Constrained construction and heated demand for office space in the most active segments of the U.S. office market are already fueling prospects of rental increases and new office property development in 2013 and into 2014.

An expansion period is approaching for the high-quality urbanized office sector of trophy skyscrapers known as the Skyline, according to Jones Lang LaSalle’s Spring 2013 United States Skyline Review.

“In all but a handful of the Skyline markets, large tenants will have few existing options to consider and thus will be forced to look at proposed development options if they desire to explore relocation options,” said John Sikaitis, Senior Vice President of Research at Jones Lang LaSalle.

>> Phoenix featured as Jones Lang LaSalle Skyline market

The Phoenix Skyline inventory represents the top 22 urban office properties in the heart of the sixth largest city in the country. The area serves as Arizona’s center of government, commerce and culture, with more than $4B in recent investment making it an increasingly desirable place to live, work and play.

“The Phoenix Skyline is a unique combination of two established but divergent submarkets,” said John Bonnell, who with team member Don Mudd are Managing Directors and office market experts at Jones Lang LaSalle in Phoenix.

“On one hand you have Downtown, which has seen positive net absorption and appreciating rents since the end of the recession. On the other hand you have Midtown, which has languished over the last six years as tenants have downsized or moved to neighboring submarkets in a flight to quality. This year, however, both submarkets have seen an uptick in tenant requirements and activity, which bodes well for positive occupancy growth in 2013 and beyond.”

After a solid occupancy gain of 140,000 SF in 2011, the Phoenix Skyline backtracked somewhat in 2012, putting 61,000 SF of losses on the board as it struggled to combat a still-recovering office market and retain tenants opting for suburban submarkets.

After these give-backs, direct vacancy in the Skyline market now sits at 21.9% between Downtown and Midtown. On a positive note, the market posted just more than 40,000 SF of new occupancy gains in the fourth quarter and forecasts for 2013 point to increased demand for office space thanks to improving overall economic and demographic fundamentals. The Phoenix Skyline may finally be at the bottom, though the recovery may remain bifurcated between Downtown and Midtown for the time being.

>> Leasing highlights indicate most Skyline markets will reach equilibrium by mid-2014

Vacancy rates are in the single digits in 10 Skyline markets, including Pittsburgh, Richmond, Bellevue, Houston, Portland, the New Jersey Hudson Waterfront, Raleigh, San Francisco, Philadelphia and Boston.

Additions to supply are only beginning to appear, with office construction in eight, or 24.2%, of the Skyline markets, including speculative construction in three markets. By mid-2014, all of the Skyline markets, including Phoenix, will have reached equilibrium, where the balance of supply and demand has historically made rents pop and new construction feasible, Jones Lang LaSalle’s researchers predict.

Three large office tenants that returned space to the market in 2012 skewed overall leasing totals across the Skyline, with a minimal net change from the previous year. Excluding those deals, however, Skyline absorption would have tipped the scales at more than 4.6 MSF. Energy and tech companies will continue leading absorption in 2013, counterbalanced by right-sizing among law, financial and consulting firms that seek greater efficiency by cutting back space, typically between 15% and 20%.

Landlords offered fewer concessions to tenants in 2012, increasing effective rents by 4.5%, compared with just 1.6% effective rent growth the previous year. More than 85% of Skyline markets will see rent increase in 2013, with compression of tenant incentives in 90 percent of markets as landlords gain pricing control. In some Skyline markets, asking rents even surpassed prior market cycles’ peaks in four markets (San Francisco; the New Jersey Hudson Waterfront; Washington, D.C.; and Cincinnati).

>> Investment sales slowly migrate to pre-recessionary peaks in select top Skyline markets

Skyline sales volume fell to less than 40 MSF in 2012, down 29.3% from 55.7 MSF sold the previous year, chiefly due to limited Skyline Trophy activity in New York. Despite reduced volume, investor appetite for the high-quality product and favorable fundamentals is pushing sales prices nearer to pre-recessionary peaks in the top five Skyline markets (New York, San Francisco, Washington D.C., Boston, and Seattle-Bellevue), and even in top energy markets like Houston and Denver.

Real estate investment trusts topped the list of buyers in 2012, accounting for 29.6% of sales transactions, closely followed by institutional domestic buyers at 29.1%, with global buyers coming in a distant third at 11.9%. An increasingly diversified economic and leasing recovery are expected to push activity levels up more than 20 percent in 2013 for the “Super Seven” primary markets (Boston, Chicago, Los Angeles, New York, San Francisco, Seattle-Bellevue and Washington, D.C.). Stronger investment activity will be based on increasingly difficult barriers to entry.

“Look for markets like Denver, Indianapolis, Minneapolis, Orlando and Portland, among others, to capture enhanced institutional demand over the next few years based on aligned supply and demand and an increased institutional focus,” said Marisha Clinton, Director of Capital Markets Research, Jones Lang LaSalle.

>> Major market highlights

 · New York: Near-term, large blocks of space weigh on the market, including 3 MSF that a financial services firm returned to Downtown Manhattan in 2012.

 · San Francisco: Sizzling leasing velocity drove up asking rents by 27.4% in 2012 from the previous year. New projects are breaking ground in the South Financial District.

 · Washington, D.C.: Tenants’ flight to quality bolstered the Skyline, bucking the malaise of the market. Concession packages hovered near record levels in 2012, however.

· Boston: Rapid technology growth and recovering legal and financial services contributed to full recovery of jobs lost during the recession. Widespread absorption and built-to-suit construction in the Back Bay is accompanied by pre-recession rent levels in premier properties.

· Seattle-Bellevue: The highest price paid per square foot for an office building here in 2012 reached $642, an all-time high.