The just-released 2017 Savills Studley Effective Rent Index shows that office rents are near or past their peak in several of the nation’s highest-cost locations, including Manhattan, San Francisco and Washington, D.C. Owners were able to prop up taking rent in the highest-caliber Class A properties by extending record concessions to tenants.
 
SERI tracks what tenants truly pay for top tier Class A office space (tenant effective rent) and what landlords ultimately walk away with (landlord effective rent) once building expenses and leasing costs are deducted from net rent. The report shows that in addition to inflated office rents, tenant improvement allowances are spiking in most markets nationally, but particularly in Manhattan, San Francisco and Washington, D.C.
 
Keith DeCoster, Savills Studley’s Director of U.S. Real Estate Analytics commented “We expect these markets to trend down as we see more price resistance and potentially a slight decrease in 2017. Tenants continue to stick to a strict regimen of space densification, whether it is the shrinking of Manhattan law firms and banks, the federal government radically reducing the space allocated per employee in D.C., or tech companies dialing back on office space in San Francisco.” He also noted that “in these three leading-edge markets, landlords kept rents elevated only by boosting concession packages.”
 
“It’s safe to say that the days of continued tenant effective rent increases in these metros are coming to a close,” said Gerald Prager, Senior Vice President at Savills Studley. “In the upper echelon of the market, landlord favorability has peaked for this cycle and we anticipate the market becoming more and more favorable to tenants over the course of 2017.”
 
Highlights from the report include:
 
Manhattan – Midtown

According to SERI, leases signed in the highest-caliber properties such as 375 Park Avenue and new developments such as Hudson Yards boosted rents, but leasing remains subpar overall. Total taking rent rose slightly, increasing by 2.9% from $100.40 to $103.32. This was accompanied by elevated concession packages which spiked to $167.41 in 2016, an increase of 10.2% from $151.93 in 2015. Tenant effective rent rose by merely 1.1% in 2016, a fraction of the 13.1% increase in 2015 and 10.4% increase in 2014.
 
Manhattan – Downtown

In Lower Manhattan, total rents and concessions both went up in 2016. Total initial taking rent averaged $56.37 for the year, a 1.5% change from $55.57 in 2015. This is compared to a nearly 10% increase in the previous few years. Concession packages registered a 2% increase to $104, up from $102 last year.
 
This was the second consecutive year with a negligible increase for tenant effective rent – the cost of occupancy rose by 1.3% during 2016 to $42.79, down slightly from the 1.7% jump in 2015.
 
San Francisco

SERI shows that landlords achieved higher rents through elevated concessions, following the pullback in the IPO market and sharp devaluations of many tech firms. Nevertheless, total rent spiked by 11.6% to $78.05 in 2016, a sharp increase from $69.95 in 2015. Concessions averaged $89.38 for the year, jumping a whopping 22.4% from $73 in 2015.
 
Washington, D.C.

In the nation’s capital, concessions also rose along with face rents. SERI reports that total rent averaged $66.67 in 2016, a 5.6% increase from $63.12 in 2015. Concessions rose to $137.27 in 2016, up from $135.57 in 2015 and $111.50 in 2012. SERI notes that the D.C. market is strongly bifurcated: there is strong demand for the newest trophy product in D.C., but tepid activity in the balance of the market.
 
Tenant effective rent has flatlined since 2012, falling from $48.78 to $48.74 in 2016 as concession packages have offset base rent increases.
 
Energy Markets Post Decline in Occupancy Costs

The only two markets to post lower effective rent in 2016 were Houston and Denver. The contraction in energy prices hit Houston particularly hard, but also took the wind out of the sails of Downtown Denver. Tenant effective rent plummeted by 20.3% in Houston and posted a more moderate 6.7% decline in Denver.
 
Markets Not at Their Peaks

While the rental rate rally is winding down in many top U.S. metros, tenants in many markets are likely to encounter further increases in occupancy costs next year. This includes many of the lower-cost Sunbelt markets plus a handful of cities such as Chicago and Los Angeles that were slower to start recovering coming out of the recession. Tightly controlled construction coupled with relatively sustained demand have been behind continued rental rate growth in all of these areas:
 
1.    Atlanta

Limited new construction activity in this market and large corporate relocations has been critical to its recent success, creating more tenant competition over a handful of very top quality buildings in Buckhead and Midtown, DeCoster explains. Total rent rose for the fourth consecutive year, rising by 6.4% from $35.57 to $37.84.
 
2.    West Los Angeles

Call it the “Silicon Beach” effect: steady hiring and leasing among entertainment and social media firms fueled brisk competition for space. Class A leasing volume totaled 5 million square feet during 2016, exceeding the long-term annual average by more than 10%. Total rent in 2016 averaged $59.22, a 7.9% increase from $54.86 in 2015.
 
3.    Chicago

The Windy City has seen space options decline as suburban businesses continue to move some or all of operations in town. During 2016, leasing volume reached 10 million square feet for the second straight year. Total rent increased for the fourth consecutive year here, jumping by 5.6% to a new peak of $50.35.
 
4.    Tampa

Availability in Tampa Bay has fallen to its lowest point in a decade as strong organic growth by local firms and steady corporate relocation activity have depleted quality space options in both the Westshore and Tampa’s CBD. Tampa is one of the most affordable and increasingly popular markets in the country. The city has crossed a new rent threshold, with total rent averaging $30.50, a 5% increase. Of note, Tampa Bay remains the most affordable market for tenants in the index.