The trophy buildings that make up the skylines in “secondary” U.S. markets are becoming hot property among investors who are increasingly looking beyond premium buildings in the likes of New York, San Francisco and Boston.
Skyline real estate remains popular across the country, with occupancy rates increasing for the eighth year in a row, according to new JLL research, which examines office space in the tallest buildings across 57 markets. Vacancy in trophy skyline buildings hovers around 10 percent nationally, compared with 12.9 percent in overall office real estate, despite the fact that these premium spaces have seen rents leap up to a record $44.55 per square foot.
“Demand for high-rise space is skyrocketing,” says Scott Homa, JLL Director of U.S. Office Research, “One reason is that low-rise space in many desirable urban areas has been picked over by creative firms, which in recent years favored post-industrial brick-and-beam buildings in emerging neighborhoods.”
While professional services organizations like financial and law firms still lease the most space in high-rise properties, he says there’s mounting interest from tech, advertising, media and information companies, too. With diverse and plentiful hunger for impressive space showing no signs of abatement, it’s easy to see why investors are taking note.
“Skyline investment remains brisk, with both domestic and foreign buyers extremely active,” says Homa. “Skyline acquisitions were up more than $1.2 billion in 2016, which is significant when compared with the 10 percent decline registered in the broader office market.”
And with today’s investors showing more interest in relatively safe, well-positioned real estate, it’s natural that they might be looking for new areas of opportunity like active secondary markets.
Combined, investment volumes in the following secondary markets were up $5.9 billion in 2016—more than double the sales seen in 2015. Take a look to see how cities like Atlanta, Dallas, and Oakland are all commanding upward momentum in their own unique way.
Boasting one of the nation’s fastest growing rents (12.7 percent since 2015), Atlanta inspired $1.8 billion dollars in investment in 2016 and the first quarter of 2017. Yet space remains at a premium, considering, for instance, that the city’s second tallest building, the 60-story SunTrust Plaza, is 98.5 percent leased. Continuing office-oriented job growth, combined with limited development, indicates this trend should continue.
Since 2015, investors have poured close to $1.4 billion into the Dallas market skyline. Rents are growing fast at 7 percent, and owners are also realizing the importance of continually re-investing in their assets by keeping them up to date. The 50-floor Thanksgiving Tower, for example, was built in 1982, but is undergoing major renovation in 2017.
More companies looking for new leases as their old contracts expire and limited blocks of quality space are heating up tenant competition in Philadelphia - and helping attract investment to the tune of $1.2 billion. Boasting single-digit vacancy of 8.9 percent, the market is in expansion mode. More interest in the central business district (CBD) from both established firms and suburban tenants looking to move is helping drive leasing activity in the 2.2 million square foot of skyline property currently under construction. The city’s tallest building, the Comcast Center, for example, is already 100 percent leased.
Skyline views are making waves in Miami-Dade, where investors poured roughly $1 billion into a market with one of the nation’s top-ten strongest growing rents. Companies looking for space in Brickell and Downtown are undeterred by the price tag, in part because prime space with higher views here is scarce. For example, the 70-story Four Seasons Hotel & Tower, the city’s tallest building, is 99 percent leased. More skyline space should open up soon, however, with several large blocks of new inventory on the way in the near future.
Charlotte, North Carolina
Investors in Charlotte skyline property have ploughed in $7.56 million since 2015, with momentum sparked in part by rents that have grown 7.8 percent in the same time frame. Financial firms have historically anchored the top tier skyline buildings, but diversified tenants are joining the mix. A healthy development pipeline here has been spurred by preleasing. As the Stonewall corridor nears completion, even more interest is expected.
Thanks to a combination of limited supply and growing interest in trophy space this East Bay city is home to the lowest skyline vacancy rate in the U.S. at just 4.9 percent. At the same time, it boasts the nation’s seventh fastest growing rent, with current rates climbing 11 percent since 2015 alone. For example, the 27-story Lake Merritt Plaza commands rents of $57 per square foot, compared with the national average of $44.55 per square foot. That kind of interest has so far led to $640 million in Oakland skyline investments.
This sunny spot has seen $597 million in skyline investment since 2015. And with 13 Class A properties comprising the Downtown office market, it’s big news in Fort Lauderdale that investors have recently snapped up five Skyline buildings here. The investment activity, combined with strengthening economic conditions, is having a major impact on the market. Vacancy has fallen to 9.9 percent and average rents are up to $40.04 per square foot compared to 36.34 in 2016.
Disney’s not the only high-profile destination in town—investors have recently put $5.8 million into skyline properties in Orlando. With vacancy rate amongst the nation’s top 15 at 9.2 percent and asking rates jumping noticeably in the city’s limited blocks of Skyline space, speculative development is beginning to take off. For example, Coral Gables-based Megastron Development LLC, is constructing a 134,000-square-foot, Class A office building in southwest Orlando’s tourism corridor. The $10 million project is the second phase a four-building office complex. The first building in the complex was the first spec development built during the Great Recession, and is now fully leased.
Hudson Waterfront, New Jersey
Manhattan is just a stone’s throw away from this waterfront skyline, which has attracted $5.3 million in investment since 2015. And with rents hovering around $43/sf, the Hudson Waterfront is a steal compared with the average $87/sf trophy space rent in Manhattan. Prime location and strong economic incentives for tenants is fueling strong rent growth. In fact Hudson Waterfront has the country’s fifth strongest rent growth, having grown 13 percent since 2015 alone.
Baltimore’s fast-growing rent, standing at 7.3 percent since 2015 has helped win the city $4.12 million in skyline investment. More momentum is on the way, too, considering Exelon’s recent move has opened up major blocks on the desirable Platt Street—which were quickly swallowed up by new tenants in this landlord-favoring market.
Investors have brought $400 million into the Minneapolis skyline market since 2015, buoyed by a combination of strong sales, new space in the pipeline, and renovations. The latter is important, considering the average age of buildings here is around 30 years old, including the city’s tallest building, the 52-story IDS Center, which was built in 1972.