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Office Investment Outlook

United States | Q4 2016

OFFICEFollowing a year of moderate declines, office dynamics well positioned in 2017

2

Incremental growth of office fundamentals expected as workforce constraints emerge and absorption decelerates. Near full employment markets and a shortage of skilled talent are restricting expansionary activity in several major technology hubs, a factor in decelerating leasing velocity and moderating occupancy growth. Broader economic trends appear favorable heading into 2017, with increased optimism toward business conditions, personal finances and employment. The shift in public policy will be a key factor to watch.

Following a year of uncertainties, office liquidity outlook improving for 2017. Despite U.S. investment volume declines in 2016 at-large, the office sector sustained stable activity, reaching $143.0 billion of full-year transactions. However, office pricing remains under pressure as investors adopt more selective, targeted acquisition strategies, impacting liquidity in parts of the market. Moving into 2017, investor sentiment continues to improve with sustained cautious optimism.

Pent-up demand for scale to benefit office investment into 2018. Lagging portfolio and entity-level transactions this cycle are expected to shift in 2017. Investor appetite for scale, built-up value by national to regional real estate platforms and underperforming public markets are factors in this outlook.

As secondary market investment increases, outperformers emerging across CBDs and suburbs. After a modest setback at midyear, secondary market momentum has been reenergized, with these markets seeing their most active relative year of the cycle in 2016. Atlanta, Dallas and Philadelphia are leading this activity, with drivers divergent across CBD and suburban submarkets.

Offshore office investment remains the norm, with German and Asian buyers now leading. With more than $20.0 billion of foreign office acquisitions in 2016, the sector continues to be a primary beneficiary of offshore capital demand. This is increasingly being driven by German and Asian capital. While three-fourths of this capital remains focused on primary markets, modest gains are being seen in multitenanted, core assets in select secondary markets.

Office investment sales

Source: JLL Research, Real Capital Analytics (Transactions larger than $5.0M)

Despite year-over-year compression, office cap rates plateauing

Source: JLL Research, NCREIF, Board of Governors of Federal Reserve

12-month completions (as % of inventory) 12-month rent growth (p.s.f.)

1.1% 3.6%

-2012-month change in total vacancy (bps) 12-month net absorption (as % of inventory)

1.0%U.S. Office property market

Average cap rate 12-month change in cap rate (bps)

4.3% -26Investment sales (FY, billions of $US)

$143.0FY investment sale growth

-0.6%U.S. Office investment

JLL | United States | Office Investment Outlook | Q4 2016

While up 7.4 percent in the fourth quarter, year-to-date office investment sales stable over 2015 levels with a modest 0.6 percent decline at year-end

$0.0

$200.0

$400.0

Q1 Q2 Q3 Q4

With recent gains in interest rates, the spread between office cap rates and the 10-Year Treasury has also tightened. However, spreads remain healthy with room for further compression

2.5%

4.1%

5.2%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

10-Year Treasury (%)Primary cap rates (%)Secondary cap rates (%)

A

growth in the U.S. office market in 24 months. This comes as markets near full employment and a shortage of skilled talent restricts expansionary activity in several major technology hubs. However, the

representing 24.4 percent of national leasing activity and helping offset suppressed tenant demand in the legal and financial services sectors.

slowing decelerating from 2.9 to 1.1 percent occupancy growth from 2015 to 2016, respectively, but sustained, robust expansionary activity in hubs such as Austin, Seattle-Bellevue and Silicon Valley are counteracting this, with each recording annual occupancy gains of 2.0 percent or greater.

Despite the moderation in leasing demand, construction volumes rose once again and now stand at a cyclical high of 110.5 million square feet. Completions for 2017 are expected to exceed demand for the first time in the current cycle, with construction anticipated to peak and new groundbreakings to ratchet back in 2017. The risk of future oversupply is most acute in major gateway markets, including New York and Washington, DC, in which a surplus of quality new space or challenging prospects for backfilling second-generation space may materialize over the next 24 months.

Heading into 2017, broader economic trends appear favorable for the office sector, with consumer confidence recently rising to a 13-year high, suggesting increased optimism toward business conditions, personal finances and employment. The broader shift in public policy will be a key factor to watch. Prospects of policies favoring deregulation and lower taxation may serve as a catalyst for select industries which have faced increased regulatory pressures over the past eight years.

Incremental growth of office fundamentals expected as workforce constraints emerge and absorption decelerates

TOP OFFICE THEMES

3

1


Source: JLL Research (leasing activity > 20,000 s.f.)

Leasing by industry

Tech remains by far the leader in leasing activity, even as the industry faces a talent shortage

1,060,760

1,091,269

1,185,646

1,228,820

1,493,676

1,504,276

2,162,539

2,464,638

3,026,617

8,050,896

Other professional services

Accounting and consulting

Health

Life sciences

Coworking/real estate

Media and entertainment

Law firm

Government

Finance

Tech

Leasing activity (s.f.)

Under construction

2016 ended the year at 110.5 m.s.f. of development activity, surpassing the previous cyclical peak

Source: JLL Research

0

20,000,000

40,000,000

60,000,000

80,000,000

100,000,000

120,000,000

140,000,000

160,000,000

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Und

er c

onst

ruct

ion

(s.f.

)

4JLL | United States | Office Investment Outlook | Q4 2016

Despite U.S. investment volume declines in 2016 at-large, the office sector sustained stable activity, reaching $143.0 billion of full-year transactions. This represented a modest annual decline of 0.6 percent. The fourth quarter was a key driver of year-end activity: $43.2 billion of office transactions represented the largest quarterly figure of the cycle, and with quarterly gains of 7.4 percent, this represented the highest level of quarterly gains since the second quarter of 2015. This further supports that investor sentiment is stabilizing with increased optimism heading into 2017.

On the heels of an uncertain global investment environment over the past 18 months and sustained record-low cap rates, office pricing remains under pressure as investors adopt more selective, targeted acquisition strategies. With this, the liquidity landscape for office product weakened in 2016, negatively impacting low-growth, non-CBD, suburban office submarkets. The liquidity for core, urban office transactions similarly weakened, though it fared well relative to the aforementioned suburban product. These dynamics have translated into plateauing office cap rates

with signs of softening emerging in select secondary markets. In 2015, a minor 6.0 percent of tracked office markets experienced softening; in 2016, this metric expanded to 25.0 percent, the highest level seen since 2010. With this, the gap between primary and secondary market cap rates remains at record levels, averaging 111 basis points, compared to the long-term average of 75 basis points.

Looking ahead, following a year of uncertainties and resulting shifts in the office capital markets, investor dynamics have already exhibited signs of improvement in the beginning weeks of 2017. For core investments, the outlook has improved. With active sources of offshore capital and increased activity expected from domestic institutional players this year, dynamics are expected to benefit gateway market opportunities and a select few secondary markets. For value-add and opportunistic opportunities in desirable urban submarkets, liquidity remains very strong and at the highest levels seen yet in select markets. As activity proceeds at more normalized levels, pricing will be a key factor to watch, with high-growth, high-barrier-to-entry markets expected to be more resilient.


Strong fourth quarter a precursor of 2017 investor sentiment

The office sector sustained stable activity in 2016 with a modest 0.6 percent decline. This was driven by a strong fourth quarter the largest of the cycle with the highest quarterly gains since Q2 2015

48.5%

23.9% 27.5%

0.1%

47.7%

28.5%

5.5% 5.0%

-4.5% -6.1% -0.5%

7.4%19.7% 18.8%

-0.6%-20.0%

0.0%

20.0%

40.0%

60.0%

2014

Q1

2014

Q2

2014

Q3

2014

Q4

2015

Q1

2015

Q2

2015

Q3

2015

Q4

2016

Q1

2016

Q2

2016

Q3

2016

Q4

2014

2015

2016

Quarterly growth Annual growth

Source: JLL Research, NCREIF. Includes 32 major office markets; Stable defined as markets seeing fluctuations within 10 basis points year-over-year.

Overall office cap rate fluctuations

While 50.0 percent of markets are seeing cap rates compress, signs of plateauing are beginning to emerge, with 25.0 percent of markets seeing a year-to-date softening of cap rates

25%6%

16%22%

22%9%

34%97%

56%9%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

2016201520142013201220112010200920082007

Annual cap rate fluctuationsCompressing Stable Softening

Following a year of uncertainties, office liquidity outlook improving for 20172

A balance between single-asset and portfolio or entity-level transactions remains the norm in the office capital markets today, with single assets primarily driving office deal flow, exceeding portfolio volumes year-to-year and averaging 58.0 percent of annual transactions since 2010. When comparing this to activity in the prior cycle, it points to pent-up demand for portfolio and entity-level transactions within the office sector. In 2006 to 2007, these transactions drove activity, with single-asset sales accounting for a minority 49.0 percent of activity on average. This average excludes the outsized impact of the Equity Office (EOP) acquisition and subsequent Blackstone dispositions of Equity Office assets in 2007, the total transaction values of which are estimated to have exceeded $60.0 billion. Excluding EOP, quarterly portfolio volumes over the last eight quarters are between 13.0 and 14.0 percent below the prior cycle peak, set in 2006 and 2007. As a result, portfolio volumes are lagging prior cycle levels by $2.5 billion on average each quarter. Despite this lag, national and regional portfolio opportunities have been rising with three $1.0 billion+ transactions closing this quarter alone:

Cousins Properties closed on its merger with Parkway Properties in an office, entity-level transaction valued at $1.95 billion.

Blackstone closed on a national, multisector portfolio from Alecta, a Swedish occupational pension manager, for $1.7 billion. While diversified, the portfolio contained a strong core of high-quality office assets, accounting for 40.0+ percent of total portfolio value.

Spurred by plan to liquidate and dissolve its global REIT, Blackstone also closed on the acquisition of 3.0 million square feet of West Coast office assets for $1.2 billion.

Considering these facts, the built-up value by national to regional real estate platforms and underperforming public markets, increased portfolio and entity-level activity are expected to drive office investment into 2018 given pent-up demand from existing platforms, as well as a strong desire for scale from dry powder focused on U.S. markets.


Pent-up demand for scale to benefit office investment into 20183


Pent-up demand for scale to benefit office investment into 2018

Excluding the impact of EOP-related investments in the prior cycle, quarterly portfolio volumes remain below historic norms; average quarterly volumes lag prior cycle by $2.5 billion

$0.0

$10.0

$20.0

$30.0

$40.0

$50.0

$60.0

$70.0

2002

Q4

2003

Q4

2004

Q4

2005

Q4

2006

Q4

2007

Q4

2008

Q4

2009

Q4

2010

Q4

2011

Q4

2012

Q4

2013

Q4

2014

Q4

2015

Q4

2016

Q4

Qua

rterly

por

tfolio

vol

umes

(billi

ons

of $

US)

Portfolio, excluding EOP-related portfolio EOP-related portfolios

$18.7BAvg. quarterly

volumes

Portfolios, excluding EOP-

related(2006 2007)


volumes

Portfolios(2006 2007)


volumes

Portfolios(2015 2016)

Following up on rebounding momentum during the third quarter, secondary market office investment continued to rise in the fourth quarter, reaching $10.4 billion of transactions. This represented the second most active quarter for this segment of the current cycle. As a result, secondary market office investment accounted for nearly 50.0 percent of fourth-quarter deal flow and 39.0 percent of full-year 2016 activity. Atlanta, Dallas and Philadelphia remain the largest drivers of volumes, each of which have seen office volumes exceed $2.0 billion in 2015 and 2016. Atlanta continues to outperform with annual volumes consistently exceeding $4.0 billion, accounting for four of the ten largest single-asset secondary transactions of the quarter and making it one of the five most active office investment markets in the United States at year-end. In acquired One Atlantic Center from Hines for $318.1 million, or $289 per square foot.

Consistent across all three is a blend of transactions across CBD and non-CBD submarkets. However, while a 35.0+ percent growth in non-CBD transactions in Philadelphia in 2016 was the primary driver of activity, both Atlanta and Dallas are being driven by urbanization momentum: The markets each experienced $1.0 billion+ of urban office investment in 2016, with Atlanta seeing growth of 37.2 percent and Dallas at 92.6 percent year-over-year. Lagging urban investment is similarly catching up in smaller markets such as Indianapolis, Austin, San Diego and Minneapolis each of which saw annual CBD office investment growth exceed 40.0 percent. Similarly, lagging suburban investment is catching up in Portland and Oakland East Bay. While market and submarket selectivity remains the norm, a heightened focus on near- and midterm economic, demographic and fundamental strength will be a critical determinant in driving domestic capital flows in 2017. Those secondary markets exhibiting sustained strength in fundamentals and investment performance will further benefit from a diversifying investor base and thus sustained liquidity and pricing.


Investment sales volumes by market type

Second-half momentum pushes secondary markets to cyclical high on a quarterly and annual basis compared to primary markets, accounting for nearly 50.0 percent of fourth-quarter transactions

Source: JLL Research (Assets larger than 50,000 s.f.)

34%

20%

37% 37%29% 34% 35%

41% 41%

27%

41%49%

32% 34% 39%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2014

Q1

2014

Q2

2014

Q3

2014

Q4

2015

Q1

2015

Q2

2015

Q3

2015

Q4

2016

Q1

2016

Q2

2016

Q3

2016

Q4

2014

2015

2016

Tran

sact

ion

volu

mes

by

mar

ket t

ype

Primary markets Secondary markets

Quarterly Annual

As secondary market investment increases, outperformers emerging across CBDs and suburbs4


Who is leading secondary market volumes?

Atlanta, Dallas Fort Worth and Philadelphia each consistently seeing office volumes exceed $2.0 billion annually


$1.0

$1.0

$1.1

$1.2

$1.2

$1.3

$1.6

$1.7

$1.9

$1.9

$2.2

$2.2

$2.5

$3.0

$4.4

$0.0 $1.0 $2.0 $3.0 $4.0 $5.0

Charlotte

Raleigh-Durham

Portland

Minneapolis

Miami

Austin

San Diego

Houston

Northern New Jersey

Phoenix

Orange County

Philadelphia

Denver

Dallas-Fort Worth

Atlanta

Leading secondary market volumes (FY 2015, in billions)

$0.7

$0.8

$0.8

$1.1

$1.1

$1.2

$1.6

$1.6

$1.6

$1.7

$2.1

$2.2

$2.4

$2.8

$4.0

$0.0 $1.0 $2.0 $3.0 $4.0 $5.0

Fort Lauderdale

Portland

Charlotte

Minneapolis

Oakland-East Bay

Phoenix

Austin

Denver

Orange County

Miami

San Diego

Philadelphia

Northern New Jersey

Dallas-Fort Worth

Atlanta

Leading secondary market volumes (FY 2016, in billions)

When analyzing foreign investor trends, office continues to outperform peer sectors and at a sustained, structural pace relative to the prior cycle. In 2016, foreign office investment exceeded $20.0 billion and accounted for 16.0 percent of overall acquisition activity for the second consecutive year record levels on both indicators. As this remains the norm, the profile of offshore buyers continues to evolve. While Canadian groups have historically been the most active, the reemergence of German capital and emergence of Asian capital is now exhibiting its impact. Nearly 40.0 percent of all inbound investment came from European buyers led by the Germans, followed closely thereafter by Asian (30.8 percent) and Middle Eastern (16.8 percent) capital sources. This is further reinforced when looking at the most active countries of origin. Following German buyers, which were the most active at year-end, Asian buyers were four of the ten most active countries of origin, with Chinese and Hong Kong buyers in the top five. In two of the largest offshore deals closed in the fourth quarter, Israel-based Global Holdings acquired 1250 Broadway in New York for $565.0 million, or $875 per square foot, and Spain-based Ponte Gadea acquired Southeast Financial Center in Miami for $516.6 million, or $422 per square foot.

With this sustained level of offshore active capital focused on the office sector, there is more evidence of the diversification of this capital into secondary markets: Of the ten largest offshore office acquisitions in the fourth quarter, five were in secondary markets, with four of those being multitenanted yet core and stabilized properties. While these opportunities are slowly increasing for top-performing secondary markets, three-fourths of this capital is expected to remain focused on those gateway markets.


Foreign office investment stable at elevated levels

Office continues to outperform peer sectors and at a sustained, structural pace relative to prior cycle: 16.0 percent of full-year 2016 acquisitions by offshore investors


10.0%11.4%

7.2%

10.7%

6.1%

15.2%

10.0%

11.9%

15.0%13.5%

13.8%

12.3%

16.3% 16.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

$0.0

$5.0

$10.0

$15.0

$20.0

$25.0

$30.0

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Fore

ign

parti

cipa

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(as

a %

of t

otal

offi

ce v

olum

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Fore

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offic

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vest

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t (b

illion

s of

$U

S)


German, Asian capital leading offshore office acquisitions in 2016

The foreign acquirer landscape took a shift in full-year 2016, with German capital surpassing Canadian as the most active and Asian investors accounting for four of the ten most active.

Germany, 19.3%

Canada, 12.9%

China, 10.4%

Hong Kong, 9.2%

Saudi Arabia, 9.0%

Japan, 6.8%

Switzerland, 6.4%

Spain, 4.7%

South Korea, 4.0%

United Kingdom,

3.7%

All others, 13.5%

Offshore office investment remains the norm, with German and Asian buyers now leading5


Source: JLL Research, January 2017

Core CBD office cap rates

Coastal, primary markets are now all seeing Core product transact at sub-5.0 percent levels

Source: JLL Research, January 2017

Core suburban office cap rates

Suburban cap rates generally stable, with best-in-class product in high-growth secondary markets seeing assets transact as low as 5.0 percent to as high as 8.0 percent

NJ

CTMA

NH

NC

VA

WA

VT

AL

AZ

AR

CACO

FL

GA

ID

IL IN

IA

KSKY

LA

ME

MI

MN

MS

MO

MT

NE

NV

NM

NY

ND

OH

OK

OR

PA

SC

SD

TN

TX

UTWV

WI

WY

MD

DE

RI

Houston5.50 6.50%

Washington, DC4.50 5.40%

New York3.75 4.40%

Chicago5.00 6.00%

Los Angeles4.00 5.00%

Seattle-Bellevue4.25 5.50%

Boston4.00 6.50%

San Francisco4.00 5.00%

Dallas4.50 6.50%

Atlanta5.00 6.00%

Miami5.00 6.00%

Denver5.00 7.00%

San Diego5.00 6.00%

Philadelphia6.00 7.00%

Tampa6.00 7.00%

Charlotte6.00 8.00%

Raleigh6.50 7.50%

Orlando6.00 7.00%

Minneapolis6.00 7.00%

Austin4.50 5.25%

Cincinnati8.50 9.50%

Phoenix6.75 7.00%

Sacramento5.75 6.75%

Columbus8.00 9.00%

Detroit8.00 10.00% Pittsburgh

8.00 9.00%

4.00 5.00%5.00 6.00%6.00 7.00%7.00 8.00%8.00 9.00%9.00% +

Oakland-East Bay5.00 6.50%

Portland4.50 6.00%

Kansas City7.00 8.00%

Cleveland8.00 9.00%

Indianapolis8.50 9.50%

Baltimore7.00 7.50%

NJ

CTMA

NH

NC

VA

WA

VT

AL

AZ

AR

CACO

FL

GA

ID

IL IN

IA

KSKY

LA

ME

MI

MN

MS

MO

MT

NE

NV

NM

NY

ND

OH

OK

OR

PA

SC

SD

TN

TX

UTWV

WI

WY

MD

DE

RI

Houston7.00 8.50%

New Jersey7.50 8.50%Chicago

7.50 8.00%

Los Angeles4.50 6.50%

Seattle-Bellevue5.50 6.50%

Boston5.00 6.00%

Dallas6.50 7.50%

Silicon Valley5.00 7.50%

Atlanta6.00 7.00%

Miami6.50 7.50%

Denver6.00 8.00%

San Diego5.00 6.50%

Philadelphia8.00 9.00%

Tampa7.00 8.00%

Charlotte6.00 8.00%

Raleigh7.00 8.00%

Orlando6.50 7.50%

Minneapolis7.00 8.00%

Austin5.50 7.00%

Phoenix6.00 6.50%

4.00 5.00%5.00 6.00%6.00 7.00%7.00 8.00%8.00 9.00%

Cincinnati8.50 9.00%

Columbus8.00 9.00%

Detroit8.00 9.00% Pittsburgh

7.50 8.50%

9.00% +

Oakland-East Bay6.50 7.50%

Portland6.00 7.50%

Sacramento 6.75 7.75%

Cleveland9.00 10.00%

Indianapolis8.00 9.00%

Baltimore7.50 8.00%

10

Notable primary market transactions, Q4 2016

Market Property Buyer Seller Price ($) Size (s.f.) Price (p.s.f.)

Boston One Kendall Square Alexandria DivcoWest $725,000,000 644,771 $1,124

New York 1250 Broadway Global HoldingsJamestown / MHP / David Werner

$565,000,000 645,977 $875

San Francisco One Front Street Paramount Invesco / State of Florida $521,000,000 651,732 $799

Los Angeles The Bluffs at Playa Vista Minskoff JPMorgan Chase $413,000,000 500,943 $824

Los AngelesLantana Entertainment Media Campus

Brightstone Jamestown $403,000,000 482,377 $835

Washington, DC Two Independence Square KTB / Kiwoom / Meritz Piedmont $385,600,000 579,000 $665

San Francisco Foundry III American Realty AdvisorsTishman Speyer / JPMorgan Chase

$349,893,786 291,093 $1,202

Los Angeles Citigroup Center Coretrust Thines $336,000,000 891,056 $377

New York 441 9th Avenue Cove / Baupost Group EmblemHealth $330,000,000 350,000 $943

San Francisco Peninsula

Genentech South Campus Genentech HCP $311,300,500 456,788 $682

Notable secondary market transactions, Q4 2016


Dallas Fort Worth State Farm Campus Mirae / Transwestern State Farm $825,000,000 2,200,000 $375

Miami Southeast Financial Center Ponte Gadea JPMorgan Chase $516,600,000 1,225,000 $422

Orange County Park Place (6 properties) Allianz (45% interest) LBA Realty / Principal $338,680,233 1,910,210 $394

Atlanta One Atlantic Center Starwood Capital Group Hines $318,100,000 1,102,246 $289

Minneapolis City Center HNA Group Shorenstein $315,000,000 1,617,888 $195

Atlanta 191 Peachtree TowerBanyan Street Capital / Oaktree Capital

Cousins Properties $268,000,000 1,209,721 $222

Orange County Google Center Jacaranda Holdings Scholle Corporation $260,000,000 573,000 $454

Austin 100 Congress Invesco MetLife $230,460,160 411,536 $560

Atlanta Atlanta Financial CenterSumitomo Corporation of Americas

Hines $222,500,000 908,659 $245

Atlanta Three RaviniaPreferred Apartment Communities

CBRE Global Investors $210,100,000 813,145 $258


Notable portfolio transactions, Q4 2016Market Property Buyer Seller Price ($) Size (s.f.) Price (p.s.f.)

National Parkway Properties Portfolio Cousins Properties Parkway Properties $1,950,000,000 - -

Naitonal U.S. Alecta Multisector Portfolio Blackstone Alecta$1,700,000,000

(overall)- -

NationalWest Coast Hines Global REIT Portfolio

Blackstone Hines Global REIT $1,162,000,000 3,000,000 $387

For more information, please contact:

Investor / OfficeSean CoghlanDirector, Investor Research+1 215 988 [email protected]

About JLL

JLL (NYSE: JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. JLL is a Fortune 500 company with, as of December 31, 2015, revenue of $6.0 billion and fee revenue of $5.2 billion, more than 280 corporate offices, operations in over 80 countries and a global workforce of more than 60,000. On behalf of its clients, the company provides management and real estate outsourcing services for a property portfolio of 4.0 billion square feet, or 372 million square meters, and completed $138 billion in sales, acquisitions and finance transactions in 2015. As of September 30, 2016, its investment management business, LaSalle Investment Management, has $59.7 billion of real estate assets under management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit www.jll.com.

About JLL Research

-leading reports and services that illuminate todand analyze economic

and property trends and forecast future conditions in over 60 countries, producing unrivalled local and global perspectives. Our research and expertise, fueled by real-time information and innovative thinking around the world, creates a competitive advantage for our clients and drives successful strategies and optimal real estate decisions.

© 2017 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.

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Office

Investment Outlook

United States | Q3 2016

$0.0

$50.0$100.0

$150.0

$200.0$250.0 Q1 Q2 Q3 Q4

OFFICEOffice asset pricing exhibiting signs of plateauing

2

Stable and growing office leasing markets during the third quarter. Despite increased labor market volatility over the past six months, there was no evidence of a summer slowdown, with leasing volumes up 4.4 percent compared to the four-quarter trailing average. With this, markets are keeping pace and have absorbed space at nearly 100 percent the rate of new deliveries. However, primary markets welcoming new supply are nearing an inflection point as supply begins to catch up to demand.

Year-to-date volume declines moderating with a strong third quarter. While up relative to the third quarter of last year by 5.7 percent, $35.5 billion of quarterly office investment sale activity brought year-to-date volumes to $101.4 billion, 1.5 percent below prior-year levels. This comes on the heels of calming yet still uncertain investor sentiment following sustained levels of heightened macro market volatility. However, if looking at market conditions today, real estate markets are well-positioned to normalize this year, supporting a return in 2017 from lagging deal flow experienced in 2016.

Office pricing showing signs of plateauing. The overall pricing landscape nationally for office product remains steady, with cap rates across primary and secondary markets averaging 4.4 percent. This is stable compared to the last two quarters while showing a 30-basis-point compression compared to this time last year. Pricing will be a key factor to watch heading into 2017, and those markets with higher barriers to

entry will be more resilient in sustaining current pricing levels.

Secondary market diversification normalizes; risk sensitivities sustained at the submarket level. After a pullback in secondary market transactions in the second quarter, momentum returned this quarter. This activity was driven by Dallas Fort Worth, Atlanta and Northern New Jersey, which collectively drove seven of the ten largest secondary market transactions of the quarter. With this, however, we have seen a sustained sensitivity to submarket risk, with non-CBD liquidity reverting to late-2014 levels. As a result, CBDs are now driving over 55.0 percent of quarterly deal flow.

Offshore office investment remains elevated and outperforming peer sectors. Following a year of sector diversification, offshore capital remains active and at sustained, structurally higher levels within the office sector. Preliminary metrics indicate office has captured more than 60.0 percent of inbound capital year-to-date beyond long-term average metrics. As a result, nearly 15.0 percent of year-to-date acquisitions were by offshore investors. This represents a consistent increase when compared to leading volume years from the prior cycle, which saw offshore participation between 5.0 and 9.0 percent. This capital continues to focus on primary office markets led by New York, San Francisco and Boston with selective diversification.

While up 5.7 percent in the third quarter, year-to-date office investment sales down 1.5 percent at close of third quarter


Despite year-over-year compression, office cap rates plateauing

Source: JLL Research, NCREIF, Board of Governors of Federal Reserve

12-month completions (as % of inventory) 12-month rent growth (p.s.f.)

1.3% 5.8%

-6012-month change in total vacancy (bps) 12-month net absorption (as % of inventory)

1.3%U.S. Office property market

Average cap rate 12-month change in cap rate (bps)

4.4% -30Investment sales (YTD, billions of $US)

$101.4YTD investment sale growth

-1.5%U.S. Office investment


1.6%

4.1%

5.2%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0% 10-year Treasury (%)Primary cap rates (%)Secondary cap rates (%)

Despite increased labor market volatility over the past six months, there was no evidence of a summer slowdown in the office leasing markets in the third quarter. U.S. leasing volumes totaled nearly 60 million square feet 4.4 percent higher than the four-quarter trailing average and expansionary leases comprised the largest share of 20,000-square-foot-and-larger leases at 47.1 percent. As a result of more broad-based growth across industries and sectors, the top-performing leasing markets year-to-date have ranged from major diversified metros such as Atlanta (+33.5 percent YTD) to industry- and corporate-driven secondary markets such as Salt Lake City (+136.2 percent YTD), Columbus (+70.6 percent YTD) and Orlando (+68.3 percent YTD), all of which have benefited from a combination of large-block office users in professional services, finance and even tech, as well as non-office users such as leisure, hospitality, education and health. With this, total vacancy edged downward by 10 basis points as markets absorbed 12.8 million square feet compared to the 12.5 million square feet that were delivered.

While markets are keeping pace and have absorbed space at nearly 100 percent the rate of new deliveries totaling nearly 35.5 million square feet year-to-date, some markets are beginning to see vacancy creep as new supply hits the market. Looking ahead, as long as employment continues to grow, occupancy in the office market should continue to expand. That said, primary markets welcoming new supply are nearing an inflection point as supply begins to catch up to demand. With more than 60.0 percent of the 105 million-square-foot development pipeline expected to deliver by the end of 2017, leasing conditions will become much more balanced by 2018, with a shift to more tenant-favorable conditions by 2019.

Stable and growing office leasing markets during the third quarter

TOP OFFICE THEMES

3

1

Source: JLL Research (volumes based on total activity)

Leasing volume by market

Primary markets remain leaders, although Silicon Valley is disproportionately contributing to volume


Market Leasing activity (s.f.)

New York 6,665,424Washington, DC 4,379,517Boston 3,549,945New Jersey 3,497,458Chicago 3,350,427Seattle 2,693,694Los Angeles 2,600,042Atlanta 1,931,398Dallas 1,906,676Silicon Valley 1,744,264All other markets 27,567,367Total leasing activity 59,886,212

11%

7%

6%

6%

6%

5%4%3%3%3%

46%

Completions

The remainder of the groundbreaking wave has boosted 2018 completions to 25.1 m.s.f.

Source: JLL Research

0

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

2016

2017

2018

2019

Com

plet

ions

(s.f.

)

PreleasedAvailable

Office pricing showing signs of plateauing

4

3


While up relative to the third quarter of last year by 5.7 percent, $35.5 billion of quarterly office investment sale activity brought year-to-date volumes to $101.4 billion, 1.5 percent below prior-year levels. This comes on the heels of calming yet still uncertain investor sentiment following a sustained level of heightened macro market volatility and thus perceptions of elevated downside risks in markets. This volatility, heightened sensitivities to cyclical risks and current pricing levels are now increasing investor selectivity on office investment opportunities, especially for higher risk, less liquid submarkets and core opportunities. With this, the majority of markets are seeing annual activity declines, with the exception of those most active markets: Los Angeles, San Diego, Northern New Jersey and Philadelphia. However, liquidity remains strong in coastal primary markets such as New York, Boston and Los Angeles as well as high-growth secondary markets such as Denver and Philadelphia. New York remains the most active market domestically and globally, accounting for the three largest office transactions of the quarter all of which were partial interest transactions, with two being to offshore buyers. In the largest trade of the quarter, Hong Kong Monetary Authority acquired a 49.0 percent interest in 1095 Avenue of the Americas for nearly $1.2 billion from Ivanhoe Cambridge and Callahan Capital Partners.

Uncertainty has calmed but likely is not yet over. The upcoming U.S. election, slowing job gains and pending Federal Reserve decisions are expected to spur near-term bumpiness. However, if looking at market conditions today, real estate markets are well positioned to normalize this year, supporting a return in 2017 from lagging deal flow experienced in 2016.

Year-to-date volume declines moderating with a strong third quarter2


Office investment sales by market

As the majority of markets continue to see year-to-date declines, New York, Boston and Los Angeles lead office investment sale activity; Los Angeles, San Diego and Northern New Jersey lead gains

$0.0 $5.0 $10.0 $15.0 $20.0 $25.0 $30.0 $35.0 $40.0

San Francisco PeninsulaNorthern Virginia

Silicon ValleyDallas-Fort WorthWashington, DC

PhiladelphiaSan Diego

Northern New JerseyAtlanta

ChicagoSeattle-Bellevue

San FranciscoLos Angeles

BostonNew York

2016 YTD 2015 YTD

-47.7%-47.4%

-29.8%-34.7%

-47.1%4.0%

23.5%9.2%

-39.7%-65.9%

-25.8%-17.4%

24.8%-47.7%

-15.9%

-100.0% -50.0% 0.0% 50.0%

Percentage change (%, YTD)

The overall pricing landscape nationally for office product remains steady, with cap rates across major primary and secondary markets averaging 4.4 percent. This is stable compared to the last two quarters while showing a 30-basis-point compression compared to this time last year. 65.6 percent of the 32 largest office markets are seeing cap rates compress year-over-year, but primary markets continue to drive annual cap rate declines, with all of these markets seeing further compression,

on average by 34 basis points. However, there has been an uptick in those markets which are softening, a trend evidenced in 22.0 percent of markets. All of these are secondary office markets. With this, the overall pace of cap rate compression is declining as well, most notably and similarly in secondary markets. Softening cap rates have been most evident in Sacramento, Houston, Raleigh-Durham and Oakland East Bay. On the other end of the spectrum, compression remains strong and at leading paces in Salt Lake City, Philadelphia and Portland, as well as in Boston and Washington, DC all of which have seen annual declines greater than 50 basis points, sustaining those primary markets at sub-4.5 percent levels and those secondary between 5.0 and 6.0 percent. As a result of these dynamics, the yield discount for secondary relative to

After a pullback in secondary market transactions in the second quarter at a level we had not seen since 2014, momentum in secondary markets returned this quarter with 41.4 percent of transaction volumes in this market set. In the third quarter, this activity was driven by Dallas Fort Worth, Atlanta and Northern New Jersey, all of which saw over $500 million of quarterly deal flow and drove seven of the ten largest secondary market transactions of the quarter. This is a return to levels experienced in two of the last three quarters and reflective of a strong and sustained appetite for higher yielding opportunities outside of expensive primary markets from core-plus and even more so value add capital. In the largest value add, secondary market transactions of the quarter, Fortis acquired the Chase Tower in the Dallas CBD for $273 million, or $219 per square foot, from Hines, and Rubenstein Partners acquired Sanctuary Park in the North Fulton submarket of Atlanta from JP Morgan. Both furthermore represent transactions of 1.0 million+ square feet.

With this, however, we have seen a sustained sensitivity to submarket risk. Since early 2014, there has been a continued expansion of liquidity for non-CBD assets, whether those fall within urban or suburban submarkets. This peaked in the first quarter of 2016, in which nearly 60.0 percent of transactions fell within non-CBD submarkets 71.8 percent of which fell within suburban submarkets. This was the highest level of this activity seen in the current cycle. However, with uncertainty in early 2016, non-CBD liquidity has reverted to late-2014 levels, with CBDs now driving over 55.0 percent of quarterly deal flow. Despite this pullback, best-in-class assets in suburban-centric markets such as New Jersey, Atlanta and Dallas continue to see strong suburban transaction volumes, with buyers primarily being private equity investors or local/regional players and institutional players less active. Looking ahead, liquidity is expected to remain intact for secondary markets. However, current investor selectivity is expected to limit liquidity for inferior, outlying suburban product due to an increased focus on cycle assurance and longer-term repositioning strategies.

primary markets remains at historically elevated levels at 110+ basis points, nearly 40 basis points wider than expansionary cycle norms.

With cap rates below prior peak levels notably, in the primary markets yet liquid real estate capital markets across debt and equity, pricing will be a key factor to watch heading into 2017, with select markets seeing pricing disconnects emerge between buyers and sellers. Those markets with higher barriers to entry will be more resilient in sustaining current pricing levels.

Secondary market diversification normalizes; risk sensitivities sustained at the submarket level

5

4


Source: JLL Research, NCREIF (Includes 32 major office markets; Stable defined as markets seeing fluctuations within 10 basis points year-over-year)

Overall office annual cap rate fluctuations

While 65.6 percent of markets are seeing cap rates compress, signs of plateauing beginning to emerge, with 22.0 percent of markets seeing a year-to-date softening of cap rates

22%6%

16%22%22%9%

34%97%56%9%3%

19%16%

0% 20% 40% 60% 80% 100%

2016 YTD201520142013201220112010200920082007200620052004

Compressing Stable Softening

Source: JLL Research, NCREIF (Includes 32 major office markets)

Primary-to-secondary market cap rate differential

Secondary market cap rates at an atypically high discount relative to primary markets, having reached 111 basis points this quarter and now beyond levels seen at the prior peak

105111

0

20

40

60

80

100

120

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

YTD

Seco

ndar

y m

arke

t yie

ld d

isco

unt

(bas

is p

oint

s)

15-year expansionary cycle average

Investment sale volumes by market type


Secondary investment volumes normalize after an atypical slowdown last quarter; as a result, these markets have now driven > 41.0 percent of quarterly deal flow in three of the last four quarters

31% 23%34%

20%37% 37% 29% 34% 35% 41% 41%

27%41%

0%

20%

40%

60%

80%

100%

2013

Q3

2013

Q4

2014

Q1

2014

Q2

2014

Q3

2014

Q4

2015

Q1

2015

Q2

2015

Q3

2015

Q4

2016

Q1

2016

Q2

2016

Q3

Primary markets Secondary markets

Following a year of sector diversification, offshore capital remains active and at sustained, structurally higher levels within the office sector. At the close of the third quarter, preliminary metrics indicate office has captured more than 60.0 percent of inbound capital year-to-date in line with and in fact beyond long-term average metrics. Largely the result of significant global capital flows into the industrial sector in 2015, the office sector captured a minor 27.0 percent of this capital in full-year 2015. However, as foreign participation metrics across sectors have normalized in 2016 to levels seen in the prior cycle, the office sector continues to see growth in participation both in dollars and in relative terms: at the close of the third quarter, nearly 15.0 percent of year-to-date acquisitions were by offshore investors. This represents a consistent increase when compared to leading volume years from the prior cycle, which saw offshore participation between 5.0 and 9.0 percent. This capital continues to focus on the primary office markets with selective diversification: New York has captured 45.5 percent of this capital year-to-date, followed by San Francisco (8.4 percent), Boston (7.1 percent) and Washington, DC (6.8 percent). Canadian, German and Chinese investors continue to lead inbound volumes, accounting for 57.3 percent of year-to-date offshore office acquisitions. As we move to year-end and into 2017, the foreign buyer pool remains active yet selective overall, with office investment levels expected to remain high relative to peer sectors given the global, institutional nature of the asset class.


Offshore office investment remains elevated and outperforming peer sectors5


Foreign office investment activity

Office continues to outperform peer sectors and at a sustained, structural pace relative to prior cycle: nearly 15.0 percent of year-to-date acquisitions by offshore investors

Investment sale volumes by submarket characteristics


Submarket selectivity continues with heightened levels of activity in urban CBD submarkets for the second consecutive quarter the highest relative level of activity in these submarkets since 2014

59% 62%57%

78%59% 57% 55% 50% 54% 50%

39%

63% 56%

37% 33%37%

20%

36%37% 34%

35%36% 44%

43%

32%37%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2013

Q3

2013

Q4

2014

Q1

2014

Q2

2014

Q3

2014

Q4

2015

Q1

2015

Q2

2015

Q3

2015

Q4

2016

Q1

2016

Q2

2016

Q3

Tran

sact

ion

volu

mes

by

subm

arke

t ch

arac

teris

tics

CBD - Suburban CBD - UrbanNon-CBD - Suburban Non-CBD - Urban

10.5%

11.7%

7.4%

8.5%

5.2%

11.0%

8.4%

11.1%

13.5%

10.6%

13.6%

11.0%

15.6%14.9%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

$0.0

$5.0

$10.0

$15.0

$20.0

$25.0

$30.0

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Fore

ign

parti

cipa

tion

(as

a %

of t

otal

offi

ce v

olum

es)

Fore

ign

offic

e in

vest

men

t (bi

llions

of $

US)

45.5%

8.4%

7.1%

6.8%

5.6%

4.8%

4.8%

2.8%

2.1%

1.9%

1.6%

1.4%

1.1%

1.1%

New York

San Francisco

Boston

Washington, DC

Dallas-Fort Worth

Los Angeles

Seattle-Bellevue

Miami

Northern New Jersey

Chicago

Atlanta

Austin

Philadelphia

San Diego

Foreign investment by destination market (as a percentage of total, 2016 YTD)

Primary markets continue to capture of inbound capital, receiving 78.2 percent of this capital year-to-date, with selective diversification evidenced

Source: JLL Research, Real Capital Analytics (Transactions larger than $5.0M; Includes all office markets which received > 1.0 percent of offshore capital as of Q3 2016)

7

Notable primary market transactions, Q3 2016


New York1095 Avenue of the Americas

Hong Kong Monetary Authority (49.0% interest)

Ivanhoe Cambridge/Callahan Capital Partners

$1,152,970,000 1,036,534 $2,270

New York 11 Madison Avenue PGIM (40.0% interest)SL Green Realty Corp.

$1,040,000,000 2,285,846 $1,137

New York 10 Hudson Yards Allianz (44.0% interest) Coach Inc. $946,000,000 1,809,073 $1,188

San Francisco2-property portfolio (303 2nd Street; 100 1st Street)

Norges Bank Investment Management (44.0% interest)

Kilroy Realty $452,900,000 1,213,000 $849

San Francisco 760 Market Street Confidential Thor Equities $374,000,000 298,124 $1,200

Chicago 321 N Clark StDiversified Real Estate Capital (95% interest)

Hines $358,000,000 896,000 $400

Chicago1K Fulton (1000 W Fulton St)

American Realty Advisors Sterling Bay $305,000,000 531,190 $574

BostonRiverview Center (245 First St)

Clarion Partners Jamestown $295,000,000 278,212 $1,060

New York 1619 Broadway Conway Capital Brickman/Allied $295,000,000 172,000 $1,715

Silicon Valley 1101 W Maude Ave LinkedIn Google $285,961,215 397,510 $719

Notable secondary market transactions, Q3 2016


Northern New Jersey 800 Scudders Mill Rd Hana Asset Management LCOR/Ivy Equities $305,000,000 761,824 $400

Dallas-Fort Worth Chase Tower Fortis Hines $273,000,000 1,248,230 $219

Atlanta Sanctuary Park Rubenstein PartnersJP Morgan Asset Management

$265,000,000 1,541,723 $172

Oakland-East BayLake Merritt Plaza (1999 Harrison Street)

Clarion Partners DivcoWest $235,500,000 535,253 $440

Northern New JerseyWaterfront Corporate Center I (111 River Street)

Mack-Cali Realty Corp.Equity Commonwealth

$235,000,000 521,410 $451

Dallas-Fort WorthVerizon Irving Regional Headquarters (600 Hidden Ridge)

Mesirow Financial Verizon $231,168,605 1,150,000 $299

Dallas-Fort Worth 2000 McKinney Ave Union InvestmentADIA/Lincoln Property/Corrigan

$225,836,000 442,355 $511

Fort Lauderdale Bank of America Plaza Deutsche Bank JPMorgan Chase $219,946,496 408,064 $539

MinneapolisAmeriprise Financial Center HQ

Morning Calm Management/Axar Capital Management

Founders Properties

$200,000,000 848,000 $236

Atlanta 2475 Northwinds Pky Brookdale Group Blackstone $186,900,000 1,037,678 $180


For more information, please contact:

InvestorSean CoghlanDirector, Investor [email protected]

OfficeJulia GeorgulesDirector, Office [email protected]

About JLL

JLL (NYSE: JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. A Fortune 500 company with annual fee revenue of $4.7 billion and gross revenue of $5.4 billion, JLL has more than 230 corporate offices, operates in 80 countries and has a global workforce of approximately 58,000. On behalf of its clients, the firm provides management and real estate outsourcing services for a property portfolio of 3.4 billion square feet, or 316 million square meters, and completed $118 billion in sales, acquisitions and finance transactions in 2014. Its investment management business, LaSalle Investment Management, has $57.2 billion of real estate assets under management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit www.jll.com.

About JLL Research

-leading reports and services that illuminate todand analyze economic

and property trends and forecast future conditions in over 60 countries, producing unrivalled local and global perspectives. Our research and expertise, fueled by real-time information and innovative thinking around the world, creates a competitive advantage for our clients and drives successful strategies and optimal real estate decisions.

© 2016 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.

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