Office market trends and outlook (Q4 2015)
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Transcript of Office market trends and outlook (Q4 2015)
Highest quarterly absorption during the cycle so far further demonstrates healthy demandUnited States Office Review Q4 2015
Despite global economic uncertainty, office market fundamentals across the United States showed no signs of a slowdown, with occupancy growing at a rate 1.3x faster than new supply and company expansion into new markets representing nearly 10.0 percent of total leasing activity. CBDs remain the premier location for many tenants, but suburbs are starting to pick up as pricing and competition encourages many tenants to look to markets such as Atlanta, Charlotte, Dallas and Raleigh-Durham.
3
Landlord confidence firmly rooted across most U.S. markets, tenants face increasing rents amidst dwindling supply
Source: JLL Research
Leasing activity• Leasing activity declined slightly by 2.8 percent to 60.5 million square feet, although it remained above the 60-
million-square-foot threshold, bringing year-to-date volumes to 241.9 million square feet. This represents a year-over-year gain of 2.4 percent as markets, particularly diversified and mid-sized geographies, continue to demonstrate solid signs of improved demand.
Absorption• Occupancy growth across the United States totaled 18.7 million square feet in Q4, the highest quarterly figure
recorded during the cycle so far. Year-end absorption was equal to 2014’s rate of 1.4 percent year-on-year.• Los Angeles joined other diversified markets, such as Dallas, Chicago, Phoenix, Atlanta and Philadelphia, in
being a leader in net absorption over the course of 2015.
Vacancy• A sharp uptick in absorption helped to propel total vacancy downward by 40 basis points to 14.7 percent, falling
below the 15.0-percent mark for the first time this cycle.• Properties across class and geographies are experiencing declines in vacancy at varying rates, with suburban
Class A posting the fastest pace in declines as minimal large CBD options hinder faster take-up of space.
Rents• Asking rents saw their second-highest level of quarterly growth during Q4 at 2.3 percent, bringing year-over-
year gains to 3.5 percent; the U.S. office market has now reached pre-recession rent levels.• While CBD Class A space continues to surpass all other classes over the course of the cycle, quarterly upticks
in other sectors have been faster as rising economic conditions boost much of the overall market.
Construction• Construction activity declined slightly over the quarter to 88.3 million square feet as numerous projects began
to deliver, although groundbreakings in Q1 2016 are likely to reverse this trend.• High preleasing rates of 47.7 and 53.1 percent for developments coming online in 2016 and 2017 mean that
relief will be somewhat limited, elevating asking rents for new space even further.
Leasing activity
5
Leasing activity was slightly slower than Q3, but remained strong at 60.5 million square feet
2007 2008 2009 2010 2011 2012 2013 2014 20150
10,000,000
20,000,000
30,000,000
40,000,000
50,000,000
60,000,000
70,000,000
80,000,000
90,000,000
Leas
ing
activ
ity (s
.f.)
Source: JLL Research
6
Annual activity surpassed 2014 by 2.4 percent, with five markets posting more than 3.0 million square feet of transactions
2007
2008
2009
2010
2011
2012
2013
2014
YTD 2015
0 50,000,000 100,000,000 150,000,000 200,000,000 250,000,000 300,000,000
258,547,529
246,521,385
228,764,145
275,274,581
282,356,988
234,094,033
249,187,644
236,140,690
241,866,448
Leasing activity (s.f.)
Source: JLL Research
7
35.4 m.s.f.total square feet leased in Q3 in transactions
20,000 s.f. or larger
94average term in months
52% / 41% / 7% of tenants are growing / shrinking / stable
46.7% vs. 53.3%urban vs. suburban breakdown
of Q3 volume
A significant number of large-block activity (> 100,000 s.f.) consisted of renewals, slightly pushing down rate of expansion
Source: JLL Research – only for leases larger than 20,000 square feet
8
Urban Suburban Total metro
Financial, tech and government activity propelled CBD volumes to more than 1.0 m.s.f. in many geographies
Source: JLL Research – only for leases larger than 20,000 square feet
Philadelphia
Houston
Portland
Raleigh-Durham
SF Peninsula
San Francisco
Denver
Charlotte
Boston
Pittsburgh
Seattle-Bellevue
Chicago
Silicon Valley
Washington, DC
New York
0 3,000,000 6,000,000
361,208
374,991
406,412
427,018
604,726
617,190
889,915
1,071,864
1,073,922
1,099,000
1,135,564
1,504,842
1,886,577
2,448,250
3,020,346
Leasing activity (s.f.)
Atlanta
Suburban MD
Baltimore
Tampa
Austin
Orange County
Los Angeles
Chicago
Philadelphia
Dallas
Denver
Boston
Houston
New Jersey
Northern VA
0 3,000,000
437,404
450,300
484,501
484,695
497,774
548,861
639,627
784,357
795,735
864,320
890,188
896,089
900,038
1,252,939
1,856,044
Leasing activity (s.f.)
Austin
San Diego
Houston
Seattle
Philadelphia
Denver
San Francisco
Orange County
Dallas
New Jersey
Los Angeles
Boston
Chicago
New York
Washington, DC
0 4,500,000 9,000,000
1,343,465
1,444,108
1,529,476
1,755,720
1,793,650
1,817,265
1,859,002
2,107,067
2,506,327
2,714,879
2,999,585
3,444,800
5,111,077
5,669,264
7,750,000
Leasing activity (s.f.)
9
Education
Accounting consulting research strategy
Telecom
Aerospace and defense
Energy and utilities
Life sciences
Other professional and business services
Law firm
Other
Healthcare
Government
Banking and financial services
Technology
0% 2% 4% 6% 8% 10% 12% 14% 16% 18%
2.3%
2.7%
2.8%
3.3%
3.5%
3.6%
4.7%
6.3%
6.4%
7.3%
8.9%
15.9%
16.8%
Share of leasing activity (%)
Tech and finance continue to drive occupancy growth across a diversity of markets
Source: JLL Research – only for leases larger than 20,000 square feet and industries with more than 2.0 percent share of activity
10
> 30,000 s.f. 30,000-39,999 s.f.
40,000-49,999 s.f.
50,000-74,999 s.f.
75,000-99,999 s.f.
100,000-199,999 s.f.
200,000+ s.f.0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
8,000,000
9,000,000
6,053,192
3,184,575 3,156,701
4,476,8194,109,935
6,292,398
8,162,871
Leas
ing
activ
ity (s
.f.)
More than one-third of activity was comprised of leases smaller than 30,000 s.f. as growth diversifies
Source: JLL Research
11
Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 20150%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
43.2% 48.0%56.0%
43.7%
57.9%52.0%
48.7% 41.0%34.0%
46.3%
38.3%41.0%
8.1% 11.0% 10.0% 10.0%3.8% 7.0%
Growing Stable Shrinking
Source: JLL Research
A slight uptick in contraction activity pushed down gains elsewhere, but more than half of activity remains expansionary
8.3%Shrinking
41.6%Stable
50.1%Growing
Average share
12
ConstructionTelecom
EngineeringEnergy and utilities
GovernmentInsuranceLaw firm
Architecture and engineeringOther
Marketing and communicationsAerospace and defense
NonprofitBanking and financial services
Media and entertainmentLife sciences
HealthcareFood and beverage production
EducationAccounting and consulting
Retail and hospitalityOther professional services
Real estateTechnology
Manufacturing and distributionAssociation nonprofit union
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%0.0%
15.2%15.4%
18.3%19.4%
28.3%29.4%
35.6%38.2%38.5%
41.2%51.1%
59.9%62.1%63.4%64.2%64.6%65.0%
70.6%71.6%
74.8%76.3%
78.0%81.0%
87.2%
100.0%62.1%
79.4%81.7%
49.8%51.6%
48.7%64.4%59.8%
61.5%56.8%
48.9%34.5%
27.3%34.3%
35.8%15.7%
26.9%29.4%28.4%21.8%
23.7%19.7%
19.0%12.8%
0.0%22.7%
5.2%0.0%
30.8%20.1%
21.9%0.0%
2.0%0.0%
2.0%0.0%
5.7%10.6%
2.3%0.0%
19.7%8.0%
0.0%0.0%
3.4%0.0%
2.2%0.0%0.0%
Growing Stable Shrinking
Share of leasing activity (%)
More than 75.0 of associations, manufacturing, technology an real estate companies signed expansionary leases in Q4
Source: JLL Research
Absorption
14
For the first time this cycle, quarterly occupancy growth totaled 0.5 percent of inventory
2008 2009 2010 2011 2012 2013 2014 2015-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
Qua
rterly
net
abs
orpt
ion
(as
% o
f inv
ento
ry)
Source: JLL Research
15-year trailing annual average
15
Due to slightly slower uptake in previous quarters, annual absorption remained consistent at 1.4 percent of inventory
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
YTD
net
abs
orpt
ion
(as
% o
f inv
ento
ry)
Source: JLL Research
15-year trailingannual average
16
Movement to Class B space as quality options diminish is increasing; quarterly B absorption double rate of early recovery
Source: JLL Research
2010-Q3 2014 Past four quarters0
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
30,000,000
35,000,000
31,348,654
12,456,664Cla
ss B
net
abs
orpt
ion
(s.f.
)
1,567,433 s.f. per quarter 3,114,166 s.f. per quarter
Dallas Chicago Boston PhoenixSilicon Valley Atlanta Los Angeles Seattle-BellevuePhiladelphia Austin All other markets
Market YTD net absorption (s.f.) Share
Dallas 4,794,274 8.6%
Chicago 3,585,989 6.5%
Boston 3,045,721 5.5%
Phoenix 2,965,982 5.3%
Silicon Valley 2,891,738 5.2%
Atlanta 2,578,651 4.6%
Los Angeles 2,557,260 4.6%
Seattle-Bellevue 2,461,440 4.4%
Philadelphia 2,453,633 4.4%
Austin 2,253,197 4.1%
All other markets 25,893,173 46.7%
United States 55,481,058 100.0%
17
Source: JLL Research
Los Angeles joins other diversified markets (Dallas, Chicago, Phoenix, Atlanta and Philadelphia) as a driver of absorption
18
More than 1.0 million square feet of absorption in Los Angeles, the SF Peninsula and Silicon Valley boosted West Coast in Q4
2010 2011 2012 2013 2014 20150%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
East Coast Central West Coast
Shar
e of
qua
rterly
net
abs
orpt
ion
Source: JLL Research
19
With 13.1 million square feet of absorption, the Sun Belt continues to gain momentum; tech’s share rises by 820bp
Source: JLL Research – figures denote share of annual net absorption
NYC and DC (*excludes Midtown South)
Tech markets (*includes Midtown South)
Energy markets
Sun Belt
All other markets
70.0%
29.7%
6.4%
2010
5.1%
33.5%
19.0%
18.4%
23.9%
201137.5%
26.0%
29.1%
7.4%
2012
11.1%
21.6%
22.3%
18.6%
26.4%
2013
13.7%
23.1%
15.3%20.1%
27.8%
2014
0.9%
31.3%
4.1%
23.6%
40.2%
YTD 2015
20
Housto
n
Pittsbu
rghDen
ver
Seattle
San Fran
cisco
Silicon
Valley
Austin
SF Penins
ulaAtla
ntaTam
pa
Phoen
ix
Raleigh
-Durham
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
-0.1%
0.4%
2.0%
2.7% 2.9%
4.2%
4.9% 4.9%
1.9%
3.4% 3.6% 3.8%
YTD
net
abs
orpt
ion
(s.f.
)Multiple tech markets absorb more than 4.0 percent of inventory, while Sun Belt geographies are approaching that threshold
Source: JLL Research
Energy Tech Sun Belt
U.S.average
21
Earlier flight to quality has kept Class A’s share of absorption gains strong, but B and C are approaching the 50-m.s.f. mark
Source: JLL Research
Trophy and Class A net absorption
181.1m.s.f.
2010-YTD 2015
Class B and C net absorption
43.8m.s.f.
2010-YTD 2015
22
Submarkets with creative and tech-friendly space outperform the national Class B average
Mid-Market (SF) South Financial District (SF)
Pioneer Square (Seattle) River West (Chicago) Santa Monica (Los Angeles)
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%11.1%
10.0%
5.6%
3.2%2.9%
YTD
Cla
ss B
net
abs
orpt
ion
(% o
f inv
ento
ry)
Source: JLL Research
U.S. average
Vacancy
24
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 20150.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
Tota
l vac
ancy
(%)
2010 2011 2012 2013 2014 201514.0%
15.0%
16.0%
17.0%
18.0%
19.0%
20.0%
The 18.7 m.s.f. of absorption in Q4 pushed vacancy down sharply by 40bp to 14.7%; first time it has fallen below 15.0% this cycle
Source: JLL Research
25
Suburban A and B properties registered sharper downturns in vacancy over the quarter due to lack of space in urban cores
2010 2011 2012 2013 2014 2015-600
-500
-400
-300
-200
-100
0
100
Chan
ge in
tota
l vac
ancy
(bp)
Source: JLL Research
-420bpCBD Class A
-510bpSuburban Class A
-290bpCBD Class B
-310Suburban Class B
Change in vacancy since Q1 2010
26
The 149,000 additional office-using jobs added during Q4 were partially responsible for the sharp drop in vacancy
2011 2012 2013 2014 201525,000
26,000
27,000
28,000
29,000
30,000
31,000
32,000
12.0%
13.0%
14.0%
15.0%
16.0%
17.0%
18.0%
19.0%Office-using employment (thousands) Total vacancy (%)
Offi
ce-u
sing
em
ploy
men
t (th
ousa
nds)
Tota
l vac
ancy
(%)
Source: JLL Research
27
Sublease space continues to fall (currently at 42.7 million square feet) despite increasing in Houston due to stalling conditions
2009 2010 2011 2012 2013 2014 201530,000,000
40,000,000
50,000,000
60,000,000
70,000,000
80,000,000
90,000,000
100,000,000
Subl
ease
spa
ce (s
.f.)
Source: JLL Research
Rents
29
Peakingphase
Fallingphase
Risingphase
Bottomingphase
Sustained rent growth is pushing markets farther along the clock, with Houston being the notable outlier
Source: JLL Research
Dallas, San Francisco
Charlotte, Fort Lauderdale, Kansas CityOakland-East Bay, Orlando, Salt Lake City
Houston
Cleveland, Indianapolis, Raleigh-Durham, St. Louis
San Francisco Peninsula
Baltimore, Detroit, Hartford, San Antonio,West Palm Beach, Westchester County
Los Angeles, San Diego
Silicon Valley
Atlanta, Jacksonville, Miami,Orange County, Richmond, United States
New York, Pittsburgh, Portland, Tampa
Denver, Minneapolis, Seattle-Bellevue
New Jersey,Washington, DC
Chicago, Phoenix
Columbus, Sacramento
Long Island, Philadelphia
Boston
Cincinnati, Fairfield County,Hampton Roads, Milwaukee
Austin
Nashville
30
CBDs remain slightly ahead on aggregate, with many approaching cyclical peaks in terms of rent growth
Source: JLL Research
Peakingphase
Fallingphase
Risingphase
Bottomingphase
Dallas, Fort Lauderdale, Los Angeles, Portland
Charlotte, New York (Midtown),Philadelphia, Raleigh-Durham
Houston
Cincinnati, Milwaukee, Phoenix, West Palm Beach
Jacksonville, Oakland, Orlando
Austin, Nashville, New York (Midtown South),Silicon Valley
Baltimore, Kansas City
Atlanta
Boston, New York (Downtown), Pittsburgh
Denver, Seattle
Detroit, Hartford, Washington, DC
Chicago, Miami, San Diego, United States
Sacramento, White Plains
Salt Lake City
Columbus, Richmond, San Antonio, St. Louis
San Francisco
Minneapolis, Tampa
Cleveland, IndianapolisFairfield County
31
Peakingphase
Fallingphase
Risingphase
Bottomingphase
Suburban markets display more variance, from super-hot tech geographies to lagging exurban submarkets
Source: JLL Research
Dallas
Charlotte, Chicago, Cleveland, East Bay,Indianapolis, Westchester County
Fort Lauderdale, Orlando, Miami, Milwaukee, Raleigh-Durham
HoustonSan Francisco Peninsula
Central NJ, Detroit, Hartford, West Palm Beach
Los Angeles, Nashville, San Diego
Silicon Valley
Atlanta, Baltimore, United States
Austin, Bellevue, Richmond
Boston, Minneapolis, Phoenix, Seattle, Salt Lake City
Washington, DC
Cincinnati, Fairfield County,Hampton Roads, Oakland
Lehigh Valley, Northern DE,Northern NJ, Sacramento
Philadelphia
Cambridge
Nassau County, Orange County, Tampa
Columbus, San Antonio
San Francisco (non-CBD)
Jacksonville, Pittsburgh, Portland, St. Louis
Southern NJ
Suffolk County
Denver
Kansas City
32
Annual rent growth remains steady at around 3.5 percent per year, while asking rents are at pre-recession highs
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
$10
$15
$20
$25
$30
$35
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
Aver
age
aski
ng re
nt ($
p.s
.f.)
Source: JLL Research
Annual rent growth (%)
33
As large blocks diminish and new supply begins to deliver, rents rose at the second-highest rate this cycle so far (+2.3 percent)
2008 2009 2010 2011 2012 2013 2014 2015-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
Qua
rterly
rent
gro
wth
(%)
Source: JLL Research
34
CBD A growth over the course of the cycle remains highest, but suburban A and CBD B posting faster rates of increase of late
2010 2011 2012 2013 2014 2015-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0% Class A (CBD) Class A (suburban)Class B (CBD) Class B (suburban)Class C (CBD) Class C (suburban)
Gro
wth
in a
skin
g re
nts
sinc
e Q
1 20
10
Source: JLL Research
+25.0%CBD Class A
+11.9%Suburban Class C
+13.7%CBD Class C
+13.5%Suburban Class A
+13.7%CBD Class B
+8.4%Suburban Class B
35
Both CBD and suburban rents are rising appreciably, but the gap between the two grew further to $16.67 per square foot
2010 2011 2012 2013 2014 2015$20.00
$25.00
$30.00
$35.00
$40.00
$45.00 CBD Suburbs
Aver
age
aski
ng re
nt ($
p.s
.f)
Source: JLL Research
$11.36
$16.67
36
Both TI packages and free months declined once again in Q4, although they are higher than in 2014 as new space delivers
2006 2007 2008 2009 2010 2011 2012 2013 2014 20150.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
$23.00
$24.00
$25.00
$26.00
$27.00
$28.00
$29.00
$30.00
$31.00
$32.00
3.5
4.1
5.1
6.1 6.2
5.7
5.15.3
5.8
5.2
Free months of rent TI allowance ($ p.s.f.)
Free
mon
ths
of re
nt
TI a
llow
ance
($ p
.s.f.
)
Source: JLL Research
Construction
38
Construction volumes are up 11.0 percent since year-end 2014 to 88.3 m.s.f. in Q4 2015
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 20150
20,000,000
40,000,000
60,000,000
80,000,000
100,000,000
120,000,000
140,000,000
160,000,000
Unde
r con
stru
ctio
n (s
.f.)
Source: JLL Research
+296.3%
since 2010
39
A number of large deliveries and groundbreakings slated for Q1 2016 pushed quarterly activity down in Q4
2010 2011 2012 2013 2014 20150
10,000,000
20,000,000
30,000,000
40,000,000
50,000,000
60,000,000
70,000,000
80,000,000
90,000,000
100,000,000
Unde
r con
stru
ctio
n (s
.f.)
Source: JLL Research
40
Market Under construction (s.f.) Share
New York 13,666,640 15.5%
Dallas 7,605,715 8.6%
Washington, DC 6,833,786 7.7%
Houston 6,306,180 7.1%
Seattle-Bellevue 5,912,171 6.7%
Boston 5,573,171 6.3%
San Francisco 3,664,519 4.1%
Silicon Valley 3,276,660 3.7%
Philadelphia 3,183,329 3.6%
Chicago 3,055,164 3.5%
Nashville 2,840,446 3.2%
Denver 2,739,079 3.1%
Salt Lake City 2,695,442 3.1%
Charlotte 2,617,222 3.0%
All other markets 18,384,503 20.8%
United States 88,328,543 100.0%
Mid-sized markets such as Nashville, Salt Lake City and Charlotte are becoming more prominent
New York Dallas Washington, DC Houston Seattle-BellevueBoston San Francisco Silicon Valley Philadelphia ChicagoNashville Denver Salt Lake City Charlotte All other markets
Source: JLL Research
41
Excluding Houston, development was largely stable quarter-on-quarter at 82.0 m.s.f.
2010 2011 2012 2013 2014 20150
10,000,000
20,000,000
30,000,000
40,000,000
50,000,000
60,000,000
70,000,000
80,000,000
90,000,000
100,000,000
Rest of U.S. Houston
Unde
r con
stru
ctio
n (s
.f.)
Source: JLL Research
42
A sharp uptick in completions in Q4 to 44.2 m.s.f. brings 2015 close to the historical average of 46.0 m.s.f.
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 20150
20,000,000
40,000,000
60,000,000
80,000,000
100,000,000
120,000,000
140,000,000
Com
plet
ions
(s.f.
)
44.2 m.s.f.
Source: JLL Research
Average completions: 46.0 m.s.f.
43
55.2 percent of space currently under construction will come to the market in 2016
2016 2017 2018 20190
10,000,000
20,000,000
30,000,000
40,000,000
50,000,000
60,000,000
Speculative BTS
Com
plet
ions
(s.f.
)
Source: JLL Research
44
47.7 and 53.1 percent of 2016 and 2017 space has been preleased, respectively, limiting options for tenants and pushing up rents
2016 2017 2018 20190
10,000,000
20,000,000
30,000,000
40,000,000
50,000,000
60,000,000
Available Preleased
Com
plet
ions
(s.f.
)
Source: JLL Research
45
Starts slowed in Q4, although tightening conditions will likely trigger more groundbreakings in 2016
2013 2014 20150
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
14,000,000
7,322,061
11,407,786
13,060,032
4,781,395
11,818,372
9,168,187
9,855,374
12,720,560 12,810,553
9,748,464
8,484,369
7,331,979
Star
ts (s
.f.)
Source: JLL Research
46
Market Starts (s.f.) Share
Washington, DC 1,010,180 13.8%
Seattle 776,962 10.6%
Dallas 728,455 9.9%
Salt Lake City 697,390 9.5%
San Francisco 680,000 9.3%
Charlotte 667,500 9.1%
Philadelphia 534,000 7.3%
Austin 517,000 7.1%
Cincinnati 485,000 6.6%
Baltimore 292,140 4.0%
Portland 280,907 3.8%
Silicon Valley 224,052 3.1%
Denver 211,879 2.9%
New Jersey 125,445 1.7%
San Francisco Peninsula 75,569 1.0%
Indianapolis 25,500 0.3%
United States 7,331,979 100.0%
A flurry of new projects in DC, Seattle and Dallas pushed them into leading positions for starts
Washington, DC Seattle Dallas Salt Lake CitySan Francisco Charlotte Philadelphia AustinCincinnati Baltimore Portland Silicon ValleyDenver New Jersey San Francisco Peninsula Indianapolis
Source: JLL Research
47
Among top construction markets, BTS-driven geographies are seeing preleasing rates in excess of 60 percent
Denver
Los Angeles
Austin
San Francisco
Seattle-Bellevue
New York
Silicon Valley
Boston
Washington, DC
Dallas
Houston
Philadelphia
Phoenix
Chicago
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0%
24.1%
26.0%
32.0%
35.0%
35.1%
46.6%
47.6%
49.0%
56.5%
57.2%
59.1%
63.7%
66.2%
69.4%
Preleasing rate (%)
Source: JLL Research
48
Trophy space under construction is 40.3 percent more expensive than existing Class A properties as demand heats up further
Trophy U/C Class A U/C Class A Class B Class C$0.00
$10.00
$20.00
$30.00
$40.00
$50.00
$60.00
$51.23
$45.71
$36.52
$25.48$23.17
Dire
ct a
vera
ge a
skin
g re
nt ($
p.s
.f.)
Source: JLL Research
Sales
50
Realized diversification deeper into primary markets, secondary markets and larger transactions spurs 16.5 percent growth in 2015
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016$0.0
$50.0
$100.0
$150.0
$200.0
$250.0
Q1 Q2 Q3 Q4 Forecast
Offi
ce in
vest
men
t sal
e vo
lum
es (b
illion
s of
$US
)
Source: JLL Research, Real Capital Analytics (Transactions larger than $5.0m)
18.8%
32.1%
19.6%
16.5%
Moderated growth forecasted in 2016
51
Primary and secondary cap rates continue to decline
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 20150.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
9.0%
2.2%
4.4%
5.2%
10-year Treasury (%) Primary cap rates (%) Secondary cap rates (%)
Source: JLL Research, NCREIF, Board of Governors of Federal Reserve
Despite the interest rate hike, the spread between office cap rates and the 10-year Treasury has widened slightly for primary and secondary markets to 219 and 296 basis points, respectively
52
Canadian and Asian capital continue to dominate inbound capitalEuropean and Middle Eastern groups are present, though did not buy at scale in 2015
Most active foreign investors (2014) Most active foreign investors (2015)
Source: JLL Research (Assets larger than 50,000 s.f.)
24.0%
21.9%
15.3%
13.5%
9.0%
16.4%
Norway Germany CanadaSingapore South Korea All others
35.1%
15.8%15.5%
9.5%
5.6%
18.5%
Canada China GermanySouth Korea Hong Kong All others
53
Of the top destinations for foreign capital, primary markets remain ahead, though secondary markets emerge
New York
Washin
gton,
DCBos
ton
Seattle
-Bellevu
e
Chicag
oMiam
i
Atlanta
Los A
ngele
s
San Fran
cisco
Dallas /
Fort W
orth
Silicon
Valley
Housto
n$0
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000 $11,237
$2,323$1,935
$1,184 $995 $709 $602 $515 $394 $347 $249 $172
Qua
rterly
offi
ce in
vest
men
t vol
ume
(milli
ons
of $
US)
Primary markets Secondary marketsSource: JLL Research (Foreign acquisition activity, Assets larger than 50,000 s.f.)
54
33.2%
56.3%
10.5%
Trophy A B
Foreign activity into Class B increased from $644.5 million in 2014 to $4.1 billion, equating to 20.0 percent of total.
201333.1%
60.3%
6.7%
Trophy A B
2014
2015
Source: JLL Research (Foreign acquisition activity, Assets larger than 50,000 s.f.)
22.9%
57.1%
20.0%
Trophy A B
55
Secondary market momentum realized in 2015 with 11 markets exceeding $1.0b, led by Atlanta, Dallas-Forth and Philadelphia
Atlanta
Dallas /
Fort W
orth
Philade
lphia
Denve
r
Phoen
ix
New Je
rsey
Orange
County
San Dieg
oMiam
i
Minnea
polis-
St. Pau
l
Raleigh
-Durham
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
$4,000
2014 2015
Seco
ndar
y m
arke
t inv
estm
ent v
olum
es (m
illion
s of
$US
)
Source: JLL Research (Assets larger than 50,000 s.f.)
56
Trophy investment volume was outpaced by Class A & BHowever, supply-demand gap for Trophy product spurred leading per-square-foot pricing appreciation in 2015
Class A Class B Trophy$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
2014 volumes 2015 volumes Year-over-year pricing change
Annu
al in
vest
men
t sal
es v
olum
e (m
illion
s of
$US
)
Annu
al g
rowt
h in
pric
e pe
r squ
are
foot
(%)
Source: JLL Research (Assets larger than 50,000 s.f.)
U.S. core product office CBD cap rates
57
NJ
CT MA
NH
NC
VA
WA
VT
AL
AZ
AR
CACO
FL
GA
ID
IL IN
IA
KS KY
LA
ME
MI
MN
MS
MO
MT
NE
NV
NM
NY
ND
OH
OK
OR
PA
SC
SD
TN
TX
UT WV
WI
WY
MD
DE
RI
Houston6.00-6.50%
Washington, DC4.00 – 6.00%
New York3.25-3.75%Chicago
4.95-5.95%
Los Angeles5.00-6.00%
Seattle4.50 – 5.50%
Boston4.00– 5.00%
San Francisco3.00 – 4.00%
Dallas5.00-7.00%
Atlanta5.00-6.00%
Miami4.50 – 6.00%
Denver5.00-6.00%
San Diego6.00-7.00%
Philadelphia6.00– 7.50%
Tampa5.75-7.00%
Charlotte6.25 – 7.50%
Raleigh6.50 – 7.50%
Orlando5.50 – 7.00%
Minneapolis6.00-7.00%
Austin4.50-5.25%
Cincinnati8.50 – 9.50%
Phoenix7.00-7.50%
Sacramento5.75-6.50%
Columbus8.00 – 9.00%
Detroit9.50 – 10.50% 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% +
East Bay6.50-7.50%
Portland5.00 – 6.50%
Sub 5-6% level in most primary and rising secondary markets
Kansas City7.00-8.00%
Cleveland7.50 – 8.50%
Source: JLL Research, September 2015
Indianapolis8.50 – 9.50%
U.S. core product office suburban cap rates
58
NJ
CT MA
NH
NC
VA
WA
VT
AL
AZ
AR
CACO
FL
GA
ID
IL IN
IA
KS KY
LA
ME
MI
MN
MS
MO
MT
NE
NV
NM
NY
ND
OH
OK
OR
PA
SC
SD
TN
TX
UT WV
WI
WY
MD
DE
RI
Houston6.50-8.00%
Washington, DC6.00 – 8.00%
New Jersey7.00 - 7.50%Chicago
7.00-8.00%
Los Angeles4.00-7.00%
Seattle5.50-6.25%
Boston6.00-7.00%
Dallas5.50-7.50%
Silicon Valley5.00 – 6.00%
Atlanta6.00-7.00%
Miami5.75 – 7.00%
Denver6.00-8.00%
San Diego5.50-6.50%
Philadelphia6.00 – 7.00%
Tampa6.25-7.50%
Charlotte6.75 – 8.00%
Raleigh7.00 – 8.00%
Orlando6.25-7.50%
Minneapolis7.00-8.00%
Austin5.00 – 6.00%
Phoenix5.00-7.00%
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% +
East Bay6.00-7.00%
Portland6.50%-7.50%
Sub 6-8% level in most primary and rising secondary markets
Sacramento 6.75-7.50%
Cleveland8.00 – 9.00%
Indianapolis8.00– 9.00%
Source: JLL Research, September 2015
Looking ahead, 2016 is expected to be another year of big numbers as markets prepare to deliver 48.9 m.s.f. of new supply, putting upward pressure on rental rates while providing large tenants with much needed supply to support expansion. Local markets maintain a favorable outlook for landlords through 2016 and 2017.
COPYRIGHT © JONES LANG LASALLE IP, INC. 2015
Julia GeorgulesDirector – Office Research+1 415 354 [email protected]
Phil RyanResearch Analyst – Office and Economy Research+1 202 719 [email protected]
Sean CoghlanDirector – Investor Research+1 215 988 [email protected]
Rachel JohnsonResearch Analyst – Capital Markets+1 312 228 [email protected]