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One type of office space that isn’t seeing soaring vacancy rates? High-rises

Posted By: REJournals on January 3, 2024.  For more information, please click here to read the source article.

While demand for office space has been sluggish since the start of the COVID-19 pandemic, there is one office sector that is still seeing lower vacancy rates: high-rise buildings.

New research from JLL suggests that vacancy rates will remain low in the country’s high-rise office spaces, largely because the development of new office space in general, and high-rise buildings in particular, will slow during the next several years.

According to JLL, while office space nationally had a vacancy rate of more than 20% as of December of 2023, office suites on floors 20 and above in high-rise buildings had a vacancy rate of just 12.4%, when excluding figures in New York City.

Signature high-rise buildings across the country also boast low office vacancy rates. JLL reported that the Empire State Building in New York City was 90.2% occupied as of December of last year while the Willis Tower in Chicago was 87% occupied. That Willis Tower figure is especially impressive considering that the overall office vacancy rate in the Chicago market was higher than 20% in December.

Jacob Rowden, JLL research manager, says that one of the reasons for the lower vacancy rates is that many high-rise buildings are built in what he calls “ultra-core” locations.

He pointed to One Vanderbilt in New York City as an example. This 93-story skyscraper is located right across from Grand Central Terminal, making the building a desirable location for companies hoping to make it easier for commuters to reach their offices.

Taller buildings, because they rise so much higher than their neighbors, also offer better natural light on their upper floors, something that companies increasingly strive to offer to their employees, Rowden said.

“These are rare assets,” Rowden said. “Only about 1% of our office space sits on the 40th floor or above. When you talk about those top-level penthouse suites in the highest buildings, those are even rarer. A lot of tenants are interested in that. There is very limited space of that kind available.”

Larger buildings also taper as they rise higher. This means that there isn’t as much room for office space available on these buildings’ upper floors. That also limits the amount of top-floor office space available, helping to increase the demand for it.

At the same time, tenants have been more interested in smaller floor plates since the start of the pandemic. That, too, has boosted demand for the smaller office spaces typically offered on the higher floors of office buildings.

Don’t expect demand for high-rise office space to lessen in the future, either. JLL says that there simply aren’t enough new high-rise spaces on the way. Of the 253 office buildings that remain under construction nationally, just 12 are planned to rise 30 stories or higher. At least six of those buildings have fully pre-leased their high-rise floors, according to JLL.

“The pipeline for super-tall buildings is very thin in most markets,” Rowden said. “Outside of Miami or Austin, we don’t expect to see the construction of any tallest buildings in any markets for a while.”

As Rowden says, since the pandemic, the demand for new office construction has fallen, and tall buildings represent the largest and most challenging office projects of all.

“These buildings are costly, difficult to propose, difficult to find financing for and challenging to build in this environment,” he said.

Don’t underestimate the power of brand names, either. Many high-rise office buildings rank among the most prominent and well-known office spaces in their cities. Rowden said that many tenants seek out that name recognition, often using it as a way to entice and retain top employees.

“We definitely see tenants that are interested in the architectural significance of these buildings,” Rowden said. “Being in an iconic building carries a level of prominence that can elevate their brand from a recruiting standpoint and overall branding of their company.”

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