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U.S. trophy office rental hit historic highs

July 2015

Demand for trophy buildings remains high but tightening fundamentals could draw attention to other asset classes, according to JLL’s 2015 Digital Skyline.

The premier office towers that make up the skylines of North American cities boast—by far—the most expensive office space to rent, garnering 77% more than non-trophy space, according to JLL’s 2015 Digital Skyline. Average trophy rates in the first quarter of 2015 were USD 57.97 per square foot compared to USD 32.70 per square foot in non-Trophy buildings. This gap between trophy and non-trophy space represents a seismic shift from historical spreads: 10 years ago, the difference was just 20.8%. The gap is most pronounced in markets that are only just beginning to see expansionary tenant activity, like Atlanta and Orange County, California.

Trophy tenants can expect little relief in rental rates in the near future, in spite of nearly 29 million square feet of new office space under construction in the 47 Skyline markets in the U.S. and Canada as identified by JLL. Nearly three-quarters (75%) of the new development is concentrated in only nine cities, which means most tenants will have little negotiating leverage in their office agreements.

If office rental rates are fierce, the price tag to buy an office building is even more so. Economic growth, business expansion and improving market fundamentals have resulted in a second consecutive year of plus-20% pricing gains, pushing Skyline buildings more than 9% above peak prices and driving cap rates 10 basis points below the 2007 peak.