still
underscores its absence of office growth. Migration was negative both
before and after 2008 in Los Angeles and the area will almost certainly
see a net domestic outflow of residents moving forward based on longerterm trends (higher cost of living, high taxes, traffic congestion, etc.)
From 2009 to 2010, all Sunbelt cities apart
from Los Angeles and Las Vegas registered
stable or increased levels of net migration.
Apart from Las Vegas, all Sunbelt cities have
seen improved migration patterns since 2007.
Jones Lang LaSalle • Perspectives on the U.S. office sector • February 2012 4
Housing crunch still felt, but on the verge of stabilizing
Housing price disparity among top Sunbelt markets
Since their pre-recession peaks, housing markets within the Sunbelt
housing markets have yet to begin recovery, but as a result of positive
office demand growth, employment and migration indicators, there is a
strong chance that most of these geographies are hitting their market
low and will soon begin to recover, if they have not already begun to yet.
Bottom
250.0
Price (Case-Shiller)
greater than any other region of the United States. In most cases, these
Peak
300.0
have experienced drastic reductions in price and sale volume, far
200.0
150.0
100.0
50.0
In almost all markets, there is over a 50.0 percent decrease in housing
prices from peak levels. Most Sunbelt housing markets are still seeing
falling housing prices, but instead of a difference of over five points on a
0.0
Las
Los
Miami Phoenix San
Vegas Angeles
Diego
Tampa
monthly basis, month-to-month drops are now fractional. Again, this
indicates that housing prices in these markets are likely to be bottoming
Builder confidence and resultant housing volume within the Sunbelt
and will start to show signs of growth through the end of 2012 and
appear to be guided more by foreclosure rates than falling housing
into 2013.
prices. In areas such as Greater Los Angeles, which has lower
foreclosure rates than much of the region, over 10,000 new units of
In terms of housing prices, Miami and Phoenix are both slightly above
housing have been authorized.
their lowest Case-Shiller scores, while Las Vegas is the only
metropolitan area to still show continued decreases in home prices. All
In other cities, specific influences also play an important role in the
other Sunbelt geographies are fluctuating and are most likely at their
housing market. Miami’s 51.7 percent uptick in housing starts is an
lowest points. In the coming months, these housing markets will likely
indication of investor confidence in the area’s connections to Latin
conform to a trend of slight, but steady monthly increases. Continued
America. Housing prices and volume have less correlation in the
gains in the office and employment sectors will drive migration in these
Sunbelt that in other regions, but as housing begins to catch up with
geographies. As a result, increased disposable income will drive
other market sectors, the two will begin to align.
consumption and thus demand, resulting in lower home vacancy and
foreclosure rates, as well as higher sales volumes appreciating prices.
High foreclosure rates are still an issue in the Sunbelt: all geographies
display well above-average foreclosure levels. Although foreclosures
are significantly lower than they were in the past few years, they are still
not conducive to growth and could prevent near-term significant
price escalation..
Recovering housing markets (growth in authorized units)
Housing unit growth
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
Greater Los
Angeles
Greater Miami
Orlando
San Diego
Other housing indicators
• Lower-than-expected housing starts in Jacksonville and Tampa,
whose office and employment growth is above the national
average. This indicates that new residents are taking advantage
of existing homes rather than investing in new construction.
• In metropolitan areas with high levels of inward migration, such
as Fort Lauderdale, Phoenix and West Palm Beach, increased
demand will boost authorized starts. In these cities, aboveaverage foreclosure rates (compared to the rest of the Sunbelt)
will begin to decline for similar reasons.
• Reduced foreclosure rates are giving builders confidence in
Orlando and San Diego. High levels of migration are also driving
residential construction.
• We must caveat that while these housing markets are at or near
bottom, they remain a very long way away from returning to 2006
and 2007 peaks from a price, volume and demand standpoint,
but at least the recovery has begun.
Jones Lang LaSalle • Perspectives on the U.S. office sector • February 2012 5
Office recovery indicates future gains that eventually surpass the
Vital to the continued improvement of most Sunbelt geographies in
national recovery in 2012 and into 2013, but we caution that markets
2012 will be consistent gains in employment across multiple sectors
have long way to go to get back to 2007 levels
with emphasis on diversifying economies. Since job performance has
The Sunbelt encompasses a wide range of metropolitan areas, all with
remained either constant or accelerating in these metropolitan areas
their unique opportunities and challenges to a strong and continued
not only among themselves, but also outpacing national results, it is
recovery. These markets suffered heavily as a result of the housing
probable that most Sunbelt markets will recover faster than the U.S.
collapse and that economic deterioration still presents a challenge in
as a whole in 2012 and 2013 and will see rebounds in their housing
analyzing their potential for growth over four years after their economies
markets as well, driving even further office demand from the housing-
started to unravel.
sectors (i.e. homebuilding, mortgage companies, etc.)
However, nearly of the metropolitan areas have shown signs of
Whereas migratory patterns drove the Sunbelt to unprecedented
improved economic health through the return of population growth and
growth in the pre-recession years, those patterns will now be
above-average gains in employment, both leading to higher levels of net
reflective of strong office recovery in these markets as of late, being
absorption in the office sector.
more economically sustainable and diverse than before with the
potential to surpass the rest of the country. Even with these positive
These positive shifts in demographics and employment are definitely
shifts, most of these geographies are two to three years away from
contributing to the housing markets showing signs of leveling out or
returning to pre-2007 levels so while we are upbeat about the
even rebounding slightly. As a result of these positive shifts in the
recovery for these markets, we remain realistic and guarded in the
regional microeconomic climates, the growth of office markets will not
fact that we are not yet back to 2006 territory and likely will not be
just continue, but be highly influential in repairing the demographic and
until the 2014-2015 timeframe.
housing issues so prominently highlighted throughout the region since
the economic decline began four years ago.
Jones Lang LaSalle • Perspectives on the U.S. office sector • February 2012 6
Sunbelt at a glance
While the Sunbelt markets all have a number of defining characteristics and commonalities, they are still divergent. Below is a breakdown of
each metropolitan area’s strengths and weaknesses, as well as what can be expected in the near future in regards to their office, employment
and housing performance.
In general, Sunbelt geographies have one or two major service industries that drive their respective economies rather than diversified ones, a
key reason for both their growth and collapse before and after 2008. These are noted wherever they drive the local economy, especially in
reference to metropolitan areas with above-average employment gains.
Metro-by-metro overview
Performing market
In spite of poor office
performance, Los Angeles
maintains a diversified
economy comprised of
larger companies in
entertainment, energy,
defense, logistics, tourism
and manufacturing, but is
also home to a vast
number of smaller
entrepreneurial companies,
which represent an
important engine for new
jobs creation.
Recovering market
Below-average employment
growth and high foreclosure rates
indicate that Las Vegas has yet to
reach its market bottom, which
should approach soon as prices
continue to decrease.
Rapid economic diversification, a
bottoming housing market and
positive net absorption rates all
indicate that Phoenix is beginning
to make a recovery in industries
such as biotech and healthcare
that are lucrative for the office
sector at large.
Stagnant market
Noteworthy increases in
private and PBS employment
as well as optimistic migration
patterns signify a comeback
for the Jacksonville area, as do
some of the lowest foreclosure
rates in the Sunbelt, which
should even out office and
residential disparities.
Tourism drives Orlando’s economy;
even during periods of economic
decline, the city registers increases in
L&H employment (as many as one in
five people are employed in leisure).
Orlando’s increasingly diversified
employment sector contains jobs within
the defense community, particularly in
simulation technology, while new
construction is attracting biotech and
pharmaceutical companies.
B
Orange County’s tenant base
has undergone extensive
diversification as technology and
life sciences firms have bolstered
their presence as active tenants
in the market. Traditionally active
tenants such as law firms,
financial services and the
mortgage industry will continue
to be major players as the local
economy improves. However, the
diversified makeup of industries
is what has been driving Orange
County’s office market in the
early stages of its recovery.
San Diego’s diverse
economy, with an emphasis
on biotech, defense and life
sciences, as well as
traditional technology, has
both shielded it from falling
into deep recessions and
helped it to emerge rapidly
from them. This trend
continues today, as the
education, healthcare and
tourism sectors all continue
to thrive, which are providing
sustained, but measured,
demand for office space.
The Tampa Bay region is
beginning to rebound
largely in part to a
renewal in call center
hiring in both the
healthcare and financial
sectors. Tampa is also
home to MacDill Air Force
Base, which has led to a
strong defense contractor
presence, while
aquaculture, biotech,
engineering and exports
all contribute to Tampa’s
economic improvement.
Internationally-focused PBS employment, as
well as foreign investment, will play vital roles in
Miami’s residential development resurgence
and balance its falling population. The law and
education sectors are also contributing to
Miami’s recovery, in particular companies with
connections to Latin America.
West Palm Beach is largely
driven by professional and
financial services that cater to
its wealthy residents and
tourists. Growth in education
and health services, and
tourism helped stabilize the
market in 2011. While
foreclosure issues loom, low
housing values are beginning to
fuel buyer interest and spawn
growth within the county’s core
employment sectors.
Mortgage services, tourism and a position
as a secondary market for Miami continue to
shape the Fort Lauderdale office market.
Although employment gains and office
performance are below-average, Fort
Lauderdale has seen a rapid increase in
the number of companies and law firms
that specialize in foreclosure defense
and processing.
Jones Lang LaSalle • Perspectives on the U.S. office sector • February 2012 7
For more information, please contact:
United States
John Sikaitis
Director of Office Research, Americas
[email protected]
Phil Ryan (Author)
Research Analyst, Office
[email protected]
Arizona
Florida
Phoenix
Fort Lauderdale, Jacksonville and West Palm Beach
Mark Dancer
Brady Titcomb
Senior Research Analyst, Office
Research Manager, Florida
[email protected]
[email protected]
California
Miami
Los Angeles
Roberta Steen
Henry Gjestrum
Senior Research Analyst, Office
Senior Research Analyst, Office
[email protected]
[email protected]
Orlando and Tampa
Devon Parry
Stephen Siena
Senior Research Analyst, Office
Research Analyst, Office
[email protected]
[email protected]
Orange County
Bryce Mordoff
Research Analyst, Office
[email protected]
San Diego
Eli Gilbert
Senior Research Analyst, Office
[email protected]
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