Office Outlook - JLL

Office Outlook United States . Q4 2013

2014 will be the year of a diversifying and expanding office recovery In 2013, the U.S. office sector handed in its best performance in seven years. Leasing activity increased, absorption neared 40 million square feet and vacancy dipped to its lowest point since 2007. As a result of this momentum, landlords across the country lowered concessions in lease negotiations and consistently pushed pricing upward throughout the course of the year. 2014 will begin without consistent clouds from the Washington public sector with elements of bipartisanship sweeping through a federal budget for the first time since 2009. That accomplishment, coupled with a private sector economy that will see employment levels return to pre-recession levels by midyear, will continue to bolster corporate confidence and heighten economic prospects ahead not just in a handful of markets, but across the overwhelming majority of the country. Accordingly, as 2014 progresses, tenants can expect to see their leverage slip away across geographies and pricing return to levels last seen in 2007. The lack of new development options across the majority of markets signals the landlord-friendly environment could stick through the middle of 2015, at a minimum, when new supply begins to flow into the market.

Landlord confidence continues to grow; for the 12th consecutive quarter, asking rents increased and concessions decreased nationally. Further, when examining tenant leverage ahead across markets, less than 10 percent of geographies JLL tracks will be categorized as tenant-favorable in 2015.

Need full page image

4 Jones Lang LaSalle • United States Office Outlook • Q4 2013

Table of contents

In this report

5

Minneapolis

27

United States office market

6

New Jersey

28

United States overall office clock

9

New York

28

United States CBD office clock

10

Oakland - East Bay

29

United States suburban office clock

10

Orange County

29

United States economy

11

Orlando

30

United States capital markets

14

Philadelphia

30

United States local office markets

17

Phoenix

31

Atlanta

17

Pittsburgh

31

Austin

17

Portland

32

Baltimore

18

Raleigh-Durham

32

Boston

18

Richmond

33

Charlotte

19

Sacramento

33

Chicago

19

San Antonio

34

Cincinnati

20

San Diego

34

Cleveland

20

San Francisco

35

Columbus

21

San Francisco Peninsula

35

Dallas

21

Seattle-Bellevue

36

Denver

22

Silicon Valley

36

Detroit

22

St. Louis

37

Fairfield County

23

Tampa

37

Fort Lauderdale

23

Washington, DC

38

Hampton Roads

24

Westchester County

38

Houston

24

West Palm Beach

39

Indianapolis

25

Appendix

40

Jacksonville

25

United States employment statistics

41

Los Angeles

26

United States office statistics

42

Miami

26

United States office rankings

43

Milwaukee

27


In this report

This report provides an overview of supply and demand conditions as well as detailed statistics, rankings and brief analyses of major office markets in the United States. Our research department is dedicated

to producing information and insights that help our clients understand dynamic real estate market trends and guide critical decision making for investors and occupiers.

Seattle-Bellevue Portland Minneapolis Milwaukee Chicago Denver Sacramento Oakland - East Bay San Francisco Silicon Valley Los Angeles Orange County

Cleveland

Boston Fairfield County New York City New Jersey Philadelphia Baltimore Washington, D.C. Richmond Hampton Roads

Westchester County Pittsburgh

Columbus Cincinnati

Raleigh-Durham Charlotte

Phoenix B

San Diego

St. Louis

Indianapolis

Detroit

Atlanta Dallas/Fort Worth Austin Jacksonville

Houston San Antonio

Tampa

Orlando Palm Beach Fort Lauderdale Miami


United States office market With 2013 closed and the doors to 2014 wide open, every local office market Jones Lang LaSalle tracks in the United States is arguably in a better position in January 2014 than January 2013 when referencing the recovery of fundamentals and activity. Unfortunately for tenants, this means fewer options, less ability to secure bargain-basement rents and recordhigh concessions and an overall market that will continue to slip away from companies across industries over the next 24 months. After five years of a recovery defined by geographic and industry segmentation, the U.S. office market showed signs of a more cohesive, across-the-board tightening in fundamentals and uptick in activity in 2013. Overall leasing volumes, which were down 6.1 percent over the quarter due to tepid activity in October during the government shutdown, increased 6.5 percent comparing full-year 2013 levels to full-year 2012 totals and 14.0 percent comparing the fourth quarter of 2013 to the fourth quarter of 2012. Further, more than 65 percent of markets reported higher tenant touring activity heading into 2014, the fourth consecutive quarter of increases. In addition to higher leasing and tenant touring levels throughout the course of the year, nearly every individual indicator JLL tracks from vacancy to absorption to rents and concessions shifted into or closer to the landlords’ favor and away from tenants as we entered 2014. Broadening recovery results in highest annual net absorption since 2007 Quarterly net absorption surpassed 13.0 million square feet for the first time since 2007, outpacing the highest quarterly total over the past six years by 24.5 percent. Absorption levels remained in positive territory for the 15th consecutive quarter with 2013 gains just shy of 40.0 million square feet. 2013 marked the second consecutive year of the recovery that more than 80 percent of geographies participated in those occupancy gains. As a result of the nearly 40 million square feet of space absorbed throughout the course of the year, vacancy levels over the past 12 months declined 40 basis points to 16.6 percent, the lowest rate in five years. Vacancies in 2014 are projected to fall below 16.0 percent at this time next year, another key milestone in migrating back to full equilibrium levels (high14.0 percent on the overall national basis). As we headed into 2014, CBD vacancy levels remained closer to equilibrium rates settling at 13.9 percent at the end of 2013, some 40 to 50 basis points from true equilibrium. On a percent basis, the strongest results in 2013 were turned in by the CBDs of Fort Lauderdale, Cleveland and Detroit, which all have seen the suburban

to urban trend increase of late due to a downward readjustment in rents downtown and by Houston and Seattle, largely driven by explosive growth in the respective energy and technology segments. While much higher at 18.2 percent, suburban vacancy levels plummeted 140 basis points from 2012 levels driven largely by Cambridge in Boston, the University and Airport submarkets of Charlotte, the East Bay of Northern California, the Westside of Portland, Sacramento, San Francisco, the Southend of Seattle and Santa Clara. While suburban vacancy levels remain another 200 to 220 basis points from equilibrium levels, there are some segments of the suburbs that are outperforming the overall market and likely to return to equilibrium levels by the end of 2014 or early 2015, if not already positioned there. In the suburbs, walkable, amenity-rich and transit-oriented locations have outperformed more traditional corporate office park settings. With the exception of some parts of Northern CA due to the strong tech demand and thus recent consistent need for large blocks of space, most tenants across the majority of geographies are opting for amenities, access to transit and some sense of place traditional corporate park settings often lack. We will likely see this trend only increase further in the future as the millennial generation becomes the decision makers of the workforce in the years ahead. This will leave buildings lacking these “sense of place” characteristics in a challenging place or a position where some buildings will only be able to compete by standing as the lowest-cost alternative. Increased activity and shrinking options drive rents up As availabilities tightened, landlord confidence has increased, fueling increases in asking rents and an overall decline in concessions offered to tenants during lease negotiations. While that confidence was present in many of the tech and energy sectors of the market last year, that confidence has spread across markets headed into 2014. In the fourth quarter of 2013 alone, 76 percent of markets JLL tracks reported higher rents from a quarter ago. Further, 82 percent of markets displayed higher rents in the fourth quarter of 2013 compared to the fourth quarter of 2012. Leading the rent gains over the course of the year were the usual suspects of the recovery: Silicon Valley, San Francisco and the San Francisco Peninsula. Also seeing higher rates of increase were New York driven by Downtown with the arrival of some very high-end product, Austin driven by rents downtown, which have grown by 11.7 percent in the past 12 months and Seattle, San Antonio and Denver. On the opposite end of the spectrum, Fort Lauderdale, Baltimore, Richmond, Atlanta and Chicago displayed


lower rents than a year ago, but even in those markets, we have seen pricing shift in recent quarters as the market continues to tighten. Overall across the country, landlords lifted rents for the 12th consecutive quarter in the fourth quarter of 2013, increasing 0.4 percent over the past three months and 3.5 percent spanning the past 12 months. Additionally, leverage continued to shift away from tenants in the form of concessions too as landlords peeled back tenant improvement allowances and free rent by 4.2 percent and 4.9 percent, respectively, over the past 12 months. Looking across markets, the message appears to be the same: market tightening In a recovery that looked very one-dimensional across both quality and location through 2012, 2013 was the year that signs of economic improvement and market tightening began to diversify across both industries and geographies. The two largest office markets, New York and Washington, DC, which had collectively given back more than 5.0 million square feet of space over the past four quarters due to regulation and political uncertainty, respectively, accounted for well over a third of absorption gains in the fourth quarter, pushing the previously - dominant tech and energy markets into second place. In New York, the year ended with positive absorption, lower vacancy and the highest volume of office leasing activity in Manhattan since the financial crisis, while the high-end of the Super-Trophy and Trophy market demonstrated the highest activity since 2007. In Washington, a budget for the first time since 2009 provided optimism that activity on the federal side would reappear after lying dormant for several years. Similar to New York, Washington’s Trophy market downtown is seeing quality disappear and renewals uptick due to lack of new efficient options. Meanwhile, throughout the course of the year, Texas, by far, stood out as the beacon of growth. Over the past 12 months, Austin, Dallas, Houston and San Antonio posted 8.4 million square feet of net absorption, equating to 2.2 percent of overall inventory levels, exactly double the rate of growth we witnessed on a national level. From Austin, which has seen vacancy plummet in recent years to the low double-digits, to Dallas posting more than 6.0 million square feet of net absorption over the past 24 months to the energy boom driving all aspects of Houston from the CBD to Katy Freeway and the Woodlands, not only are the markets tightening and rents heading up, but domestic and global institutional investors have appeared on the doorstep, something new for many aspects of these markets. Coming in right behind the Texas markets were technology-heavy markets. Northern California tech hubs, the Pacific Northwest (Seattle-Bellevue and Portland), Cambridge (Boston) and Midtown South (New York) experienced 7.6 million square feet of net absorption or 1.8 percent of total inventory levels.

As 2013 came to a close and we look to 2014 and 2015, economic prospects throughout the country have brightened. What does that tell us? That speaks to greater growth prospects from pieces of the pie. More industries and more geographies have in recent quarters and will participate in the quarters ahead in the recovery, something we did not see throughout 2010 to 2012. This benefits markets with a diversified economic base and tenant base disproportionately. When Jones Lang LaSalle analyzed economic bases of all the markets, some of the most diverse were Chicago, Los Angeles, Atlanta, Philadelphia, Phoenix and Miami. While the recovery has started in all of these markets to an extent, the overall markets from a demand standpoint have not been clicking consistently. That is something likely to change in the next 24 months as economic growth elevates, the employment markets nationally eclipse pre-recession highs, spurring additional office sector demand. Into 2014… Looking forward, a combination of a lack of new supply coming to the market in 2014-2015 and a dwindling number of large and mid-sized blocks will keep small to mid-sized tenants as the main drivers of activity over the next 12 months. Brighter economic prospects, combined with the above, should continue to push leverage in the landlord’s favor until additional supply in the form of new developments deliver across markets in the mid2015 to early 2016 time frame. Geographically, tech and energy markets may begin to see signs of peaking until legislation in Washington pushes through immigration and energy reform to reignite the next phases of growth in those respective areas. Meanwhile, diversified metros will benefit from growth across industries positioning markets like Chicago, Los Angeles and Atlanta, among others into top drivers of growth nationally for the office sector. Should New York and Washington exhibit continued stability like both markets have over the past four months, we could see U.S. fundamentals exceed our forecasts over the next two years. Nonetheless though, across markets, we are entering a diversified recovery, which benefits landlords. Ultimately, for tenants, more challenges will arise in the next two years than they have faced since 2006, early 2007. From a rent standpoint, pricing is going up and concessions down; from a competition standpoint, enhanced and diversified economic growth will create more tenant activity and thus greater competition for spaces and finally, a still minimal development pipeline delivering over the next 12 months and the continued lease-up of certain segments of the market will limit choice of spaces. Thirty-six months ago, tenants came to the market three or four years in advance of their lease expiration to blend and extend below-market rates and take advantage of the slow-paced environment. Moving forward, tenants will enter the market early to beat out their competition and be the first one to a space or to negotiate for one.


Q4 2013 marked the 15th consecutive quarter of positive net absorption and the highest since 2007

20%

15-year trailing quarterly average 1.0%

16% 0.5%

14% 12%

0.0%

10% -0.5%

8%

Migrations to cost? Class B absorption has risen dramatically of late in line with Class A rent increases

Landlords are also pulling back concessions, signaling the close of a tenant-friendly market Months

Average rent abatement (months)

7

5.7

5.1

5

$45

$30

5.5

5.3

$29 $28

4.1

$27

3.5

$26

3

$25

2

$24

1 0

$50

$31

6.2

6.1

6

2007

2008

2009

2010

2011

2012

140,000,000

80,000,000 60,000,000 40,000,000

2010

2011

2012

Source: Jones Lang LaSalle

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2012

2011

Q4 2013

Q3 2013

Q2 2013

2013

Class A (CBD) Class B (suburban)

Class A (suburban) Class C (CBD)

Class B (CBD) Class C (suburban)

80% 70% 60% 50% 40%

10%

0 2002

Q1 2013

$20

20%

2001

Q4 2012

Q3 2012

Q2 2012

Q1 2012

Q4 2011

$25

30%

20,000,000

2000

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

$30

90%

Historical average amount of completions (s.f.) per year

Under construction (s.f.)

Completions (s.f.)

Class C (suburban)

$35

100%

100,000,000

Class B (CBD)

Class C (CBD)

The majority of new construction is now in suburbs rather than CBDs driven by Houston and Silicon Valley

New supply coming to market is slowly increasing, but still well below historic norms

120,000,000

Class A (suburban)

Class B (suburban)

$40

$10

$22

2013

Class A (CBD)

$15

$23 2006

1993

Rental growth fastest in CBD Class A based on supply and demand coming in close to equilibrium levels

$ PSF

Average tenant improvement allowance

Q3 2011

2013

Q2 2011

2012

Q1 2011

2011

Q4 2010

2010

-6.0%

Q3 2010

$28

Q2 2010

$29

-0.6%

-4.0%

Q1 2010

$30

-0.4%

-2.0%

Q4 2009

$31

-0.2%

0.0%

Q3 2009

$32 0.0%

2.0%

Q2 2009

$33

0.2%

Q1 2009

0.4%

4.0%

Q4 2008

$34

Class A average asking rent ($ p.s.f.)

$35

0.6%

Class B YTD net absorption (as % of stock)

Quarterly percent change 6.0%

$36

Q3 2008

Class A rent

Marketed rents increased 0.4 percent during the quarter, registering their 12th straight quarter of increases

Q2 2008

Class B net absorption

0.8%

1992

2013

Q1 2008

2012

1991

2011

Q4 2007

2010

Q3 2007

2009

Q2 2007

2008

1990

6%

-1.0%

4

16.6%

18%

Average asking rent ($ p.s.f.)

Quarterly net absorption (as % of inventory)

1.5%

After years of remaining elevated, vacancy starting to fall at faster rates

2013

0%

2010

2011

2012

2013


United States overall office clock

Seattle-Bellevue Houston, San Francisco San Francisco Peninsula, Silicon Valley

Peaking phase

Falling phase

Rising phase

Bottoming phase

Dallas

Austin Pittsburgh Denver Boston, Orange County Tampa, United States Atlanta, Indianapolis, Los Angeles, New York, Richmond Miami, San Diego Cleveland, Cincinnati, Minneapolis, Oakland-East Bay, Philadelphia, Portland, San Antonio Charlotte, Detroit, Fairfield County, Milwaukee, Sacramento, St. Louis, Westchester County

Reading the clock The Jones Lang LaSalle office clock demonstrates where each market sits within its real estate cycle. Markets generally move clockwise around the clock. Geographies on the left side of the clock are generally landlord-favorable, while markets on the right side of the clock are typically tenant-favorable. At the end of 2013, 33 markets were positioned beyond 6:00 (compared to 28 in the third quarter of 2013 and 20 in the fourth quarter of 2012). Hitting 6:00 on JLL’s proprietary clock signals the market has hit absolute bottom and leverage for tenants has stabilized and even started to shift back to landlords. Driving this movement around the clock is an overall improving economic forecast for 2014, combined with a supply-constrained market in the office sector due to lack of development activity, over the past three years. The lack of a development cycle, coupled with increasing demand, is creating the perfect storm for landlord confidence to build further moving forward. Landlords increased rents for the 11th consecutive quarter in the fourth quarter of 2013. Overall in 2013, rents jumped 3.5 percent, while landlords peeled back tenant improvement allowances and free rent by 4.2 percent and 4.9 percent, signaling fleeing leverage ahead for tenants. In fact, by the end of 2014, JLL is forecasting that less than 10 percent of markets will labeled as tenant-friendly, a big change from 12 or 24 months ago. Tech-heavy and energy-rich markets continue to be the geographies leading overall markets with the most aggressive upward rent trajectory based on high levels of demand and thinning availabilities.

Orlando, West Palm Beach Baltimore, New Jersey Fort Lauderdale, Jacksonville Washington, DC Chicago, Columbus, Hampton Roads, Phoenix, Raleigh-Durham

Seattle-Bellevue, San Francisco, Silicon Valley, Houston and Dallas have all experienced above-market rental rate growth and now, aggressive development cycles as options remain limited. With development cycles that are active, these also could be the markets that stabilize first from the pricing perspective in early to mid-2015. Through 2014, once-lagging markets like Atlanta, Philadelphia, Los Angeles, Chicago and other heavily diversified tenant markets are likely to see rents grow at faster clips due to an economic recovery that finally appears firm and beginning to click on numerous fronts. This will drive demand and activity higher, prompting landlords to likely raise rents. And for the first time in three years, New York and Washington, while still more challenged from the demand side (finance and government) compared to most markets, both geographies appear to be showing some momentum and thus concessions have likely peaked. Heading into the latter part of 2014, we could realistically see some net effective and even face rate rent growth in both New York and Washington, especially at the higher-end of the super-Trophy, Trophy and A+ market segments. An argument can be made that all geographies we track are in a better position today than 12 months ago. Consequently, tenants will need to be more proactive in their decision making and even if that is the case, will likely see rents that are higher tomorrow than they are today. Opportunities will continue to exist and second and third-generational buildings in urban areas and some suburban locations, but increasingly, even these segments of the market are demonstrating tightening, and could like turn away from tenants over the next 18 months.


United States CBD office clock Midtown South (New York)

Seattle-Bellevue San Francisco San Francisco, Seattle

Austin, Houston Austin Miami Houston Denver Pittsburgh, San Jose CBD Denver, Miami Boston,Boston Philadelphia Atlanta, Tampa, United States CBD Midtown South (NYC), Pittsburgh Greenwich CBD, Indianapolis Greenwich CBD,Midtown Indianapolis, (New York), Philadelphia, Portland, Jose CBD Portland,San Stamford Atlanta, Midtown (NYC) Bay Oakland-East Cleveland, Cincinnati, Detroit, Los Angeles, Stamford CBD, United States Minneapolis, White Plains CBD Minneapolis, Richmond Charlotte, Dallas, Jacksonville, Milwaukee, Charlotte,Raleigh-Durham, Detroit, Jacksonville, San Antonio Oakland CBD, Raleigh-Durham, Tampa

Peaking phase Peaking phase

Falling phase Falling phase

Rising Rising phase phase

Bottoming Bottoming phase phase West Palm Beach Baltimore, Fort Lauderdale, Orlando Baltimore, Orlando, Phoenix, Phoenix, West Palm BeachSt. Louis St. Louis Downtown (NYC), Milwaukee, Sacramento Washington, DC Chicago, Columbus, Downtown Raleigh-Durham, Sacramento, (New York), Fort Lauderdale, San Diego Richmond, San Diego. Washington, DC Chicago, Cincinnati, Cleveland,

Columbus, Dallas, Los Angeles, San Antonio, White Plains CBD

United States suburban office clock

Silicon Valley Seattle-Bellevue Dallas, Houston, San Francisco

Peaking phase

Falling phase

Rising phase

Bottoming phase

San Francisco Peninsula Cambridge

Austin, Pittsburgh Los Angeles, Portland (Westside) Denver, Richmond Indianapolis, Orange County, Tampa Baltimore, Boston, Lehigh Valley, Philadelphia, San Diego, United States Suburbs Atlanta, Cleveland, Cincinnati, Milwaukee, Minneapolis, Oakland- East Bay, Sacramento, San Antonio, St. Louis Charlotte

Southern New Jersey Jacksonville Orlando, West Palm Beach Fort Lauderdale Miami, Central and Northern New Jersey, Northern Virginia Northern Delaware, Raleigh-Durham, Suburban Maryland Chicago, Columbus, Detroit, Fairfield County, Hampton Roads, Portland (East, Vancouver), Westchester County


United States economy After years of a recovery characterized by geographic and industry segmentation and a start-and-stop nature, the U.S. economy began to display signs of broader and more consistent growth throughout 2013, particularly in the fourth quarter. Indicators across the board – employment, output and housing – pointed to sustained growth for the first time throughout the recovery of late, a trend that is likely to continue into 2014 and the coming years. At the same time, growth still remains below historical norms and will remain so as external market forces suppress demand. Temporary clarity in fiscal and legislative policy has helped ease the uncertainty that hampered growth from 2009 through last year, but will need to be sustained for economic gains to last. Finally, while the global environment did little to help encourage domestic economic growth, 2014 looks to be a year where global economic prospects rebound from Europe to the emerging markets around the world. Employment growth mirroring diversification seen in office market From January to November 2013, the U.S. economy added nearly 2.1 million jobs, an increase of 3.7 percent compared to the same period in 2012. Monthly additions averaged 188,545 jobs per month, while year-on-year growth remained consistently at 1.5 to 1.7 percent. This is only moderately below average; payrolls grew by 1.7 to 2.0 percent year-on-year during the mid-2000s, with slightly less stability than seen over the past few years. Importantly, the composition of growth has shifted dramatically. Traditional office tenants such as law and finance represented just 3.6 percent of payroll increases in 2013; on the other hand, computer systems design, management and technical consulting and management of companies comprised 6.9 percent of growth during the year, just one of the reasons we are still seeing tech leasing performance outperform that of the overall market. Overall, office-using industries added roughly one quarter of net new jobs in 2013, down 620 basis points from its share in 2012. Now dominant are education and health care, leisure and hospitality and retail trade, among other subsectors. This increasing diversification mirrors the spreading seen in the office sector and is likely to persist into the coming years. The economy is also seeing more geographically balanced growth in 2013 than earlier in the recovery. One year ago, the only markets that Jones Lang LaSalle tracks posting year-on-year payroll increases of

over 2.0 percent were the domain of the tech and energy industry, with few outliers. This year, that group has seen the addition of diversified markets such as Atlanta, Phoenix and segments of South Florida, while the rate of increase in core tech and energy markets has in many cases decreased below the 3.0+ percent growth registered in 2012. Heading into 2014, we expect that these trends will continue, while diversified and non-niche geographies will be responsible for an increasing share of job growth as they climb from the bottom of their economic cycle. Output and other external economic indices showing signs of improvement GDP and other external economic data also point to a strong 2013 and the continuation of gains made in the recovery so far. During the first three quarters of 2013, the U.S. economy saw GDP rise by $377.6 billion, or 2.3 percent year-to-date. This is greater in both absolute (+$63.2 billion) and percent (+30 basis points) terms than during the first three quarters of 2012. As a result, national GDP is just shy of $17.0 trillion, and will likely surpass that figure in Q1 2014 at the current rate of growth. The components of GDP growth have also shifted drastically throughout the year: gross private investment grew by nearly 2.6 percent in the third quarter, boosting GDP to its second-highest quarterly growth rate during the recovery so far at 4.1 percent. This came in spite of government expenditures increasing by less than 1.0 percent after three consecutive quarters of contraction. Consumption of goods in particular represented the second largest component of GDP growth (+1.0 percent), outdone only by change in private inventories, also known as inventory investment (+1.7 percent). Other indicators also point to momentum Other indicators pointed in a positive direction as well. Consumer expenditures increased by $158.5 billion, or 1.4 percent, over the first three quarters of the year; goods spending grew over 1.2 times faster than spending on services. Industrial equipment, software, manufacturing and commercial health care represented nearly two-thirds of private investment growth in the third quarter, while exports of goods and services jumped more than 3.0 percent over the year. Corporate profits exceeded a record $2.1 trillion in the third


quarter, up 5.7 percent year-on-year, indicating unprecedented wealth accumulation in the private sector. Despite such improvements, the U.S. economy needs to regain almost 1.3 million jobs to reach pre-recession peak employment. Consumer confidence has begun to wobble after reaching high points during the recovery, currently resting at 78.1 points, in part due to the federal shutdown in October and perceived lack of improvement in the economy. CEO confidence dropped more significantly and is now at only 54 points, compared to previous readings over 60 earlier in the year, but will likely rebound quickly due to the first budget resolution in four years. The changing nature of economic growth will remain a key challenge as the recovery moves forward, but also represents significant opportunity for growth and investment on a longer term sustainable basis. Housing on the up, but still a long way to go The housing market has also witnessed measured gains, but remains significantly suppressed and segmented geographically. YTD 2013 housing starts have surpassed authorized units throughout all of 2012 and currently stand at 899,800 with a value of nearly $161.3 billion, 14.8 percent higher than at year-end 2012. However, the number of authorized units year-to-date is 35.5 percent below the historical annual average, with the value of new starts only slightly better at 18.6 percent below average. Home prices have also continued on an upward swing over the course of the year, up 10.7 percent since January. Similar to new units and value of new residential construction, however, prices are well below previous peaks; as of October 2013, they remain 20.7 percent below their April 2006 high point. How rising interest rates will impact home price growth as well as sales volumes has yet to be seen, but the effect will be most prominent in Sunbelt markets that have only begun to see gains after beginning to climb out of a bottoming cycle. At the national level, this may mediate some of the rapid improvements in the housing market of late, although starts, sales and prices should still rise. A strong end to 2013 boosting prospects for 2014 Overall, 2013 presented a positive economic picture compared to the recovery as a whole, but there are still challenges, but also more opportunities. •

The traction gained in consumption, corporate health and output is necessary to keep the recovery going, but consumer confidence

remains hampered by a perceived lack of improvement in the economy as a whole. •

Long-awaited clarity in government may reduce confidence issues and boost corporate action and personal expenditures. • In particular, private investment appears to be a bright spot and is likely to promote further economic expansion.

•

Meanwhile, slow-but-steady job growth will result in previous peak employment being reached at some point in the middle of 2014 at the current rate, although a different set of subsectors will be responsible for payroll additions.

With both domestic and global stability appearing more and more certain, the outlook for 2014 is one of optimism rather than caution.


Unemployment drops to 7.0 percent as monthly job growth becomes more consistent in 2013 600

Monthly employment change

73 months into the cycle, total employment is now only 0.9 percent below prior peak levels 12.0%

Unemployment rate

400

Past recessions (40 years)

1981

6.0%

-400

4.0%

Recovered jobs (%)

0 -200

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2007

98% 96%

2.0%

92%

0.0%

90%

85.2 percent of jobs have been recovered with pre-recession peaks to be surpassed during the middle of 2014

2001

94%

-600 -800

1990

Pre-recession employment level

100% 8.0%

Unemployment rate (%)

One-month net change (thousands)

200

-1000

1973

102%

10.0%

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40 42 44 46 48 50 52 54 56 58 60 62 64 66 68 70 72

Six subsectors have accounted for 83.4 percent of recovered jobs

PBS

1,238,200

Health care

Jobs lost during recession…

2,211,000

Leisure and hospitality

285,600

Retail trade

554,000

Manufacturing Educational services All other sectors

923,500

Jobs gained during recovery…

Since bottoming in Q2 2009, U.S. GDP has grown by 17.9 percent

Private investment and personal consumption driving GDP gains; government holding growth back

$18,000

10 8

$16,000

6 Contributions to % change in real GDP (%)

$17,000

GDP ($ billions)

$15,000 $14,000 $13,000 $12,000 $11,000 $10,000 $9,000 $8,000

2 0 -2 -4 -6 Government consumption expenditures and gross investment Net exports of goods and services Gross private domestic investment Personal consumption expenditures

-8

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

-12

2001

$2,500

2,500

$2,000

2,000

1,500

$1,500

1,000

$1,000

$500

500

0

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Source: Jones Lang LaSalle, U.S. Census Bureau, Bureau of Labor Statistics, Bureau of Economic Analysis.

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013 housing starts likely to be highest since 2008; surpassed previous three years

Authorized housing units (thousands)

Corporate profits ($ billions)

4

-10

Quarter in and quarter out, profits are up with corporate profits surpassing $2.1 trillion in Q3 2013

$0

1,145,700 1,087,000

Historic average: 1,394,300 starts per year

2013


United States capital markets No let-up in investment sales momentum during fourth quarter More than five years into the recovery since the 2008 Financial Crisis, recent growth in jobs, retail sales and housing, as well as a new budget deal in Congress, were enough to prompt the Federal Reserve to announce the trimming of its current $85.0 billion bond buying program. Beginning this January, plans to reduce the purchase of both mortgage and Treasury bonds by $5.0 billion each will be under way. At the same time, so as to not derail the recovery, the Federal Reserve has cited the possibility of keeping overnight rates near zero well past the time the unemployment rate falls below 6.5 percent, especially if inflation expectations remain below the 2.0 percent target. Despite some market overreaction leading up to the actual taper news, which has led to a rise in Treasury yields and interest rates into 2014, investment sales volume activity across the board did not slow down its momentum in the fourth quarter and we expect that strength to continue during 2014. For the office sector in particular, fourth quarter 2013 marked the best fourth quarter performance since the 2007 peak year. Based on preliminary totals, estimated sales volume for office transactions nationally came in above $44.0 billion during the fourth quarter, representing a 45.0 percent increase over the same period in 2012. For the full year 2013, office sales volume growth is tracking at 36.0 percent annually, as volumes have grown steadily each quarter during the year. Given greater signs of a continued broadening recovery across most geographies, our prior cautious optimism has turned more positive. Accordingly, we estimate growth in office investment sales volume to likely come in the 20.0 to 25.0 percent range for the full year 2014. Lending environment also remains active, despite rise in Treasuries During the fourth quarter of 2013, Treasuries initially moderated in October from September highs, before rising by 25 basis points after the end of November and into 2014. For the full year 2013, the 10-year Treasury yield has spiked 125 basis points, ending the year at 3.0 percent. Despite the rise in Treasuries, debt and equity capital providers posted funding levels at new post-recession highs. While balance sheet providers became more competitive in their lending, alternative players remained highly active. Particularly for CMBS lenders, relatively stable credit spreads, which tightened by 10-15 basis points during the quarter, helped support a new issuance level in excess of $86 billion for the year. While recently rising modestly, as overall Treasuries and interest rates are expected to remain low from a

historical perspective even into 2015, we also expect the overall lending environment to remain healthy over the same time frame in support of real estate investment market activity. Multidimensional recovery leads to both strong primary and secondary markets As the recovery broadens across assets and geographies, competition remained strong in secondary markets, while high-end deals continued to uplift stronger primary market activity during the fourth quarter of 2013. As seen in leasing activity, the largest primary office market of Manhattan exhibited the highest volume of investment sales activity since the financial crisis, dominated by high-end Trophy asset sales. The same holds true for Chicago during the quarter, and overall strength across most primary markets ultimately helped to push share two percentage points above last year’s level to 54.0 percent. At the same time, office transaction volumes continue to grow in secondary markets, with share coming in at the end of the year above the 40.0 percent level. During the fourth quarter of 2013, most notable was the Atlanta market, where volumes remained strong and have surpassed each of the prior two years by more than 110.0 percent for the full year driven largely by strong demand for core product, as well as tightening leasing fundamentals. As growth in local economies continues to be bolstered by strength beyond technology and energy, we can expect markets such as Philadelphia, Phoenix and Miami to also move up on the radar from an investor point of view. Investor flight to ‘safer’ properties remains most prominent during prolonged recovery period As real estate markets continue their recovery, investor flight to ‘safer’ properties with high occupancy will remain favored among most investors, particularly as movement occurs further along the risk spectrum. Even amidst the prolonged recovery, if GDP growth in the U.S. were to remain above the 3.0-4.0 percent level and job growth were to pick up more meaningfully, we would expect investors to grow more comfortable with value-added strategies, in addition to core and core-plus. Regardless of the strategy, safety and stability will remain top of mind. Transacted office assets during the fourth quarter continued to have significantly greater average occupancy than that for the overall national office market, coming in at 92.3 percent and representing a


new high during the recovery. In addition, while Treasury yields began to rise modestly again during the end of the quarter, the office yield premium over risk-free rates has tightened and yet remains attractive. Having currently tightened by 50.0 basis points, property yields for all transacted office property fell in a 200-300 basis point range for the end of fourth quarter of 2013. With the overall national average office cap rate around the 5.8 percent level, we believe leveraged buyers continue to have some room to absorb any potential increases in overall mortgage financing rates. Investment sales momentum likely to continue in 2014 as the recovery forges ahead Further along into the recovery, the U.S. continues to show consistent and steady growth across a greater number of geographies. Along the way, both domestic and international investors are taking note of this growth and continue to aggressively place capital into the region in primary and new secondary markets, particularly as they grow more comfortable in the assessment of such market risk. As we enter 2014 without a major budget overhang, we are optimistic and expect the investment sales momentum seen in 2013 to continue, providing for an even more diversified recovery.


U.S. office transaction volumes up 45 percent in Q4 and 36 percent for the full year after very strong Q4 activity Estimated Q4 2013 Increase: 45%

$210 $180

4%

Yield (%)

$120 $90

Q2

Q3

Seven yr treasury

Ten yr treasury

Oct-13

Dec-13

Aug-13

Apr-13

Jun-13

Feb-13

Oct-12

Dec-12

Aug-12

Apr-12

Jun-12

Oct-11

Feb-12

Dec-11

Aug-11

Apr-11

Jun-11

Feb-11

Oct-10

Five yr treasury

Q4

Dec-10

Apr-10

Jun-10

Aug-10

Feb-10

Oct-09

Dec-09

Aug-09

Apr-09

Jun-09

Feb-09

Dec-08

2013*

2012

2011

2010

2008

0%

After rising by 45+bps during Q2, highly-rated CMBS spreads have now tightened by 15-20 bps during Q3 2013 and remain at post-crisis lows

One mo libor

New CMBS issuance of $26 billion for Q4 2013 compares to $18 billion a year ago; year-to-date level of $86 billion represents new post-crisis high $90

$86

$80

1,400

$70

1,200

$60

800 600

$48

$50 $40

$33

$30

$26 $18

$20

$12

$12

Most primary markets remain strong through Q4 2013; San Francisco still a drag, while secondary market activity is the greatest for Atlanta and ahead of prior two years $25,000 $20,000 $15,000 $10,000

Investor flight to ‘safer’ properties remains most prominent during recovery period

20%

Q4 2013

2012

Q4 2012

2009 48%

45%

2008

2009

59%

56%

54%

2012

2013

10% 0%

Source: Jones Lang LaSalle, Bloomberg, Real Capital Analytics, Moody’s Analytics, Commercial Mortgage Alert

Office

550 500 450 400 350 300 250 200 150 100 50

2010

2011 Secondary

Tertiary

Office-High Quality

5.8% cap rate

Q4 2013*

Q3 2013

Q2 2013

Q4 2012

Q1 2013

Q2 2012

Q3 2012

Q4 2011

Q1 2012

Q3 2011

Q2 2011

Q1 2011

Q3 2010

Q4 2010

Q1 2010

Q2 2010

Q4 2009

0 -50 Q3 2009

Q4 2013*

Q3 2013

Q2 2013

Q1 2013

Q4 2012

Q3 2012

Q2 2012

Q1 2012

Q3 2011

Q2 2011

Q1 2011

Q4 2010

Q3 2010

Q2 2010

Q1 2010

Q4 2009

Q4 2011

Transacted office assets continue to have significantly greater average occupancy than overall office market Q3 2009

30%

Q2 2009

84%

Q2 2009

52%

40%

Q4 2008

86%

Q1 2009

41%

50%

Q1 2009

88%

Q4 2008

43%

44%

60%

Q3 2008

90%

78%

5%

Office yield premium over risk-free rate has tightened given rise in treasury yields, more so by quarter-end; but still attractive in a 200-300 basis point range

92%

80%

38%

38%

45%

5%

92.3%

Occupancy-Traded Office Properties

82%

80% 70%

3%

6%

11%

Primary

Spread of office over 10 year treasury yield (basis pts)

Occupancy - All Office Properties

7%

90%

Phoenix

San Diego

Austin

Denver

Seattle

Atlanta

San Francisco

Dallas

Boston

San Jose

Houston

DC

Chicago

Los Angeles

Manhattan

$5,000 $0

2008

100%

YTD 2013*

Q2 2008

2012

Percent of all office building transactions by dollar volume

2011

Competition remains strong in secondary markets overall through Q4 2013, although high-end deals continue to uplift stronger primary market activity

Q1 2008

$30,000

$3

$0

Sep-13

Jun-13

Mar-13

Dec-12

Jun-12

Sep-12

Mar-12

Dec-11

Jun-11

Sep-11

Mar-11

Dec-10

Jun-10

Sep-10

Mar-10

Dec-09

Jun-09

Sep-09

Mar-09

Dec-08

Sep-08

Jul-08

$10

2011

200

2010

400

YTD 2013*

US $ billions

1,000

Transaction volume ($ in millions)

2% 1%

$30

Q1

Average office occupancy rate

3%

$60

$0

0

As of 12/31/13, the 5-year, 7-year, and 10-year treasury hit 1.74, 2.45 and 3.02, respectively, rising since the end of November and reaching new highs. We attribute recent moves to the Fed’s announcement of a $10 billion per month taper of its current $85 billion monthly bond purchase program, expected to begin as early as January 2014.

5%

Projected 2013 Full-Year Increase: 36%

$150

2009

Total transaction volume ($ billions)

Benchmark Treasury yields have risen since the end of November as we entered 2014; however, from a historical perspective, are still relatively low


United States local office markets Austin

Atlanta Economy Atlanta’s job market has improved when compared to this time a year ago and considerably so when compared to unemployment highs immediately following the recession. November’s rate was 7.0 percent, 1.1 percentage point lower than in November 2012 and 3.3 points lower than the post-recession high. Sectors which contributed most over the 12-month period are heavy users of office space. Professional and business services added 15,100 jobs in the metro area; leisure and hospitality added 12,000, and education and health services added 11,500. Headquarter and regional hub relocations by PulteGroup and State Farm were notable additions. Beyond the headlines, however, are the myriad of small businesses who are benefiting from a thawed economy. Improvements in consumer confidence, solid retail spending data, strong stock market performance, and the Fed’s clear path forward with regard to bond buying and interest rate strategy all raised spirits in the fourth quarter of the year. Conditions Atlanta’s employers, large and small, have increasingly been the beneficiary of continued growth in the region, adding demand for metro office space. Job additions over the year can be credited for much of the positive movement in office market fundamentals seen in the final three months of the year. Atlanta absorbed 548,000 square feet of space in the fourth quarter 2013 alone. Total positive net absorption for the year was approximately 1.9 million square feet, a notable increase over the previous year’s 1.3 million square feet. The last three months marked the ninth consecutive quarter in a row with positive demand, a trend increasingly seen among metro submarkets, most notably in the central business district. Pronounced declines in vacancy have also been seen in well-located buildings. Year-over-year urban rates dropped by 5.2 percent for Class A assets and 5.9 percent for Class B – continuing the three-year trend of shrinking space options for tenants. Outlook Large deals like Coca-Cola’s 276,000-square-foot relocation to SunTrust Plaza certainly contributed to tightening urban fundamentals over the year. However, smaller 25,000 to 50,000 square foot deals like Harland Clarke taking 30,000 square feet at Georgia-Pacific Center are becoming increasingly common and, as economic growth spreads, will make up a larger component of total demand. Expect key micromarkets in the Northwest and North Fulton suburban areas to see decreasing vacancy rates over the first half of 2014 as they will be beneficiaries of spillover demand from Central Perimeter. Post-recession the improving labor market has largely benefited the central business district, however, throughout the 2014 growing demand within a supply constrained office market will lead to continued broadening in terms of tenant size and the areas affected.

- Ryan Harchar Senior Research Analyst, Atlanta

Economy 2013 further illuminated the Austin area’s strong economic performance and job growth numbers. Since 2008, the number of private sector jobs in Austin has increased by 11.8 percent, the highest of all of the major metropolitan areas in the United States by almost 2.0 percentage points. In the 12 months ending in November, the Austin metro area added 22,500 jobs, or 2.7 percent. The unemployment rate in Austin for November was 4.7 percent, over one percentage point lower than the statewide value of 5.8 percent and significantly lower than the national rate of 7.0 percent. The number of unemployed in the Austin area has declined by 3.3 percent over the last year. Conditions Total net absorption this quarter was more than double that of the previous quarter, at 176,229 square feet. However, total year-end absorption was 701,715 square feet, a 40.5 percent decline from 2012. Overall vacancy at the end of the year was 12.6 percent, or 1.6 percentage points lower than this time last year. Low marketwide vacancy contributed to declining absorption numbers, as it has become increasingly difficult for tenants to locate ample, quality space to occupy. Leasing activity remained fairly strong this quarter, coming in at 829,703 square feet, bringing the total for the year to nearly 3.9 million square feet. Vacancy in Class A and B office properties in the CBD is now in the single digits, sitting at just 9.6 percent. Five years ago, vacancy in the downtown area was over seven percentage points higher. In conjunction with the lack of availability, rates downtown have skyrocketed 11.7 percent over the past 12 months, now averaging $40.47 per square foot. Compared to five years ago, rental rates for Class A and B product downtown are now 22.5 percent more expensive. Imminent completion of new construction will alleviate some of the supply constraints downtown, though, and should help to slow or even potentially reverse climbing average rental rates. Outlook 2013 was a year characterized by substantial changes in the Austin real estate market. At the beginning of the year, there were no significantly sized office projects being built. Now, over 1.5 million square feet of space is being constructed across the metro, with several other projects in the pipeline to break ground next year. Though building sales were prevalent in 2012 as well, sales activity ramped up significantly this year, as almost 10.0 million square feet of space traded hands in some way in the past 12 months.

- Meredith Sheeder Research Analyst, Austin


Boston

Baltimore Economy Job growth in the Baltimore metropolitan area slowed slightly in the fourth quarter, but remained positive overall. After growing at a year-over-year rate above 2.0 percent for 10 straight months, nonfarm payrolls rose 1.4 percent in the fourth quarter as government employment continued to shrink. In a break from tradition, the employment base in Baltimore City grew more quickly than the overall metro area as the city added 6,200 jobs compared to last year. Professional business services (PBS) and health & education remained among the fastest-growing segments, adding 6,400 and 10,300 jobs, respectively, areawide over the past year. Conditions Leasing activity dropped considerably in the fourth quarter as the region saw yearly absorption fall compared to the prior year. A majority of leasing focused on renewals and relocations to smaller, more efficient spaces as companies focused on limiting real estate expenses. Led by expansions in Harbor East, the Southeast Baltimore market experienced nearly 68,000 square feet of occupancy gains as The Johns Hopkins Cary School of Business backfilled sublet space at 100 International Drive and Morgan Stanley expanded in 1300 Thames Street. In the traditional CBD, the pace of conversions of obsolete and Class C office space to residential apartments accelerated as the new owner of 10-12 N Calvert Street revealed their plans to convert the approximately 62 percent leased office building to apartments. Downtown landlords outside of the Pratt Street Corridor, however, continued to face chronic vacancy with limited prospects to backfill availabilities created by a long-standing trend of a flight to quality. After a busy start to 2013, which brought vacancy for Class A space in I-83 North to just 7.6 percent, activity in the I-83 Corridor and Hunt Valley slowed at the close of the year. The Reisterstown Road Corridor continued to struggle with elevated vacancy created in part by the submarkets concentration of financial firms, which made it susceptible to the previous economic cycle. The bulk of significant leasing occurred in the Columbia market from a diverse mix of tenants as tour activity focused on Howard and Anne Arundel County. Only five multistory options over 40,000 square feet remained in Howard Counties following several renewals and relocations from single-story product within the market. Outlook While construction and closed investment sale activity dropped at the close of 2013, pending projects and transactions should drive an uptick in the first half of 2014. The growth potential remains highest near Fort Meade and the NSA revolving around the cyber security industry. In the private sector, fundamentals should continue to slowly tighten as the regional economy grows at a respectable pace, led by PBS and health and education services firms.

- Patrick Latimer Senior Research Analyst, Baltimore

Economy Greater Boston surfaced from a tumultuous year on very strong footing. The year began as we braced ourselves for the effects of sequestration. We were shortly after shaken by the tragic events of Marathon Monday. In the summer, we endured a two-week government shutdown and then ended the year with the uncertainty of a mayoral election. All being said, we have, through November added 52,000 in the Greater Boston Necta, a level unseen since the early 2000s - Greater Boston demonstrated its resilience this year. More than 50.0 percent of these new jobs were added since August, showing a shift in momentum that may be taking shape. While employment data can be revised dramatically, the tightening in fundamentals and the leasing activity we are seeing in the market both support this trend in employment growth. Conditions Greater Boston closed out the year with rents up 5.6 percent over 2012 levels. The vacancy rate has continued to decline coming in at 13.8 percent, 300 basis points above the metro long-run average. At the heart of Boston’s story is the tail of two trends. On one side, the large corporates that are mature and growing at a slower pace, continue to explore built-to-suit (BTS) possibilities. We have a number of BTS projects under way in the city and in the suburbs. On the other side, small- to mid-size, fast growing firms are filling the nontraditional office space in secondary submarkets creating pockets of growth in Boston and surrounding areas. And in between the increase in amenities coming in to cater to the growing workforce. Development is at the core of Greater Boston’s story right now. This quarter, notable news include the full completion of Biogen’s almost 500,000-squarefoot, built-to-suit projects in Cambridge. In Boston, the Boston Redevelopment Authority approved the Government Center Garage redevelopment. The mixed-use project will feature 812 residential units, 196 hotel rooms, retail amenities and 1.1 million square feet of office space. And in the suburbs, Partner’s Healthcare has committed to a build-to-suit for up to 1.1 million square feet at Assembly Square in Somerville. Plans for Assembly Square include 1.8 million square feet of commercial space, 500,000 square feet of retail, a theater, a Legoland Discovery Center, a hotel and 2,100 residential units – all on the orange subway line. Outlook It is a very exciting time to be in Boston, as a resident, a tenant or an investor. The metro area appears to be undergoing a transformation. Being an innovation economy is positioning Boston well long term. But being an innovation economy that evolves with changing times and demographics can only further support Boston’s long term outlook. The metro area appears to be doing just that.

- Lori Mabardi Vice President Research, Boston


Charlotte

Chicago

Economy At year end, Charlotte’s steady activity throughout 2013 has not only generated some of the largest tenant movements since the recession, but has served as solid reinforcement that this market’s recovery is built-to-last. With a show of confidence in Charlotte, institutional investors have made their presence felt as six transactions of properties greater than 250,000 square feet have closed year to date. Sharon Square, the lone construction activity outside of Ballantyne since the recession, broke ground in the premier Southpark submarket, creating muchneeded space in an otherwise tight market. Economically, the employed population has steadily grown at a rate greater than the influx of new residents, helping to lower the unemployment rate throughout the year. Although still higher than the national average, Charlotte’s MSA unemployment rate of 7.5 percent is skewed slightly due to the population inflows the area has been experiencing. Carrying a large proportion of the population inflows, the millennial generation, born in the 80s and 90s, will likely have the greatest influence on shaping the future of Charlottes’ office landscape. Office space in walkable, amenity-rich, high density areas continues to be the trend for this generation. With future development allowing, Charlottes’ growing young educated labor force will continue to be an attractive option for companies or corporations looking to relocate. Conditions With six consecutive quarters of positive absorption, the Charlotte metro is continuing its long climb back to the pre-recession times of vacancy rates circa 10.0 percent. With relatively tepid activity within the premier submarkets (CBD, Midtown, Highway 51/Ballantyne, SouthPark) the Airport and University submarkets have, like third quarter, carried the bulk of the positive absorption within the metro. Meaningful vacancy erosion will likely continue to occur as long as absorption outpaces pending new deliveries. Outlook Moving into 2014, 2013 has left Charlotte with the momentum necessary to keep the recovery alive. MetLife showing a vow of confidence in the market after bringing its retail headquarters to Ballantyne, Wells Fargo deciding to reabsorb its previously vacated 160,000 square feet at 1840 Research Drive and Electrolux committing to expand its Charlotte operations by 810 employees all stand as signs that corporations feel comfortable with where things are headed in Charlotte. As MetLife is set to absorb at least 360,000 square feet of space through the first two quarters of 2014 and numerous commencement dates are set for the start of the year, absorption looks to remain positive across the metro for the foreseeable future.

- Taylor Allison Research Analyst, Carolinas

Economy As 2013 drew to a close, it was a year of consistent, measured growth for the Chicago economy. The metro unemployment rate decreased 20 basis points to 8.1 percent in November and Chicago’s nonfarm employment base expanded in October and November adding a total of 33,700 positions. In percentage terms, Chicago’s regional labor market expanded by 1.4 percent in the past 12 months. Similarly, gross regional product was up 3.5 percent yearover-year and unemployment insurance claims in Cook County were down 4.9 percent. Recent Chicago area consumer prices declined 0.3 percent mainly due to falling costs for electricity and gasoline. Looking ahead, these trends indicate that the Chicago economy is positioned to shift into an accelerated expansion and with that, the labor market, especially office jobs sectors, will push employers to a tipping point to start expanding their footprints. A recent example of this is Sprout Social’s sublease of 64,000 square feet at the Citadel Center, which is an increase of 50,000 square feet for the young social media tech company. Conditions Downtown Chicago’s office market held steady during the closing quarter of 2013. At 15.3 percent, CBD vacancy remained unchanged for the second consecutive quarter as had been expected and declined 50 basis points year-over-year to a four-year low. Meanwhile, CBD average asking rents recently slipped $0.30 to $31.64 per square foot, repeating a trend of fluctuation that characterized the calendar year. Chicago’s CBD leasing market continued to experience most activity from small- and mid-sized users but observers noted a greater share of interest from mid-sized firms than in recent quarters. Moving to the suburban office market, Chicago saw the most quarterly activity from technology firms signing the largest leases of the quarter. A major lease transaction of the year was completed by Zebra Technologies inking a 230,000-square-foot agreement at 3 Overlook Point in North Lake County. Flexera Software, a company that produces application usage software, will be moving into 75,000 square feet at Hamilton Lakes in Itasca and will be taking over a portion of the space that Gogo Inc. will be vacating when it moves its headquarters downtown in 2014. Another significant transaction was penned by Japanese electronics company, Omron Corporation, at Greenspoint III in the Northwest submarket for 71,000 square feet. Outlook Chicago area landlords are continuing to improve and upgrade their assets to stay competitive by investing in lobby renovations or adding outdoor terraces. The CBD trend of plug-and-play is still strong and there are more on-demand suite availabilities in the 8,000- to 10,000-square-foot range. Meanwhile, the trend of companies moving to downtown Chicago (or opening satellite locations in the CBD) continues to mean that suburban landlords will remain extremely competitive. Where tenants want to renew or expand will be crucial in 2014 as physical location - Robert Kramp plays an increasing part of the suburban lease making Vice President, Research, decision process. Chicago


Cincinnati

Cleveland

Economy The Cincinnati economy continues on its slow run of gradual improvement, posting annualized gains of 8,800 jobs in October, bringing total nonfarm employment to 1,021,500. Meanwhile the metro’s unemployment level sits equal to the national level at 7.0 percent, an increase of half a percentage point year-overyear. Office employment sectors has begun to cool in recent months, with essentially no net gains in September or October. The professional and business services has posted the largest gains of the four office-using employment sectors over the last year, adding 5,200 jobs to local payrolls, while government has been the biggest detractor, eliminating 3,200 jobs over the same time period. Conditions For the second consecutive year Cincinnati posted positive net absorption, just shy of 250,000 square feet in 2013, pushing down total vacancy 70 basis points to 18.6 percent. Leasing activity continued along at a moderate level in the fourth quarter. Cincinnati Children’s Hospital provided the largest lease of the quarter with a renewal and expansion totaling 118,000 square feet at the Historic Ford Factory in the Clifton/Midtown submarket. Leasing activity is expected to tick up in 2014 with a sizable number of tenants in the market. The latest to begin their search for space include Catholic Health Partners, which is in need of a new 350,000-square-foot headquarters and Huntington Bank, who is searching the CBD for 60,000 square feet as they look to consolidate from multiple locations. Construction activity remains active with over 900,000 square feet under construction. One of the region’s most anticipated projects is the Kenwood Collection, which resumed construction in the third quarter. Kenwood Collection will include 220,000 square feet of Class A office space on seven levels. In addition, the mixed-use development will have 300,000 square feet of retail space, upscale restaurants and amenities, a 2,500-car parking garage and 860 surface parking spaces. Neace Lukens, one of Cincinnati’s largest insurance agencies, was the first announced office tenant of Kenwood Collection. The company signed a letter of intent to lease an entire floor of office space upon completion of the project. Outlook Touring activity and leasing volumes are expected to hold steady into early 2013 as multiple requirements are currently out in the market. For those tenants evaluating options, large blocks of space remain prevalent both downtown and in the suburban submarkets. Asking rents did see modest increases in 2013 and are expected to hold steady over the coming quarters, despite this, market conditions are expected to remain tenant-favorable through 2014. The development pipeline will remain occupied into the new year as over 900,000 square feet of office product is under construction. While most of this square footage is tied up in built-to-suit projects like Dunnhumby’s and Paycor’s new headquarters, the region is seeing some speculative space constructed, namely in the Rookwood - Andrew Batson and Kenwood developments.

Senior Research Analyst, Great Lakes

Economy Following a 32-month run-up of annualized jobs growth, Cleveland’s economy has taken a step back of late, posting yearover-year losses three of the last four months. Cleveland’s metro area saw 7,700 jobs taken off payrolls over the past 12 months ending October 2013, according to the latest report released by the Labor Department. Cleveland was the only one of 49 large metros to a decline in the jobs report. The local metro area’s consistent decrease in employment is clearly concentrated in a few sectors. Government is not surprising; however, the contraction in professional and business services, a category encompassing a variety of businesses from corporate headquarters to scientific, technical and management, equates to lukewarm forecasting for office leasing activity in the months ahead. Conditions Leasing activity held steady in the fourth quarter and the metro posted sizable absorption gains. Total net absorption for 2013 pushed above 600,000 square feet, driven mostly by the delivery of the Ernst & Young Tower and subsequent move-ins. In the fourth quarter the law firm of Zashin & Rich leased the last full floor in the tower. Zashin & Rich, which has roughly 45 attorneys and staff is expanding its footprint, growing from just under 14,300 square feet in its current offices to 21,000 square feet in the Ernst & Young Tower. Most real estate insiders expected the construction scene to slow down in Cleveland in 2014, but with Arhaus Furniture’s recent headquarters announcement, that won’t be the case. Arhaus Furniture announced that in 2014 it will break ground on a 770,000-square-foot, $43.0 million corporate headquarters and distribution center in the Village of Boston Heights. The company, which is the fastest-growing furniture retailer in the country, has spent years searching for a new home because it can’t expand any more at its current location in the Village of Walton Hills. Company executives considered moving some of its operations to North Carolina or South Carolina, before local and state officials offered incentives to convince it to stay and expand in Ohio. The new offices will eventually be four times the size of its 210,000-square-foot space in the Village of Walton Hills. The company is looking move in at the end of 2014 or the first part of 2015. Outlook Large blocks of space among Class A assets remain near nonexistent across the metro, which will limit large occupiers to either renew or enter into built-to-suit projects such as Omnova and Arhaus did. For this reason, the second office phase at the Flat’s East Bank is likely to kick off within the next 12 months. Given the weak employment numbers observed thus far this year, little to no office demand growth is expected in the short term.

- Andrew Batson Senior Research Analyst, Great Lakes


Columbus

Dallas

Economy Current nonfarm employment in Columbus sits at 969,100, a few thousand shy from the high watermark set in June of 2013 at 972,000 jobs. While employment growth has tapered off from the 2.0 and 3.0 percent year-over-year gains reached in 2011 and 2012, the metro continues to steadily add jobs. As of October, employment was up 90 basis points year-over-year, an increase of 9,100 jobs. Unemployment sits 6.1 percent, an increase of 60 basis points year-over-year. The office employment industry continues its run of strong performance, posting net gains in each of the last 41 months. Industrial employment sectors posted its strongest performance since the beginning of the year, adding 2,000 jobs in the month of October. Although this is encouraging, the industrial industry has begun to cool down, no longer reaching the net gains seen in 2011 and 2012. Conditions Leasing activity tapered in the fourth quarter, yet absorption still remained in the positive at 111,000 square feet. Total vacancy sat at 15.7 percent, a decrease of 20 basis points from the third quarter. Relocations were plentiful and comprised a large portion of market activity. Of particular note, the $50.0 million apartmentand-office development at 250 South Street have landed marketing agency Resource LLC, which plans to occupy approximately 60,000 square feet of the 135,000 available upon its expected delivery in 2015. Construction activity continued to be a focal point for Columbus in the fourth quarter, with major projects currently under development totaling over 540,000 square feet. Mixed-use projects have been particularly prevalent as of late, as Crawford Hoying Development Partners unveiled plans for a $300.0 million project at Bridge Park in Dublin, which will include 140,000 square feet of office space, 1,000 residential units, and 196-room hotel. Groundbreaking is expected to begin in September of 2014 and continue over the next three to four years. This is in addition to the recently announced $50.0 million 250 South High development, which will feature 136,000 square feet of office space and 156 apartments. This project is expected to be completed in 2015. Outlook Touring activity and leasing volumes are expected to hold steady through 2014 as a number of tenants are currently active in the market. For those tenants evaluating space options, large blocks remain limited both downtown and in the suburbs. While this will weigh on large users, smaller tenants will find ample available space options. With landlords still eager to fill vacant space, rents will see little change and concessions will remain plentiful, preserving a tenantfavorable market through 2014.


Economy Optimism for the local economy and office market recovery continues to remain high with year-over-year net job growth of 96,000 positions, a number that will drive continued absorption gains over the coming quarters. Over the past year, business services and other traditional office-focused sectors have been behind much of the job growth, but it should be noted that the latest employment figures show that all of the industry sectors finally saw yearover-year increases, indicating a diversified local economy boosted by strong population growth and widespread improvement for all industry types. Conditions Dallas recorded 1.4 million of positive net absorption in the fourth quarter, making the year-end total just under 3.0 million square feet. This high level of demand matched 2012 and pushed the total vacancy rate below the historic norm. Most of the net absorption over the past year has been concentrated in three submarkets: Far North Dallas, Las Colinas and Richardson/Plano. The Dallas total vacancy rate stood at 19.6 percent at year-end and overall average asking rates have increased to $21.29 per square foot, full service gross. Upward pressure on rates is expected for most submarkets until new construction begins to hit the market in late 2014 or early 2015. Outlook The construction, which had largely been dormant since 2010, is now above the historic norm with roughly 4.3 million square feet currently under way. This volume is of construction is above the norm, but low in comparison to 6.0 million square feet of space absorbed over the past two years. It should also be noted, that more than a third of the new construction is made up of built-to-suit projects. Since 2000, an average of 3.0 million square feet has been completed. With a two-year lag time for most office construction projects, continued upward pressure on rates is expected for most submarkets over the next two to three years until supply becomes more in line with demand. The current roster of active tenants in the market looking for space indicate that the current construction level of speculative projects is justified, but there is some concern of overbuilding if several of the planned and proposed projects are added to the pipeline over the next two years.

- Walter Bialas Vice President, Research, Dallas


Denver

Detroit

Economy Metro Denver’s unemployment rate was 6.5 percent in October, down 1.1 percentage point from one year ago. As unemployment continues a steady decline, job growth is occurring with a 2.6 percent employment base gain over the past year. The professional and business services, construction and natural resources and mining, and leisure and hospitality services industries have led this employment gain over the past 12 months. These gains are expected to continue, which will help stabilize economic growth over the mid-term. Accordingly, office demand is expected to accelerate in 2014, which will yield landlord-favorable conditions across the majority of submarkets. Conditions Leasing activity totaled over 2.0 million square feet in the fourth quarter. Direct net absorption for the fourth quarter totaled over 302,000 square feet, and increased to just over 426,000 square feet when including subleases. Year-to-date, the market has absorbed over 1.7 million square feet of direct space and nearly 1.5 square feet of total space, including subleases. The Southeast Suburban and the CBD yielded the majority of the absorption for the quarter with over 225,000 square feet of direct net absorption combined, although the Class A CBD market yielded negative net absorption during the quarter due to a lack of expansions and large new deals making the move during the quarter. Asking rates remain the highest in the CBD, with an overall average of $29.40 per square foot compared with $21.33 per square foot in the suburban submarkets. During the fourth quarter, rates increased in all submarkets throughout the Denver market. The increase is becoming apparent in many submarkets as landlords have started to gain leverage. Tenants with requirements larger than 100,000 square feet had 13 options throughout the Class A market. 1801 California in the CBD had three of those large blocks, providing some relief in a tight submarket. Speculative construction plans are back on the table and 1601 Wewatta Street in the CBD is under construction with a 299,990-square-foot, Class A building, which plans to deliver in May 2015. Outlook Growth in the oil and gas industry will continue to be an economic driver, as will the professional and business services industry and the leisure and hospitality industry. Leasing activity is expected to increase in the coming quarters due to that force and several others. Landlords have gained leverage in the CBD and will continue to gain leverage in many of the suburban submarkets, causing effective rates to rise with less free rent and fewer tenant concessions. Market momentum and forecasts indicate a strong year ahead as job growth continues to develop, driving further economic growth.

- Amanda Seyfried Research Analyst, Denver

Economy Detroit’s economy continues to improve slowly, adding 17,200 jobs year-overyear in November, an increase of 93 basis points. While jobs gains across the metro in 2013 haven’t been to the levels observed in 2011 and 2012, they at least remain in positive territory. Detroit’s unemployment rate continued to tick down in August, coming in at 8.3 percent, a reduction of 1.4 percentage points year-overyear. While this is still high in comparison to much of the country, considerable progress has been made since July of 2009 when the unemployment rate hit 16.9 percent. Hiring among the office-using employment sectors heated up at the end of 2013 following a mostly inactive summer. Together, the four sectors posted net year-over-year gains of 9,500 jobs in November, led by the professional and business services sector, which has posted an annualized gain of 14,500 jobs. Conditions Capital markets activity has been particularly hot in Detroit over the last 24 months and another blockbuster sale might be just around the corner. The Blackstone Group, owner of the Southfield Town Center, is considering four offers from prospective buyers to purchase the landmark office complex, in default on its mortgage with $138.0 million owed. Offers for the 2.2 millionsquare-foot Class A office complex are reported to be between $160.0 million and $170.0 million. Blackstone purchased the five-building complex in 1999 for $270.0 million. The complex was appraised this summer at $177.5 million, 44.7 percent below a 2004 appraisal of $321.0 million. The Southfield Town Center is currently 32.0 percent vacant, far above the 22.8 percent Southfield Class A vacancy rate reported by Jones Lang LaSalle in the fourth quarter. Leasing activity also remains quite active in the Detroit market, with over 4.0 million square feet of transactions transpiring in 2013. Given recent employment gains among the office-using employment sectors, demand is expected to see an uptick in 2014. One of the region’s largest tenants currently searching the market is Molina Healthcare of Michigan, which may go from suburban living to city dwelling. The state’s third-largest Medicaid HMO, which has about 60,000 square feet in the Troy submarket, is exploring a relocation of its 300 employees to downtown Detroit. One of Molina’s top downtown prospects is the 415,000-square-foot Detroit Media Partnership building. Molina is also considering the Southfield submarket. Outlook Total vacancy has continued to decline since hitting a record high of 29.2 percent in the first quarter of 2011. With consistent employment gains experienced over the last 12 months, total vacancy is expected to continue its downward trend through the end of 2014. That said, over 15.5 million square feet of office product remains vacant, ensuring a tenant-favorable conditions across most submarkets for several years. Rental rates are expected to increase modestly over the - Andrew Batson next year, with the concentration of gains taking place Senior Research Analyst, among Class A properties. Great Lakes


Fairfield County

Fort Lauderdale

Economy Fourth quarter economic indicators for Fairfield County showed some strengthening, but there remain fundamental structural weaknesses with the local economy. Unemployment has ticked down, with October estimates at 7.4 percent for Fairfield County. Stamford, in particular, has shown more momentum in recovery as of late, with the unemployment rate contracting to 6.1 percent by year-end. Likewise, nonfarm payrolls added 4,200 jobs during 2013 along with 0.6 percent expansion in office-using employment. Unsurprisingly, the region continues to lack significant momentum in emerging industries. Financial services remains the primary driver for activity, but all the while is contracting in terms of presence with few other industries poised to infill gaps. This growthprohibitive environment is most clearly evident in the lack of recovery in the local office market. Conditions A year ago, the office market came off of a stellar year in terms of leasing volume. Aside from transaction activity, however, vacancy and absorption indicators showed a tepid market. This year shows a different office market environment. While vacancy was relatively flat, the market recorded positive year-to-date absorption, and asking rents showed growth, ending 2013 more than 3.0 percent higher than one year ago. The overall vacancy was 22.6 percent at the end of the fourth quarter, with nearly 100,000 square feet in yearto-date net absorption. One of the most defining trends through year-end was the consistent acceleration in major lease activity. Leases most typical for the Fairfield County office market are around 10,000 square feet on average, and leases of more than 20,000 square feet are less common. Major transactions in the fourth quarter were scattered among a variety of submarkets, helping provide widespread absorption. In the Stamford CBD/Railroad, UBS sublease space continues to be leased up, relieving the submarket of one of the largest availabilities. BLT Financial Centre remains on the market with more than 600,000 square feet available, but a portion of this space is likely to be leased in the first half of 2014. Outlook The most solidified plan in terms of office development in Fairfield County involves the development of the Stamford Transit Center. While the bulk of transit-oriented development in Fairfield has been sidelined because of anemic demand, plans for the Stamford Transit Center are well under way and do not hinge on securing an anchor tenant to validate ground-breaking. The $500 million mixed-use project will expand office space options in direct proximity to transit, but more importantly will improve the surrounding infrastructure, badly in need of updates, and general accessibility to Stamford. Among all Connecticut counties, Fairfield has the second highest number of inbound commuters.

- Erin Patterson Research Manager, Fairfield County

Economy Broward County’s unemployment rate continued its decline in November, falling to 5.2 percent, down 20 basis points from the previous month and drastically below the 6.8 percent unemployment rate from one year ago. While the majority of employment gains continued to be realized in retail/hospitality sectors, material gains were posted in the financial sector throughout the year, the only office-using sector to see real improvement. Conditions The improved economic situation and outlook in Broward County has finally begun manifesting itself in the office market, particularly within the CBD. Overall, tenants absorbed over 343,000 square feet of office space throughout Broward – 57.5 percent of which occurred in the CBD. Much of the occupancy gains Downtown materialized in the fourth quarter, with Becker & Poliakoff taking occupancy of over 46,000 square feet in 1 East Broward after signing earlier this year. Even more space is expected to be absorbed early next year once Greenspoon Marder (65,000 square feet at 200 East Broward) and Prolexic Technologies (33,000 square feet at New River Center) take occupancy after signing leases late this year. As a result, total vacancy downtown has dropped 410 basis points to 18.0 percent, the lowest it has been since early 2009, and buildings are beginning to push asking rates (Class A asking rents are up 2.3 percent from one year ago to $32.57 per square foot) – even prompting discussion of new development. In the suburbs, Class A product accounted for all absorption gains, despite more tenants relocating downtown. Over 220,000 square feet of Class A inventory was absorbed this year (2.3 percent of total stock); albeit, US Gas and Electric, which relocated from Miami-Dade County, is responsible for nearly 20.0 percent of those gains after signing a lease for nearly 50,000 square feet earlier this year at the Space Coast Credit Union building in Southwest Broward. Outlook The dynamics downtown are already beginning to shift as vacancy dips and few large, quality availabilities are still on the market. We expect leverage to shift to benefit landlords in the latter portion of next year – if not sooner. A similar situation will occur in the western submarkets of Sawgrass and Southwest Broward, but Cypress Creek and Plantation should remain tenants’ markets for the foreseeable future, with Plantation balancing out more quickly.

- Marc Miller, Senior Research Analyst, Fort Lauderdale


Hampton Roads

Houston

Economy Bipartisan resolutions to federal spending late in the fourth quarter bolstered confidence in Hampton Roads by funding the area’s large military manufacturing base for the next two years. The National Defense Authorization Act of 2014 and the Bipartisan Budget Act of 2013 will give back $63.0 billion in defense cuts produced by the 2013 sequester and fund shipbuilding and repair contracts through the 2015 fiscal year. Despite prior continuing resolutions which dragged on the local economy, the region managed to add over 160,000 positions to the payroll base since 2012. This welcomed clarity will foster substantial employment gains, specifically from the government contractor sector moving forward. Conditions Slow but steady progress continued thematically across the region as downsizes triggered by space efficiency measures decelerated space absorption. Relocations and renewals drove overall leasing volume, contributing to a paltry 190,147 square feet of positive net absorption for the 2013 year, a 42.2 percent decline from total net absorption recorded in 2012. Stagnant leasing activity attributed to little construction activity in the market, which was led by tenantowned build to suits or highly specialized government buildings. However, with no major exogenous shocks in the past two years, these two conditions gradually tightened market fundamentals, specifically in the Class A inventory. Large, Class A blocks have diminished in number, particularly in Downtown Norfolk where no vacant Class A blocks exist larger than 25,000 square feet. Outlook Hampton Roads’ prolonged recovery will maintain its pace into the second half of 2014 with spring-loaded growth anticipated approaching 2015. Occupiers seeking Class A space will find few options outside the Class B and Class C inventory, pushing large users toward mid-sized build to suits. A large volume of lease expirations over the next 24 months will produce small waves of negative net absorption due to rightsizes - a continuing trend in the Hampton Roads market. Short-term leases signed over the past two years will fuel most of these renewal requirements. Large vacancies in the Class B inventory will begin to see spill-over demand as Class A market fundamentals tighten, although these leases will be temporary as the Class A supply pipeline reemerges.

- Geoff Thomas, Research Analyst, Richmond

Economy Houston’s office market continues to benefit from its robust economic environment, one which added approximately 80,000 new jobs in the 12 months ending October 2013, a 2.5 percent rate of growth. While this growth rate is slowing, Houston still outpaced the nation as a whole in 2013 and is expected to do so again in 2014. Houston’s non-seasonally adjusted October 2013 unemployment rate fell below 6.0 percent, more than a full percent lower than the national rate of 7.1 percent. The continued job growth and low unemployment figures allow Houston to enter 2014 secure in its stance as one of the top cities for job seekers and global trade and is indicative of the longterm strength in the region. Conditions Houston’s office market maintained its high level of leasing activity during the second half of 2013, with the fourth quarter matching the prior quarter’s just over 1.0 million square feet of positive absorption. Houston’s Class A rental rates gained nearly a full dollar from the prior quarter and sat at $34.14 per square foot at the end of the year. Houston’s core six submarkets continue to lead the way in positive absorption. The six submarkets accounted for nearly 70.0 percent of all the absorption in the fourth quarter, or roughly 700,000 square feet. Even with new construction arriving in 2013, the Woodlands, West Houston, and Galleria submarkets all register single-digit vacancy rates to close out the year. Overall, new office construction reached nearly 7.0 million square feet this quarter and is highlighted by the ExxonMobil and Southwestern Energy campuses in the Woodlands, as well as over 25 planned or under construction buildings in West Houston. Houston’s office sales activity remained strong as 2013 came to a close, with over $750 million in office space changing hands between a variety of institutional and international investors. A key merger from the fourth quarter occurred when Parkway Properties acquired Thomas Properties Group, including their control over Phoenix Tower, CityWest Place, and San Felipe Plaza in some of the premier submarkets in the city. Outlook 2014 will continue the last 24-month trend of Houston’s most in-demand submarkets being landlord-favorable with rental rate increases and tightening of tenant concessions. New office deliveries for the Galleria, West Houston, and the Woodlands will eventually create a rate ceiling for existing blocks of availability; however, the vast majority of these new builds arrive preleased and will not allow the market to loosen in the near term.

- Graham Hildebrand Research Manager, Houston


Indianapolis

Jacksonville

Economy The Indianapolis MSA job market displayed solid growth in most sectors based on the November employment data. Notable changes occurred in major office-using sectors, such as professional and business services, which exhibited 5.5 percent local growth year-over-year, and financial activities, expanding 1.9 percent growth during the year. This positive news is evidence that Indianapolis companies are adding to area payrolls and making investment into their future business planning. There were minimal year-over-year downturns in both manufacturing and construction employment, tightening by 1.0 percent and 1.8 percent declines, respectively. The government shutdown (which lasted from October 1–16) is likely to have contributed to this decrease in employment as the sector’s payrolls did shrink technically during the shutdown. In regard to the construction sector, the slowdown can be attributed to a colder than usual winter, which may have shelved projects and decreased the need for construction, a seasonal business. Meanwhile, sectors that tend to be lighter users of office space, such as trade, transportation, and utilities, saw jobs gains as the region is home to a rapidly expanding supply chain and logistics hub which boosted the overall growth of the Indianapolis industrial sector this past year. Conditions Office market conditions held steady during the fourth quarter. For example, average annual overall asking rents increased to $17.47 per square foot, $0.91 per square foot over the same period last year. The e-commerce, retail and information technology sectors saw substantial expansion in 2013, which is unsurprising given Indianapolis’ growth as a tech-innovation incubator, particularly throughout the office market, while M&A activity saw Indianapolis capture national headlines as Salesforce acquired Indianapolis-based Exact Target in a $2.5 billion transaction. The state’s pro-business environment, coupled with local balanced budgets and a general low cost of doing business, lead us to a sustained pattern of steady growth in the office sector going into 2014. Outlook The tightening in the office-occupying sectors seen in the fourth quarter is evident with such transactions as HP Enterprise Services and CTI Group of inking agreements for 50,000 and 16,000 square feet, respectively. For tenants eyeing large space, there are tightening opportunities in both the CBD and suburban submarkets, although a greater number of options exist for small and mid-size tenants. We expect rents to hold steady in the first months of the year throughout most Indianapolis submarkets with landlords being regional competitive on price and while holding the line on concessions.

- Ajay Patwari Research Analyst, Indianapolis

Economy Jacksonville was recently selected as one of eight cities nationwide to join the Global Cities Initiative, a project created by the Brookings Institution and JPMorgan Chase. The goal of the project is to promote greater global trade and economic competitiveness. The Jaxport CEO says the goal for Jacksonville is to grow the private sector, while making the city a “principal hub in the south for transportation and logistics.” Jacksonville has already started down the path of job creation. Nonagricultural employment has risen 1.9 percent since this time last year as over 11,000 jobs have been added. With that growth, the unemployment rate, currently at 6.0 percent, is the lowest of the top four largest metropolitan areas in the state The unemployment rate has dropped 23.1 percent over the past year, which is the equivalent of 180 basis points. Furthermore, Jacksonville has become one of the most desirable locations for bank mergers and acquisition in addition to a target location for financial firms relocating from Wall Street. With an educated population and an advantageous business climate, Deutsche Bank is not likely to be the only firm leaving the northeast for the Sunshine State. Conditions The fourth quarter saw more leases executed than any other quarter throughout the year, yet the total square feet leased was the lowest. Thus, the end result is that the average lease in the fourth quarter was only 4,249 square feet compared to the third quarter figure of 8,328 square feet per lease. Rental rates are a great place to find evidence of Jacksonville moving into the new year with a full head of steam. Rents have appreciated 3.3 percent, year-over-year, throughout the market in its entirety. The majority have that appreciation has occurred in the suburbs where Class A rents are up 1.7 percent and Class B rents are up 5.6 percent during that same time period. Outlook With office-using employment already surpassing pre-recession highs and vacancy below historical averages in both the ‘burbs and downtown, some may think that 2014 may be a year of little to no growth or change. We expect just the opposite. Jacksonville’s office-using employment growth rate is expected to be 1.7 percent in 2014. Moreover, the growth in office-using employment is expected to exceed 2013’s rate of growth for the next three years. With additional demand being created from the financial services industries, landlords are likely to continue to bump rents above $19 per square foot as they were back in 2007.

- Ryan Vaught Research Analyst, Central Florida


Los Angeles

Miami

Economy Los Angeles’ vast economy continues to add new jobs, but at a measured pace. The county’s unemployment rate remains elevated, coming in at 8.8 percent for the month of October. While still 180 basis points higher than the national unemployment rate of 7.0 percent, it is a marked improvement from the 9.6 percent of a year ago. Leisure and hospitality jobs led all major Los Angeles industry clusters in yearover-year growth and reported the second largest year-over-year expansion in 10 years, driven by domestic and international travel and visits to Los Angeles. Professional and business services added 15,400 jobs over the year, which has begun to translate in greater occupancy gains in office properties in key regional submarkets. Conditions With regard to supply, no additional large contiguous blocks of space are expected to hit the market in Downtown Los Angeles, paving the way for moderate occupancy gains ahead should tenant demand not falter. Though law firms and financial service tenants still dominate the Downtown landscape, owners are increasingly targeting a more diverse tenant base, including creative and entertainment companies. Renewals will continue to play a large part in leasing with little or no organic growth forecasted in the coming quarters. Tenants from outside the market are likely to be the sole drivers of new demand. Legal, financial services and engineering firms will continue to account for a healthy share of leasing activities in the Tri-Cities office markets as well. Alternatively, the Westside is already an established home base for many media, technology and mobile industries. These sectors and expected to see continued growth and will drive new requirements, which could spill over into the neighboring South Bay submarket. This trend is expected to continue as more and more large corporate users are setting up shop in and around Playa Vista. Heightened demand has translated into an increase in competition among tenants for “creative” space, which has led landlords to increase rental rates. Outlook As evidenced by the growing number of tenants looking to enter the market as well as the sustained growth from existing tech tenants, the future looks optimistic for landlords. As local technology firms dive deeper into content creation and distribution, the interplay between entertainment and high-tech will become increasingly intertwined. This synergy will likely form new niche markets in Los Angeles, which will help to build market performance.

- Henry Gjestrum Senior Research Analyst, Los Angeles

Economy Miami’s unemployment rate was reduced by 1.0 percentage point during the year and at 8.5 percent in October, marking a substantial decline from the decade’s record high of 12.8 percent recorded during midyear 2010. The biggest gains were experienced in leisure and hospitality with a 3.4 percent expansion over the last 12 months, not surprising given the city’s strong year in tourism as visitors and visitor expenditures are approaching record levels. This has especially been driven by foreign visitors, particularly those originating from Latin America. Boding well for the office-using segment were several industry sectors also posting positive job gains: financial activities up by 2.8 percent and both professional/business services and trade/transportation/utilities each up by 2.3 percent during the same time frame. Conditions An encouraging statistical performance topped off the year with marketwide vacancy dropping by nearly 3.0 percentage points since the end of 2011. Annual absorption levels have remained relatively steady (in the 600,000+ square-foot range) over the last three years. Leading the charge was the Class A segment, which accounted for 84.0 percent of 2013’s new occupancy gains. Following last year’s trend, positive absorption within the Class A sector remained nearly evenly divided between the CBD and suburbs. Overall, the CBD office sector continues to display a steady pace of tightening fundamentals, while patterns vary within the suburban sector, which collectively contains a significantly larger inventory. Outlook Among the best located buildings, landlords that can accommodate the largest contiguous prime spaces particularly with views continue to have the strongest expectations going into 2014. Sales activity and the ensuing redevelopment bustle continue to attract notice from both domestic and international investors. The city’s retail sector is poised to receive some of the largest contemporary and luxurious product in the country. The same holds true by the exuberance being demonstrated for our accelerating housing market which has garnered most of the attention. The office sector should benefit as a variety of businesses will be needed to support the elevated new commercial uses slated for this marketplace. The CBD closed out the year with the first new office construction activity since 2007. Two Brickell City Centre, the first of the multitenant, for lease office product planned for the 5.4 million-square-foot, mixed-use Brickell City Centre development is now under way. Totaling 120,000+ square feet, the building has a late 2015 completion date. No preleasing has yet to be announced.

- Roberta Steen Senior Research Analyst, Miami


Milwaukee

Minneapolis

Economy According to the Business Outlook Survey conducted by the Metropolitan Milwaukee Association of Commerce, MMAC expectations toward fourth quarter sales and profits were mixed. While larger firms seem to see more of a profit than the smaller ones in the last quarter of the year, overall employment optimism increased as most companies see fourth quarter jobs holding steady. Milwaukee’s information super sector this month carried the office-occupying sectors, with 100 jobs added to area payrolls during the past 30 days, an increase of 70 basis points, while the professional and business services sector lost 3,200 jobs yearover-year. Conditions Milwaukee’s office activity is experiencing a gradual tightening in tenant demand as leasing velocity increased over the past year. While momentum looks to be starting to shift toward the landlord side, leases are happening as the markets relays its slow tightening for the up coming year. Larger blocks of continuous space are becoming more difficult to find in both the CBD and suburban markets. On the suburban side, demand for Class A office buildings is on the rise, as there are several shovel-ready sites available in Brookfield Lakes and Bishops Woods. Ruby Farms in Brookfield is controlled by Irgrens and has plans for a mix-use development, although an office building could be built, it would be some time before that to happen. Moreover, Class B has seen an uptick in activity within the suburbs Milwaukee’s skyline will see a new ‘sky-scrape’ due to recent announcements of new developments by the lakefront. The largest on it will be completed by 2017 and is the Northwestern Mutual planned 33-story office building located at 800 East Wisconsin Avenue. Demolition of an existing office building began this December to clear the way for the new development. Another major development is Irgens’ planned 18-story office being built on part of the former U.S. Bank garage located at 833 East Michigan Street. Construction is anticipated to begin in February 2014. Outlook Milwaukee is on the path to a more diversified recovery away from its historic manufacturing and agriculture base, although it will be slow gear growth in the upcoming year. While new developments are in the pipeline and local pocket economies are coming back, investors and local companies are seeking to place capital in the Milwaukee area, as seen with recent rise in sales activity in the Class B office market with additional properties listed as available.

- Robb Russell Senior Research Analyst, Milwaukee

Economy The Minneapolis-St. Paul economy continues its strong, diverse performance with housing prices up, regional gross domestic product improving and unemployment currently at 4.1 percent, a full percentage point lower than the next MSA with at least one million people and one of the lowest in the Midwest. Year-over-year office employment growth, which continues to be driven by the government and professional and business services sectors, moderated though, in September and October. Conditions Active requirements were reduced from third quarter levels due to the closing of multiple highly anticipated transactions during the fourth quarter. Most notable was the agreement signed by Wells Fargo to own a newly constructed 1.1 million-square-foot office complex in a new mixed-use development in the eastern section of the Minneapolis CBD with construction expected to commence in 2014. Also of note was Be The Match’s lease of a new 240,000-square-foot office building in the North Loop neighborhood with its construction expected to begin in spring 2014. Despite continued growth in office-using employment, increasingly efficient space usage by large users remains a major trend in the local office market, muting overall 2013 absorption numbers, and creating some challenges for landlords. The recent deal struck by Campbell Mithun illustrates this trend; the advertising agency signed a lease for 65,000 square feet at the Class B 510 Marquette building in the Minneapolis CBD. The firm will move in late 2014 from the Class A Campbell Mithun Tower where it is currently occupies approximately 80,000 square feet and is under lease for 135,000 square feet. Outlook Multifamily construction, transit upgrades and build-to-suit office projects in the pipeline will help drive office lease dynamics in the Minneapolis CBD in 2014 and onward. A renewed interest in urban living by a growing population of young educated workers looking for a live-work balance is helping to fuel the trend and investors, developers and employers are taking note. Other areas of the Twin Cities likely to benefit from the live-work paradigm include the West End area along I-394, the St. Paul CBD and Minneapolis’ Uptown neighborhood in the Southwest submarket. The second phase of Mozaic, a planned multitenant office building, exemplifies the growing demand for office space in the Uptown neighborhood, an amenityrich district historically popular among the “20-something” demographic. Similar to the Minneapolis CBD, multifamily development is in full swing and Uptown continues to grow its population of talented young workers. Increased interest by employers has ensued and the concept for Mozaic 2 has recently increased to 185,000 square feet as a result. - Abel Balwierz Senior Research Analyst, Minneapolis


New York

New Jersey Economy The New Jersey employment market embarked on a rollercoaster ride during the past year. After adding 38,700 new jobs from January through June, employment growth rapidly decelerated from late summer into the fall as an average of only 1,200 jobs were created per month between August and October. However, an estimated 16,900 jobs were added during November, with the biggest gains witnessed in the education, health services, leisure and hospitality sectors. These clusters were also responsible for more than 60.0 percent of the nearly 71,000 jobs added since November 2012. The New Jersey unemployment rate declined to 7.8 percent compared to 9.6 percent one year ago. Despite this decline, the state’s unemployment rate remained eight-tenths of a percentage point above the national average. Conditions Limited demand countered by corporate consolidations steered the course of the Northern and Central New Jersey office market during much of the past year. Overshadowing the office market has been the lack of significant employment growth in the professional/business and financial services sectors, which collectively shed approximately 8,500 jobs since November 2012. These sectors have historically driven space requirements in the office market. While edging lower during the first half of 2013 to 24.2 percent by mid-year, the Northern and Central New Jersey overall office vacancy rate ticked higher during the second half of the year and reached 24.9 percent by year-end. Despite this increase, the overall vacancy rate remained below the 25.5 percent witnessed in 2012. Outlook Despite the transitional market conditions, the volume of new construction under way in the Northern and Central New Jersey office market is expected to trend higher in the coming year. While only 390,140 square feet was completed in 2012, nearly 1.2 million square feet was developed one year later. Most of this development involved build-to-suit projects as companies consolidated their operations into facilities offering increased efficiencies, while also helping to reduce operating expenses. Build-to-suit construction will define much of the new construction under way in 2014 as well. More than 90.0 percent of the 1.4 million square feet being developed at year-end 2013 can be attributed to two buildings in the mass transit-centric Hudson Waterfront and Newark submarkets. In Hoboken, construction continues on Waterfront Corporate Center III. Pearson Education will occupy approximately 40.0 percent of the 520,000-square-foot building as the book publisher consolidates operations from Upper Saddle River and Old Tappan. In addition, Prudential Insurance will move out of three buildings at Gateway Center and into a new 740,000-square-foot tower being developed near Military Park in downtown Newark.

- Steve Jenco Vice President, Research, New Jersey

Economy New York City added 12,700 jobs in November, bringing the total employment to a new high of 3.996 million. Since 2009, the city has gained 328,000 private sector jobs. This equates to approximately 200,000 more jobs than it had before the recession. New York City’s tech sector expanded at an annual pace of 5.3 percent. Accounting for less than 2.0 percent of total employment in the city, the tech sector was responsible for nearly half of net new jobs across the five boroughs in 2013. Yet many of the other sectors that have outperformed—education, health, retail and tourism—do not fall within the office-using employment category. For instance, according to the New York State Comptroller, the city’s vital securities industry is 13.5 percent smaller than before the crisis. Even though the securities industry represents only 5.0 percent of total employment, it accounts for 22 percent of total wages and a disproportionate amount of Class A office space. Conditions The year ended with positive absorption, lower vacancy and the highest volume of office leasing activity in Manhattan since the financial crisis. Downtown attracted much of the attention in the fourth quarter with a string of large, marketshifting leases. After rising to a multiyear high of 16.6 percent at mid-year, the Downtown Class A vacancy rate plummeted, finishing 2013 flat at 14.3 percent. Midtown Class A rents finished 2013 at $75.38 per square foot—the highest since 2009—but only a 3.6 percent increase from last year, shy from our forecast of 4.1 percent growth. Meanwhile, the top of the market—transactions with a starting rent above $100 per square foot—rose to pre-recession levels, with 80 transactions recorded, up from 51 last year. After an extended run as one of the nation’s most dynamic markets, Midtown South has seen a sharp decline in activity over the past few months. Overall Midtown South vacancy rose to 8.4 percent at year-end 2013 from 7.2 percent at year-end 2012. Yet Midtown South overall asking rent rose to an all-time high of $57.88 per square foot, suggesting that higher rents in Midtown South may have slowed activity. Outlook Most economic and employment forecasts for the New York region in 2014 are positive, but tepid. Overall job growth may slow even as output and profits continue higher. The Federal Reserve’s move to taper, coupled with the full implementation of Dodd-Frank, could temper growth in New York’s financial services sector. The sustained growth of the U.S economy, however, will drive New York City’s office market as sectors such as media, technology, advertising, fashion and retail continue to expand. The recent deviation between overall demand and submarket demand appears to be diminishing as tenants have migrated across markets in search of value. Creative industries have crossed into Midtown and Downtown from their base in Midtown South, while traditional Midtown tenants have signed leases Downtown. Over the next few years, new product at Hudson Yards and the World Trade Center is expected to continue disrupting traditional - Tristan Ashby market dynamics and geographic forces.

Vice President, Research, New York City


Oakland - East Bay

Orange County

Economy The local economy continued to improve with an unemployment rate of 7.0 percent, down 150 basis points year-over-year with the addition of 5,800 jobs in the same period. In the two-county region, the strongest year-over-year job gains were recorded in the trade, transportations, and utilities, construction, and leisure and hospitality sectors. Additionally, the strong housing market aided in the advancement of the local economy with housing prices up 25.6 percent since November of 2012 in Contra Costa and Alameda Counties. Conditions Although the year ended with strong job growth and positive net absorption, the Oakland-East Bay market’s momentum weakened in the fourth quarter, a likely result of the holiday season. With the first phase of major move-outs of large corporate tenants in the Tri-Valley already completed, three new, desirable, large blocks of space came to the market. Additionally, AT&T is selling their 1.8 million square-foot campus at San Ramon’s-Bishop Ranch, which offers 900,000 square feet of vacant space. The city of Oakland has planned two transformative projects—the expansion of the Port of Oakland and the creation of Coliseum City for the Raider’s stadium, which will have positive effects on economic drivers in the office market. In the fourth quarter, Oakland-CBD and Emeryville, contributed 95,873 square feet to total net absorption and experienced some spillover of tenants from San Francisco, such as: UC Press and CDD Innovations. Further in-migration from San Francisco is anticipated in 2014. This in-migration will create greater tenant competition and has already put upward pressure on rental rates, especially within Class A buildings. Outlook With several large move outs planned for the first quarter of 2014, including phase two of Zenith Insurance in Pleasanton and AT&T in Bishop Ranch, several desirable blocks of space will become available. Conversely, a few major relocations and expansions by tenants in the Oakland-Metro market will result in positive net absorption in the first quarter. With a healthy housing market, stable economy, and affordable rental rates, the Oakland-East Bay market should resume positive growth in 2014.

- Hailey Harrington Research Analyst, Oakland - East Bay

Economy With another year in the books, the Orange County market is still searching for a catalyst to ignite the local economy. Despite not having a defined industry acting as a driver, the county has recorded positive job growth over the year adding 30,600 jobs, translating into the unemployment rate falling to 5.6 percent. Growth has been led by the construction sector; however, a slowdown in the hiring of office-using jobs has coincided with a slowed leasing velocity in 2013. Conditions Four years removed from the bottom, the market is just a little past the halfway mark in many aspects of the recovery. The latest numbers show that Orange County has regained about 60.0 percent of the 200,000 jobs that were cut during the downtown and has absorbed 75.0 percent of the 7.1 million square feet of lost occupancy. But on the flipside, the office market’s vacancy rate hangs relatively high near 14.0 percent, which has tempered rent growth outside of the choice assets and submarkets. The still-challenging market conditions have forced landlords to get creative— both figuratively and literally. The era of ‘blend and extend’ lease restructures has given way to things like speculative creative suite build-outs and the implementation of new amenities to attract the new generation of young professionals. Orange County is now seeing the aggressiveness dissipate among landlords that are positioned in well-performing submarkets of Irvine, Newport Beach and select pockets in the outer regions. Large and mid-sized tenants looking for Class A-quality space in these areas are finding fewer options to choose from and landlord concessions are not as easily up for grabs like they were two years ago. Even though average contract rents are seeing only minimal growth (less than 3.0 percent over the past year), the confidence among owners is palpable enough to suggest that leverage is slipping away from tenants. Outlook The highlight in 2014 will be the new product delivering to market and additional projects breaking ground. The PIMCO and Hyundai build-to-suit headquarters are both set to deliver by the end of the year, which will open up big holes of vacancy in the Fashion Island and Fountain Valley submarkets, respectively. Also, the Irvine Company is rumored to be pursuing two new speculative office towers in the Irvine Spectrum submarket. Once the product delivers, the overall market’s vacancy rate will jump back up unless an unforeseen flood of new leasing activity takes place. Regardless, expect to see average rents moderately tick upward in 2014, especially in the premiere areas of Newport Beach and Irvine.

- Bryce Mordoff Senior Research Analyst, Orange County


Orlando

Philadelphia

Economy The Orlando metro area economy continued to strengthen in the last quarter of 2013. For the month ending November 2013, total payroll growth increased at an annualized rate of 2.7 percent, which is the highest annual growth rate for the month of November since 2006. A total of roughly 29,000 jobs have been added since November 2012. Out of that total, office-using employment sectors, which make up about a quarter of total nonfarm payrolls, added roughly 9,100 jobs or 31.4 percent of the total jobs created. Professional and business services posted annual growth rates of 3.4 and 3.9 percent for the years ending October and November 2013. At the same time, financial service positions grew by 3.1 and 3.6 percent, respectively. From the start of the year through November, total combined job growth in these two office-using sectors grew by 4.9 percent, which corresponds to 11,500 jobs added to the local economy. These gains, along with job growth in other areas, helped reduce Orlando’s unemployment rate from 7.7 percent in January 2013 to 6.0 percent at the end of October 2013, a 170-basis-point decline. Conditions The Orlando office market continued to realize the benefits of an improving economic landscape, which has driven down vacancy rates in both the CBD and suburban areas. The direct vacancy rate for the total market ended the quarter at 17.4 percent, down 40 points or 2.0 percent from the third quarter. Year over year, the rate dropped 190 points or 9.9 percent. Out of the seven submarkets in Orlando, six posted positive direct and total net absorption. The 436 Corridor submarket led the way in terms of demand, capturing 1.4 percent of their total stock, followed by Atlamonte and the CBD capturing 1.2 and 0.6 percent of their total stock. Demand was concentrated in Class A space as tenants continue to take advantage of lower than average asking rates. Combined CBD and suburban direct average Class A asking rates ended the quarter at $21.50 per square foot, which is $1.10 per square foot or 4.9 percent below the five-year moving average. Outlook Looking ahead, the outlook for the Orlando office market appears bright. Overall, vacancies are trending down as employment growth in office-using sectors continues to grow at a steady pace. Direct vacancies for both the CBD and suburban areas closed out the quarter below their five-year moving averages. This was the result of strong overall demand throughout the year as the fourquarter rolling total for direct net absorption ended the year at its highest level since before the recession. Expect these trends to continue into 2014 as brighter local and national economic conditions drive business confidence to the more optimistic end of the spectrum.

- Austin Carter Research Analyst, Central Florida

Economy Federal Reserve plans to taper easy-money policies in 2014, a result in part of economic growth and decreasing jobless claims, began to impact year-end performance in the financial markets: 10-year treasury yields saw their biggest calendar-year increase since 2009 as the government bond market experienced its largest annual loss in five years. In the Philadelphia Metropolitan Area, the unemployment rate reached its lowest level since April 2009, sitting at 7.6 percent, in October. Next year, continued economic growth and the impact of rising interest rates will be important determinants of 2014 economic performance. Conditions Following strong volumes of positive net absorption in 2011 and 2012— counteracting the impact of recession-driven contractions with 893,000 square feet of positive net absorption collectively, pockets of rightsizing spurred a transitional year in the Philadelphia CBD in 2013, characterized notably by more than 460,000 square feet of negative net absorption in Market Street West. However, continued strength in University City and The Navy Yard paired with stabilizing market conditions in Market Street East spurred 117,000 square feet of positive net absorption for the CBD-at-large. The Philadelphia Suburbs ended 2013 in a positive direction for the third consecutive year as nine of the fourteen suburban submarkets ended the year with positive 574,606 square feet of net absorption, a 22.2 percent increase over 2012. Leasing activity slowed for the second consecutive quarter, evidenced by leasing volume declines in excess of 56.0 percent relative to the first quarter. This can be attributed to the diminishing demand of large tenants, over 100,000 square feet, currently touring the suburbs. As large deal flow has dwindled over 2013, the market was again supported by mid-sized deals, taking blocks of vacancy as small deals fill space in between. Atypical from past years, relocations trended this year as almost 10.0 percent of the transactions completed in 2013 were relocations, typically within the same submarket as the tenant’s previous locations. Outlook In the CBD, strengthened, diversified leasing activity in 2013 paired with consistent signs of net new demand and improving local employment dynamics should lead to normalized conditions in 2014, positioning the market for broadbased tightening: Top-tier, Class A and Trophy product across the CBD will continue to outperform the market-at-large as supply constraints facilitate landlord leverage. With new construction limited to build-to-suits in the suburbs, building renovations will continue to fill a growing need for Class A product, expanding into secondary submarkets with Class B vacancies in excess of 20.0 percent. Given market conditions, Center City and Trophy suburban markets Radnor and - Geoff Wright Conshohocken should see ground- - Sean Coghlan Senior Research Analyst, Senior Research Analyst, up office construction with potential Philadelphia Philadelphia suburban groundbreakings in 2014.


Phoenix

Pittsburgh

Economy 2013 was marred by skepticism as political upheaval from Washington and economic risks from abroad threatened to derail an already slow recovery. The year ended on a very positive note with just under 1.0 million square feet of total positive net absorption. Unfortunately, this total still falls almost 500,000 square feet short of last year’s year-end results. Despite the government shutdown in October, Phoenix reported a steady 2.3 percent job growth since last year, adding 36,000 jobs. Education and health services as well as trade, transportation, and utilities contributed the most, together adding 18,000 jobs. Professional and business services and financial activities, the two sectors most closely tied to office-using employment, also recorded strong gains adding 7,000 and 6,000 jobs, respectively. The unemployment rate has fallen back under 7.0 percent to settle at 6.8 percent after hovering around 7.2 percent throughout most of the year. Conditions 2013 is the first year to record four consecutive quarters of positive net absorption since before the recession in 2006. Although absorption gains fell short of 2012 totals, this consistent demand, despite political brinkmanship in Washington, is fueling a steady recovery. The fourth quarter saw similar absorption gains as compared to last quarter filling 379,550 square feet of previously vacant office space across the Valley. Total vacancy fell another 50 basis points to 23.8 percent. New development remains at historically low levels with only 281,799 square feet being delivered this year. Current projects are limited to two BTS projects for General Motors and GoDaddy in the Southeast Valley, SkySong in South Scottsdale, and building four of Allred Park Place in Chandler. Developers are beginning to commit to Phoenix’s recovery as several new proposed office buildings are expected to break ground in early 2014. As expected the three hottest trending submarkets, the Camelback Corridor, Tempe, and Deer Valley, ended the year far ahead of any of their neighbors. These three submarkets were the only three to record over 100,000 square feet of positive net absorption each, with Camelback Corridor absorbing 401,696 square feet this year. Outlook With much of the government uncertainty behind us, 2014 is setting itself up for stronger growth and employment gains, especially among the office-using sectors. Washington has agreed in December on next year’s budget eliminating any risk of another government shutdown and the Federal Reserve has detailed its path for rolling back quantitative easing, effectively removing the speculation for when the financial support was to end. Although Phoenix is still several quarters away from regaining all of the jobs lost in the recession, the Valley is expected to start gaining traction through 2014.

- Matt Kolano Research Analyst, Phoenix

Economy As of November, total nonfarm employment in Pittsburgh sits at 1,191,400, its highest level in the last two decades. Over just the last year, the region has added 17,400 jobs, a 148-basis-point increase. Meanwhile, the unemployment rate decreased to 6.1 percent, down 60 basis points yearover-year. The office-using employment sectors continue their streak of strong performance, posting cumulative net gains for 45 consecutive months. These gains have been mostly driven by the financial activates and professional and business services sectors. Given the strong employment performance of the region, increased office demand is expected in the first half of 2014. Conditions Pittsburgh has received significant investor interest over the last two years, the result of the region’s high occupancy rate and landlord-favorable conditions. That trend continued in the fourth quarter as Rugby Realty purchased the 34-story Koppers Tower, paying $17.2 million ($48 per square foot) for one of downtown Pittsburgh’s most distinctive properties. With the acquisition, Rugby now owns three of the most iconic buildings on Grant Street; Koppers, the Frick Building and Gulf Tower. The new owner takes over a 360,000-square-foot property with a vacancy rate of approximately 40.0 percent. Rugby plans to make improvements to the space to boost the occupancy, including completely rehabilitating floors 24, 25 and 27, all of which are empty. Rugby also has plans to install a new fitness center, renovate a ninth-floor conference room and fill the street-level retail space with a grocery store. Construction activity also remains heightened throughout the region with approximately 1.5 million square feet under construction. Soon to be joining the mix of construction projects is The Gardens at Market Square. Western Pennsylvania real estate developer Millcraft Investments finalized and closed on project financing for The Gardens. With financing complete, the developer can begin new construction on the $104.0 million mixed-use development in the heart of downtown. The Gardens will consist of 128,000 square feet of Class A office space, a 198-room Hilton Garden Inn, a 330-car parking garage and 14,000 square feet of retail and restaurant space. Construction crews will begin mobilizing immediately with substantial completion in the fall of 2015. Outlook Touring activity and leasing volumes are expected to hold steady into 2014 as a number of tenants are currently active in the market. For those tenants evaluating space options, large blocks remain limited both downtown and in the suburbs. While this will weigh on large users, smaller tenants will have more space options. With landlords firmly in control at the negotiating table, we expect rents to tick up slightly through the end of the year and concessions to remain at historic lows.



Portland

Raleigh-Durham

Economy Portland’s economy continues to show improvement as the metro area unemployment rate reached a new fiveyear low of 6.9 percent in October. The year-over-year private employment gain for the Portland area was 14,300 jobs, representing a 1.6 percent growth rate, about on par with the national average. Office employment drivers have been largely positive for most of the past 35 months, while government employment losses continue to be a drain on the local economy. In particular, professional and business services sector, which includes many high-tech jobs, contributed 4,200 jobs, a growth rate of 3.0 percent. Conditions Portland’s office market vacancy ended the year at 11.1 percent, the lowest overall vacancy in the U.S., tied with the San Francisco and New York markets and Portland’s lowest overall vacancy since 2007. While net absorption for the fourth quarter was modest at 95,223 square feet, demand for the year was solid totaling 989,864 square feet. Westside suburban demand, driven by activity related to Intel and Nike, has returned with strength, registering 735,000 square feet and accounting for almost 75 percent of metro area yearly net absorption. Overall vacancy in the Westside suburbs ended 2013 at 13.3 percent, down 400 basis points from year-ago levels. After riding out the recession relatively unscathed thanks to federal stimulus dollars that put significant federal GSA tenants into the competitive marketplace, Portland’s CBD is now feeling its effects. Over the past few quarters, as federal agencies re-occupy the newly renovated Edith Green/Wendell Wyatt Federal Building, the CBD is registering Class A absorption losses, which have pushed vacancy up 80 basis points to 8.5 percent. Although these moves have nudged Class A vacancy up, they were expected and have brought about a rare opportunity for large tenants seeking to establish a foothold in some of Portland’s premier downtown properties. Overall CBD demand remained in the black for 2013, totaling 35,000 square feet, thanks in large part to demand for Class B creative space from software and high-tech firms who continue to show an interest in establishing a foothold in Portland. Year-end vacancy for the CBD as a whole settled at 9.2 percent, just 10 basis points higher than year-ago levels. Outlook The growing economy and increased interest from real estate investors will continue to tighten Portland’s office market in the coming year. Competition for assets will inevitably drive prices up both within the leasing and investment spaces, particularly within the central city. Leasing activity from creative office tenants will also increase driving area building owners to find innovative ways to meet this demand; whether through adaptive reuse of existing sites, or through investment and repositioning of existing buildings. Either way, the cost of office space, especially in our central city, is going to escalate in the coming year.

- Patricia Raicht Vice President, Research, Portland

Economy For October, unemployment rate in Raleigh-Cary declined by 10 basis points from September and was recorded at 6.0 percent. Compared to a year ago, the rate has fallen from 7.3 percent, signifying strong job growth in the MSA. For the overall state, unemployment rate was at 7.4 percent in November, it dropped by 60 basis points compared to the previous month. In Durham-Chapel Hill the unemployment rate remained stable at 5.7 percent. Future increases in hightech employment and education-health services are expected to help the triangle grow further in 2014. Conditions Raleigh-Durham’s office market continues to move toward a strong path of recovery as the year ended. With seven quarters of consecutive absorption, vacancy rates have declined, which has even spurred some new construction in the market. Raleigh-Durham’s vacancy rate declined further this quarter to 12.5 percent. In addition to the recent drop in vacant space, sublease space remains less than 1.0 percent of the entire inventory. There continues to be a strong demand for Class A space in CBD. Tenants seeking new Class A spaces will have to wait for new supply to be added to the market in the coming years. Companies gaining traction in the area are the ever-present medical users, hightech start-ups and digital marketing consulting. Meanwhile, traditional 1990s office tenants like law firms, accounting firms, banks, etc. are rightsizing their mature footprints for efficiency measure. Going forward we expect, the scarcity of quality large quality blocks will help urbanized Class A product continue to lead the recovery with continued rent increases and concession compression. While tightening in this market segment has led to new construction in some submarkets, this will eventually create more options for tenants. Leverage will remain with landlords for the next 18 to 24 months, at a minimum, as the new product is delivered to the market. Outlook Education and technology will continue to be a main driver of growth in this market. Companies are willing to expand or set up new operations in the region as they have a strong well-educated labor pool to select from. Overall, as the local economy strengthens, the triangle region will transform to become a premier location to live and work, local and new users will fuel demand and transition the area to a landlord-favorable market. The forecast for 2014 remains one of continual growth as new tenants enter the market and existing tenants expand their footprint.

- Mehtab Randhawa Research Analyst, Carolinas


Richmond

Sacramento

Economy Richmond’s financial services sector led employment gains into the fourth quarter, surpassing other office-using employment with a 3.4 percent growth rate over the trailing12 months and boosting its payroll base above the prerecession peak. Despite a recent impressive recovery, rising interest rates and financial reform may not sustain these gains, particularly in Richmond’s large mortgageorigination and servicing divisions. Additionally, job cuts from Capital One, Bank of America, SunTrust, and Genworth Financial may not be reflected in these preliminary employment numbers. Aside from these losses, Richmond’s overall unemployment rate fell to 5.8 percent in the fourth quarter, but remained well above the prerecession rate of 3.1 percent (2007). Conditions While renewals and space reductions still characterized leasing activity in the Richmond market, growing footprints have slowly tightened fundamentals. Most notable contractions were in the Northwest Quadrant and the CBD where expansions and new leasing activity returned. Users with growing footprints sought out prebuilt out space to lower occupancy costs, capitalizing on recent or pending downsizes. Outlaying areas, such as the Southwest Quadrant, continued to suffer from relocations and decelerating tour activity, maintaining tenant leverage in submarkets such as the Midlothian Corridor. Downtown fundamentals have tightened, but McGuireWood’s pending relocation to Gateway Plaza in 2015 placed over 244,000 square feet of shadow space on the market. Consolidations from several other large firms in the CBD were pending, but will not come to market in the next 18 to 36 months-providing ample time to prelease this surplus space before vacated. Outlook An improving economy will pave the way for new leasing and expansions in the Richmond market. Incubator-leased space in the past two years have blossomed, absorbing small suites that have flooded the market due to downsizes. Users larger than 15,000 square feet will find relocation options dwindling, increasing renewal activity over the next 12 to 24 months and reducing tenant leverage for this requirement segment. Overall fundamentals will tighten; however, tenant leverage will remain strong in the southwest quadrant due to large blocks of space coming online next quarter. Repurposing of Class C towers Downtown will help improve Class B fundamentals, which suffered from flight-to-quality sprees after the recession. Requirements from the financial service and law firms will drive Class A demand in the CBD.

- Geoff Thomas Research Analyst, Richmond

Economy With total unemployment down by 170 basis points year-over-year in November, and the unemployment rate at 8.1 percent, the local economy continued to stabilize. The four-county region added 7,800 jobs to nonfarm payrolls over a 12-month period with the strongest jobs gains in the leisure & hospitality, trade, transportation, & utilities, and educational & health services sector. Furthermore, the strong recovery of the housing market has contributed to the positive momentum seen in the Sacramento economy. Conditions Ending the year with yet another positive quarter as well as the sixth consecutive quarter of positive growth brought year-to-date net absorption to over 1.6 million square feet with a total market vacancy rate of 19.4 percent. The suburban submarkets forged ahead adding an additional ±129,900 square feet to total occupancy during the fourth quarter. Total market direct vacancy declined to 18.8 percent with the help of insurance, state and local government, and healthcare companies contributing to overall growth. Although the suburban submarkets were most active with vacancy rate down to 19.0 percent overall, the CBD did experience positive demand in the Class A space, helping push vacancy rates down to 17.8 percent. Overall rental rates remained unchanged in the fourth quarter, and are still seen as a bargain compared to neighboring coastal Bay Area markets. The suburban Class A space saw asking rental rates increase by 2.7 percent while downtown Class A office rents remained relatively unchanged. Historically, downtown rental rate velocity lags behind suburban submarkets by 9-12 months, meaning we can expect to see rates for downtown space turn the corner in 2014. That said, certain landlords within the CBD are already starting to tighten on concession and free rent offerings for spaces that are considered more desirable and can offer larger contiguous block configurations. Meanwhile, suburban rental rate increases have been concentrated in South Placer and South Natomas; submarkets that have received the lion’s share of leasing activity and positive occupancy gains over the past 12 months Outlook With 124 contiguous blocks of space 15,000 square feet and larger, tallying 6.2 million square feet, small to mid-sized tenants will benefit as they look to grow and expand their business. Furthermore, large blocks in the Class A downtown market will continue to dwindle as tenants attempt to lease space with current rental rates. Scarcity of large block availabilities will yield higher contract rents compared to smaller commodity space that is in greater supply. As the local economy continues to improve with the support of a healthy housing market, Sacramento market should continue to experience positive growth moving into 2014.

- Elliot Williams Senior Research Analyst, Sacramento


San Antonio

San Diego

Economy Unemployment in San Antonio was just 5.8 percent in October, lower than the statewide value of 6.0 percent and over one percentage point lower than the national unemployment rate, which was 7.0 percent. For the month of October, the San Antonio metro had the sixth-lowest unemployment rate among large metro areas in the United States. For the 12 months ending in October, San Antonio added 1.0 percent new jobs, putting the area 38th among the 50 largest metro areas. Conditions The office market in San Antonio is set up for a strong start to the new year. Marketwide, year-end net absorption totaled 219,640 square feet—a significant difference year-over-year, where in 2012 annual net absorption for the San Antonio metro was negative. Leasing activity for the year came in at nearly 1.5 million square feet, representing 5.9 percent of Class A and B office inventory. From 2012, total leasing activity has increased 22.1 percent. Citywide average asking rental rates have jumped to $21.77 per square foot, increasing 8.9 percent year-over-year. Construction of several sizeable Class A and B projects completed this year, bringing around 400,000 square feet of space to the market. However, the delivery of these projects was not offset by absorption, pushing marketwide vacancy up to 17.0 percent, half of a percentage point higher than this time last year. Outlook Though vacancy rates this year have increased, this can be attributed to the delivery of new construction to the market, as the San Antonio market yielded positive absorption for the year. Rental rates continue to increase and leasing activity remains strong, indicating that 2014 will be another strong year for the metro. Relatively high leasing activity at newly delivered office projects and growing rental rates could fuel developers to begin construction at other proposed sites. Market confidence is high as the city continues to receive accolades for its business-friendly environment, ample workforce, low costs and high quality of living.

- Meredith Sheeder Research Analyst, Austin

Economy The San Diego economy is faring well moving into 2014. The unemployment rate remained at 7.0 percent in October, following a decrease from 7.5 percent in August; this compares with an unemployment rate of 8.7 percent for the state and 7.0 percent for the U.S. during the same period. Leisure and hospitality posted the greatest 12-month gain, adding 7,000 jobs. More traditional office-using industries such as professional and business services (PBS) was one of seven sectors that also saw employment gains; PBS added a total of 1,900 jobs since last year. With a new mayor to be elected early in 2014 and uncertainties with the federal budget, some San Diego businesses are waiting to see how the business climate unfolds in the city. Conditions San Diego’s office market fundamentals remained relatively flat over the past quarter. Vacancy rates experienced an incremental dip this quarter to 13.8 percent on a direct basis while overall vacancy was 14.6 percent. Rents countywide are hovering around $2.17 per square foot full service gross per month, with marginal increases seen in Class A and B projects year-to-date. While leasing activity was down countywide, the Downtown submarket experienced a surge of activity late in the year. Downtown had a disproportionately larger share of total leasing activity countywide at 21 percent compared to 15 percent of the county’s total rentable building area. Due in large part to the 300,000 square foot Sempra deal last quarter and a number of large tenants extending their lease in the CBD including Arrowhead Insurance, ESET, and Littler Mendelson. Downtown also had the County’s largest direct net absorption this quarter at 119,579 square feet. Submarkets like UTC and Mission Valley continue to outperform the rest of the market, with UTC seeing the County’s lowest direct vacancy rate at 6.6 percent. In fact, in both submarkets the direct vacancy rate has consistently decreased over the past 14 quarters from a high of 25.8 percent in UTC and 18.8 percent in Mission Valley in the second quarter of 2010. These vacancy decreases have in turn pushed asking rents, especially for Class A space. Outlook Limited construction and continued employment growth, coupled with the incremental dip in vacancy and the slight increase in rental rates, indicates measured office market tightening heading in to 2014. In spite of political and economic uncertainties, the San Diego office market continues on its road to recovery. Leasing activity is expected to increase over the next year due in part to the growing demand of tenants in the technology industry and projected employment growth in other traditional office-using industries, such as - Eileen Turnalad Senior Research Analyst, professional and business services. San Diego



San Francisco Economy The local economy continued to expand and outperform other core markets around the nation, benefitting greatly from the robust technology sector and talented workforce it has attracted. San Francisco County added 10,200 jobs year-over-year at an annual growth rate of 2.3 percent, while unemployment fell to 5.2 percent, 180 basis points lower than the national average of 7.0 percent. Since 2008, the San Francisco economy has recovered 64,477 jobs, surpassing the 2008 peak by 23,920 jobs. Conditions The fourth quarter proved to be one of the strongest and most active quarters of 2013, as leasing activity increased and investment sales resulted in over 2.6 million square feet of transactions totaling approximately $1.3 billion, or $488 per square foot. Leasing activity increased by 20.0 percent compared to the first half of the year, while total net absorption posted the greatest single-quarter gain in five quarters, resulting in nearly 1.4 million square feet by year-end. Solid leasing figures for the quarter can be attributed to a rush of deals in excess of 100,000 square feet that closed in the final days of the year. Google renewed and expanded its presence at Hills Plaza at 345 Spear Street for 386,000 square feet, while DemandForce leased the entirety of 22 Fourth Street for more than 200,000 square feet. Although a year-end rush is typical, activity in the final weeks of 2013 was especially lively. Several tenants with forthcoming expansion plans have also begun to proactively lease space in anticipation of future growth, at times subleasing the excess. Neustar subleased 36,000 square feet of its original 145,000-square-foot lease at 505 Howard Street, while Yelp.com left two full floors, out of the total 150,000 square feet it leased at 140 New Montgomery Street, for future expansion. Of the 1.8 million square feet of office space that Salesforce has leased, more than 340,000 square feet of it remains vacant for future growth. Similarly, Airbnb has 90,000 square feet of future expansion space at 888 Brannan Street. Although leasing figures for the second half of the year were up significantly, leasing activity has been somewhat inflated as not all of this growth represents added jobs or true expansion in the near term. Outlook As tenants continue to lease significant amounts of space, especially tenants that have committed to expansionary leases or those that have relocated from other markets, the local economy will further improve along with office market fundamentals continuing to tighten. Sustained growth will be dependent upon the future performance of the tech sector as well as the steady advancement of improving sectors such as the legal and financial services industries. - Julia Georgules Research Manager, San Francisco

Economy Local economic conditions in the MidPeninsula continue to benefit from the technology sector’s exponential growth. Unemployment slid for the fifth month in a row, decreasing from 5.2 percent in October to 5.0 percent in November. While tech-related jobs have been a significant part of the recovery, the demand for residential housing has also promoted job growth in the construction industry. Meanwhile, city officials have become very active in the rejuvenation of downtown micro-urban areas, like Downtown Redwood City, where developers and officials are hoping to attract more workers to the area to stimulate local retail. Conditions Tenant demand for space continues to be focused on submarkets with access to the 84 or 92 freeways and in micro-urban downtown centers serviced by Caltrain. The South County and the 92 corridor continued to experience the most leasing activity. YouTube signed a lease for 94,465 square feet in San Bruno in one of the largest deals of the quarter at 1000 Cherry, while CardioDX will relocate from Palo Alto to Redwood City, leasing 69,449 square feet on Saginaw Drive in Redwood City. However, despite these and other sizeable transactions, a fair amount of available space was added to the market. While most of the vacancies were due to tenants consolidating space, the migration trend to San Francisco has been ongoing. Epocrates will vacate nearly 120,000 square feet in San Mateo once they right-size into 50,000 square feet in San Francisco’s SoMa submarket. Although their departure will add to vacancy levels, current tenant activity suggests that most of the space will likely get backfilled given its prime location. With leasing activity holding steady, investors are beginning to warm up to the Mid-Peninsula. The market has seen a significant uptick in sales activity as buyers have been targeting fully leased assets with secured, long-term, credit tenants. Although much of the sales activity has been in prime submarkets like San Mateo, the increase in sales volume is a welcome change for the MidPeninsula as most buyers had been more focused on Silicon Valley and San Francisco assets. Outlook Although there were several tenants to vacate large blocks of space during the fourth quarter, current touring activity suggests that deal velocity will continue its steady positive trend. Redwood City’s new development project on Middlefield Road demonstrates that developers have enough confidence in the market to break ground on speculative construction, but will be limited to submarkets high in demand. Though net absorption will continue to mount through 2014, the Mid-Peninsula will continue to face competition in bringing new firms to the area from neighboring markets. - Christan Basconcillo Senior Research Analyst, San Francisco Peninsula


Seattle-Bellevue

Silicon Valley

Economy Office employment drivers have been largely positive for the past 36 months in the Puget Sound area. Year-over-year job growth has been 2.6 percent, substantially higher than the 1.7 percent nationwide. Metro area job growth is expected to remain at an impressive rate of 2.3 percent in 2014. Current figures show that unemployment in November 2013 stood at 7.0 percent statewide and 5.6 percent in the Seattle-Bellevue-Everett area. Over the past 12 months, a total of 38,400 jobs have been added in Washington, mostly in the trade, transportation and utilities, government, leisure and hospitality, and professional and business services (this sector includes many jobs related to high-tech). Conditions Puget Sound remained a top-10 market nationally for institutional grade investments. PWC’s recently released Emerging Trends in Real Estate ranked Seattle as the fourth best market in terms of investment potential in 2014 and the sixth best overall real estate market, up from seventh in its previous report. Twelve major transactions occurred during the fourth quarter with a sales volume of greater than $626 million. While the past quarter lacked that one jaw-dropping deal that had marked many of the previous quarters, it was notable in the variety of properties that traded. Ten of the assets that were sold were not located in the CBDs, which illustrates investors’ increased interest in suburban and noncore product. Net absorption of office space for the fourth quarter came in at 313,071 square feet, bringing total net absorption for the year to 2,585,636 square feet. This is the 4th highest net absorption of all office markets in the U.S. tracked by Jones Lang LaSalle (behind Houston, New York City, and Dallas). Metro area office vacancy dropped to 12.5 percent, down 220 basis points from year-ago levels with Bellevue CBD dipping to 6.8 percent and Seattle CBD vacancy down to 11.9 percent as this submarket approaches the tipping point for dramatic rental rate growth. Downtown Seattle Class A average asking rates grew by 9.8 percent in the last year to $34.56 per square foot, while marketwide asking rates grew by 6.5 percent year-over-year to end 2013 at $30.40 per square foot. Strong demand has led to a surge in construction activity with 1.3 million square feet of office under construction, almost all of it in Downtown Seattle. Low vacancy and strong tenant demand is also driving significant pre-development activity in Bellevue CBD. Outlook The market continues to make incremental gains with the return of more sustainable organic tenant growth, which bodes well for overall office market fundamentals. Market wide average asking rents are inching up and larger increases continue to be observed in well-leased buildings and the tightest submarkets. There are more than 180 firms actively seeking space in the Seattle and Bellevue markets representing as much as 5.4 million square feet of potential activity, including - Patricia Raicht over 1.5 million square feet on the Eastside. Vice President, Research, Portland

Economy Tech’s robust expansion has led to an inflow of talent to the Bay Area, helping to push unemployment down to pre2007 recession levels. Silicon Valley’s unemployment rate was 6.3 percent in November and sat well below California’s rate of 8.5 percent. Additionally, the tech industry has boosted constructionrelated employment over the past 12 months thanks to the demand for commercial office and residential development. The Valley’s economic climate will continue to improve as the strength of the technology industry is expected to retain its momentum into 2014. Conditions Demand for office space in Silicon Valley has yet to slow as deal velocity continued at a rapid pace. Although there were fewer tenants leasing space larger than 200,000 square feet, there were still plenty of 100,000-square-foot firms in the market including Google who preleased 165,000 square feet of a proposed development adjacent to their campus in Mountain View. The Valley’s prime submarkets, Palo Alto, Mountain View, and Sunnyvale all continue to experience tight market conditions with vacancy levels well within the single-digit arena and landlords remaining staunch on bolstering asking rents.. However, tenants are finally beginning to warm up to tertiary markets like North San Jose as there is still plenty of quality space on the market that provides better lease economics when compared to similar product in prime submarkets. Activity has also begun to flow into Downtown San Jose, as the signing of Apigee’s new 41,151-square-foot office space at 10 Almaden could be the beginning of more tech tenants migrating to the Valley’s true downtown submarket. Investment activity in the Valley has picked up its pace as current leasing trends have helped to tighten market fundamentals. Although sales volume has yet to reach peak-2007 levels, investors are continuing to target prime real estate. Cap rate compression has remained significant; however, net leased transactions with 10 years of lease term occupied by a credit-worthy tenant command up to a 50-basis-point premium over comparable stabilized assets. Outlook The continued growth of the technology sector will continue to promote leasing activity in Silicon Valley into 2014 as there are still several sizeable tech tenants looking to secure more than 80,000 square feet. Development activity will continue at its current pace, but could ease in the latter half of 2014 as there remains approximately 1.5 million square feet of newly constructed space in Santa Clara that has yet to lease. Secondary markets, like North San Jose, will likely see more leasing activity as quality space in prime markets become more expensive. All-in-all, Silicon Valley is well-positioned to continue its bullish run in 2014.

- Christan Basconcillo Senior Research Analyst, San Francisco Peninsula


Tampa

St. Louis Economy Unemployment in St. Louis fell 20 basis points to 6.5 percent in October, the lowest level since 2008. The drop in the unemployment rate is attributed to a shrinking labor force, which tightened to its lowest level since the end of 1999. After gaining 6,000 jobs from the prior year, nonfarm payrolls had year-over-year gains in 13 consecutive months. Eight of the 10 super sectors had annualized gains, while government employment was again the loss leader, shedding 4,000 jobs from October 2012. For the fifth consecutive month, financial actives and professional and business services showed year-over-year gains in employment. Post Foods, AmDocs, Barry-Wehmiller and Monsanto are just a few of the St. Louis companies that have deployed capital in recent months through acquisitions. While the acquisitions may not immediately add to the local workforce it is positive that these companies are investing on growth. Conditions The office market continued to rally with the vacancy rate falling 80 basis points year-over-year to 17.1 percent, the lowest level since the end of 2010. Expansions exceed contractions and net absorption for the year was the most since 2008. West County had a strong finish to the year as vacancy fell 250 basis points from the end of 2012 to 14.4 percent. Pockets of West County are becoming particularly tight, along the I-64 corridor several Class A buildings are more than 90 percent occupied. After bottoming out in 2008, leasing activity increased for the fourth consecutive year. While previous quarters had a lot of tenant expansions, this quarter had a lot renewals and relocations that will not increase occupied space. Sales activity ascended in the fourth quarter with several investor transactions taking place. Duke Realty’s sale of six office buildings to Tryperion was the highlight of the quarter. The acquisition is Tryperion’s first in St. Louis and is a mix of single and multitenant office buildings. Other notable transactions were single tenant assets included in multimarket portfolio sales. Outlook Look for Northwest County to have a strong start in 2014. Large leases by Equifax and Charter are set to commence next quarter; both tenants will be occupying vacant buildings. Financial and Business Services will lead the way in transactions over the next 18 months, the two industries represent 42.1 percent of the active tenants in the market. While the I-64 corridor in West County is very tight right now, RGA will be vacating 200,000 square feet in Timberlake II & III at the beginning of 2015, moving into its new corporate headquarters that is currently under construction.

- Blaise Tomazic Senior Research Analyst, St. Louis

Economy Tampa Bay was recently announced as one of the fastest-growing metros in the entire county. Finishing 16th out of the 363 metro areas evaluated, the Bay Area grew at 3.2 percent in terms of real gross metropolitan product (RGMP). For a comparison, in 2011, the RGMP growth rate was only 1.5 percent. Conditions A great sign of an ever-tightening real estate market can be seen by the amount of land that was bought over the past three months. Behnke Ranch, a 536-acre plot of land 20 miles north of downtown Tampa known as “one of the most exciting large tracts of land…in the Southeast” was sold to the international real estate firm known as Hines. 300,000 square feet of retail space is projected to be built in addition to 550,000 square feet of office and light industrial space. USAA acquired 37 acres in Brandon, east of downtown Tampa, to build a new 420,000-square-foot office building. Gold Crown Management, an investment group who has ties to the Tampa Bay Lightning owner Jeff Vinik, purchased three acres of land in downtown Tampa near the current location of the Tampa Bay Times Forum. The future use of the land has not been announced. Evaluating the market on a pure statistical approach also shows that the Bay Area is a rising market. Looking at total net absorption, the four-quarter rolling total has been positive for three consecutive years now, which matches the longest streak since 2000, which occurred during the third quarter of 2004 to the second quarter of 2007. Other signs of confidence in the current market conditions can be seen in the appreciation of rents. Rents have appreciated 2.5 percent over the past 12 months, which is the equivalent of $0.53 per square foot, nominally. To put that into perspective, the financial effect of a $0.53 per square foot rise in rents on a market the size of Tampa is over $18M annually to landlord’s pockets. Outlook As we exit 2013 and move into 2014, the outlook for landlords appears optimistic. All signs point not only to a recovering real estate market, but a very strong business climate as well. New deals are beginning to become the norm, not the exception, which could not have been said two to three years ago. Furthermore, more companies are beginning to hire additional employees. As this happens, firms will need to expand their real estate footprint and take on additional space. As expansion occurs, vacancy will continue to decline. Looking at historical vacancy rates, only one submarket, the Tampa CBD, is below its 10-year historical average, but areas like the I-75/I-4 Corridor and Westshore are likely to dip below their historic averages in 2014.

- Ryan Vaught Research Analyst, Central Florida


Westchester County

Washington, DC Economy Although the beginning of the fourth quarter was marred by a 16-day government shutdown and intense political wrangling over the implementation of the Affordable Care Act, sequestration and other policy issues, lawmakers pivoted and appeared more willing to compromise as the year headed to a close. A budget deal that rolls back approximately half of all sequestration cuts in 2014, and softens additional spending cuts in 2015, passed both houses of Congress and was signed into law at the end of the fourth quarter. The deal will break a series of Continuing Resolutions and result in the first official U.S. Federal Budget since early 2009. Since federal spending accounts for approximately 40.0 percent of Metro DC’s gross regional product, political compromise on the budget has the potential to reinvigorate the local economy. Leasing activity has languished since the 2011 midterm elections, when the concept of across-the-board spending cuts was introduced as part of the Budget Control Act. Under the new budget deal, sequestration cuts will be reduced by $63.0 billion and agencies will have increased spending authority – a potential catalyst to regional office demand. Conditions Most lease transactions signed during the fourth quarter continued to emphasize cost-containment and efficiency; however, broad market fundamentals suggested that the rightsizing trend may have hit a tipping point. Sublease space in the Metro DC region fell to a 13-year low of 3.7 million square feet during the fourth quarter, and the availability of new, efficient space continued to decline due to limited speculative construction activity. Meanwhile, growth of small and midsize tenants helped drive modest occupancy gains throughout Washington, DC, Northern Virginia and Suburban Maryland during the fourth quarter. While most tenants still found ways to improve space efficiency as part of new leases, the ability of tenants to continue this trend in the future will be limited by a skewing of available inventory from new, modern buildings to older, less efficient product. Outlook The pullback in new construction will have a meaningful impact on the Metro DC office market over the next 36 months. Although a few submarkets in the region – particularly NoMa in Washington, DC – still have ample new space options available, most vacancy across the region is becoming concentrated in Commodity Class A and Class B assets – buildings that are not particularly appealing to today’s efficiency-minded tenants. The result of this trend is that large tenants with pending lease expirations must start their search process early to preserve the option of anchoring a new development or risk being confined to less-desirable second-generation space. That confining supply-demand dynamic is likely to signal a peak in concession packages and a gradual shift in negotiating leverage from tenants’ favor to more balanced conditions.

- Scott Homa Vice President, Research, Washington, DC

Economy Westchester County remains held back by a lackluster economy and labor market. While the local economy has added jobs, the subdued rate of growth, coupled with job growth isolated to a few particular industries such as healthcare and hightech, is holding back widespread momentum. The unemployment rate has fallen, to 6.5 percent in October, but a portion of this improvement was a result of job seekers pulling out of the labor force. Overall nonfarm payrolls grew 1.4 percent year-over-year, equating to 5,800 jobs added during 2013. This marked an improvement compared with just 4,300 jobs gained in 2012. Yet, office-using employment has grown only minimally, increasing by just 0.4 percent in the last year. Office-using sector hiring was a fraction of what it was in 2012. Hiring that is present is largely limited to the White Plains area and in the health services arena. Likewise, health services and high-tech sectors showed year-over-year job growth. Growth in these sectors, however, while a boon for the region, is not enough to sustain or promote a full office market rebound. Conditions Without a significant platform for growth, the Westchester County office market remains in a holding pattern. Recovery has not managed significant momentum out of the recession, hindered by lack of employment growth and simultaneous efforts by businesses to be more space efficient. The vacancy rate was up to 20.2 percent at the end of 2013 from 18.5 percent one year earlier. While overall asking rents were flat year-over-year, there was some uptick in the fourth quarter compared with the third quarter. In contrast with much of this year, the White Plains CBD/Railroad finally exhibited traction in the last three months of 2013. Year-to-date total net absorption was negative, but more than 50,000 square feet of direct space was absorbed in the fourth quarter alone. One of the previously most challenged assets in the submarket, 44 South Broadway, has recorded a flurry of activity in the second half of this year which has taken some large blocks off the market. Additionally, legal service activity – long a boon to this area – started showing some rebound, and accounted for the largest lease this quarter. Outlook A positive outlook for Westchester County continues to hinge on job recovery and industry diversification – a common thread among many secondary markets. Initial seeds are planted with local efforts to develop Westchester as a life-science hub, for example, but real growth can come only after the formation of much stronger incentive programs and a more business-friendly environment. Development projects on the horizon should help to focus efforts and gear the local economy for further growth, but likely at the expense of other industries.

- Erin Patterson Research Manager, Fairfield County


West Palm Beach Economy Although still above Florida’s unemployment rate, Palm Beach County’s unemployment rate remained below the national average in November to 6.4 percent – a 30-basis-point decrease from October and well below the 8.1 percent rate from a year ago. Office employment, though, has remained relatively stagnant since this time last year, with professional services being the exception. Professional service sector payrolls have expanded 2.4 percent year-over-year, compared to a paltry 0.3 percent in financial services employment and slightly negative job growth in the information sector. Conditions The Palm Beach office market closed out 2013 on a strong note, absorbing 93,900 in the fourth quarter, which accounted for 66.6 percent of all absorption gains for the year. As a result, total vacancy throughout the County fell to 21.7 percent, 70 basis points below last quarter and 100 basis points below last year; however, asking rents have remained unchanged in that time on a countywide level and have been declining in certain areas. For example, Core CBD properties closed the year out with a full service asking rate of $33.35 per square foot, a 1.5 percent decrease from last year and well below peak levels experienced in 2008. Class A properties downtown, which once commanded rents well above $40.00 per square foot, have seen a more drastic decline, falling to $36.81 per square foot. Suburban asking rents have remained more stable and are in line with their three-year average. The declining rents in the CBD have led to more activity among suburban tenants downtown over the course of the year, but lease executions are still below historic levels. The big news downtown came from tenants shifting within the CBD. Ackerman relocated to Phillips Pointe from Esperante Corporate Center, but the vacated space was quickly backfill, with Cole, Scott & Kissane leasing 50,000 square feet. They will be relocating from the Sabadell United Bank building along Palm Beach Lakes. Outlook The slow tightening should continue for Palm Beach County, as there are reportedly more new tenants circling the market and executing leases, which will result in true absorption gains. The increased interest from new and existing tenants in the CBD should benefit the overall office market but question marks still remain for Boca Raton. However, until material gains are realized in office sector employment, leasing activity and absorption will continued to be at muted levels, leaving asking rents to remain in place or increase only slightly in the majority of submarkets. Despite the increased interest in the Core CBD, the rental rate premium will likely keep smaller tenants in the suburbs or Outer CBD.

- Marc Miller Senior Research Analyst, Fort Lauderdale


Appendix


United States employment statistics Total nonfarm jobs 12-month net change (000's)

Total nonfarm jobs 12-month percent change

Office jobs* 12-month net change (000's)

Office jobs* 12-month percent change

Unemployment (October 2013)

Unemployment (October 2012)

12-month unemployment change (bp)

Atlanta

58.8

2.5%

18.7

Austin

22.4

2.7%

11.5

2.8%

7.7%

8.5%

-80

5.9%

5.1%

5.3%

-20

Baltimore

25.0

1.9%

Boston

52.1

2.1%

9.4

3.1%

6.9%

6.9%

0

16.7

2.5%

6.3%

5.8%

50

Charlotte

19.9

2.3%

Chicago

59.3

1.3%

9.0

3.8%

7.5%

9.3%

-180

30.8

2.7%

8.3%

8.4%

Cincinnati

11.0

1.1%

-10

5.0

2.1%

7.0%

6.5%

Cleveland

-7.8

-0.8%

50

-5.8

-2.6%

6.7%

6.4%

30

Columbus

7.1

Dallas-Fort Worth

83.6

0.8%

1.2

0.5%

6.1%

5.5%

60

2.7%

34.6

4.3%

5.9%

6.1%

-20

Denver

31.4

Detroit

17.6

2.5%

9.5

2.6%

6.0%

7.3%

-130

1.0%

13.5

2.9%

9.0%

10.4%

Fort Lauderdale

-140

17.3

2.3%

2.7

1.4%

5.3%

6.9%

Hampton Roads

-160

10.4

1.4%

1.2

0.8%

6.0%

6.1%

-10

Hartford

8.3

1.5%

0.5

0.4%

7.5%

8.1%

-60

Houston

85.7

3.1%

21.7

3.7%

5.9%

6.1%

-20

Indianapolis

18.2

2.0%

8.5

4.1%

6.5%

7.4%

-90

Jacksonville

11.4

1.9%

6.8

4.2%

6.0%

7.6%

-160

Los Angeles

66.4

1.7%

30.3

3.1%

9.5%

10.4%

-90

Miami

16.0

1.6%

4.7

2.1%

8.5%

9.2%

-70

Milwaukee

1.0

0.1%

-2.7

-1.5%

6.5%

6.5%

0

Minneapolis-St. Paul

32.3

1.8%

4.7

1.0%

4.1%

5.0%

-90

New Jersey

70.9

1.8%

-7.1

-0.7%

8.4%

9.6%

-120

New York

109.6

2.8%

10.9

0.9%

8.7%

9.0%

-30

Oakland-East Bay

2.7

0.3%

-2.5

-1.0%

7.0%

8.5%

-150

Orange County

30.1

2.1%

7.7

1.9%

5.8%

7.2%

-140

Orlando

28.7

2.7%

9.1

3.5%

6.0%

7.8%

-180

Philadelphia

28.4

1.0%

5.6

0.8%

7.6%

8.4%

-80

Phoenix

41.2

2.3%

13.6

2.9%

6.8%

7.0%

-20

Pittsburgh

17.3

1.5%

6.9

2.6%

6.1%

6.7%

-60

Portland, OR

20.1

2.0%

5.6

2.5%

6.5%

7.6%

-110

Raleigh-Durham

8.6

1.6%

6.0

4.3%

6.0%

7.3%

-130

Richmond

9.2

1.5%

0.3

0.2%

5.8%

6.0%

-20

Sacramento

12.2

1.5%

0.8

0.5%

8.1%

9.8%

-170

San Antonio

11.0

1.2%

2.5

1.2%

5.8%

5.9%

-10

San Diego

22.7

1.8%

-0.1

0.0%

7.0%

8.6%

-160

San Francisco

24.5

2.4%

10.9

3.0%

5.3%

6.8%

-150

San Jose (Silicon Valley)

26.7

2.9%

8.9

3.3%

6.4%

8.0%

-160

Seattle-Bellevue

35.5

2.1%

8.5

2.0%

6.0%

6.8%

-80

St. Louis

7.1

0.5%

-0.1

0.0%

6.5%

7.1%

-60

Stamford, CT (Fairfield County)

8.1

2.0%

2.2

1.8%

7.0%

7.6%

-60

Tampa

39.0

3.3%

14.5

4.5%

6.4%

8.2%

-180

Washington, DC

23.9

0.8%

5.1

0.5%

5.9%

5.3%

60

West Palm Beach

11.9

2.3%

2.1

1.5%

6.7%

8.4%

-170

3.0

0.5%

0.2

0.2%

6.0%

7.0%

-100

2,293.0

1.7%

725.0

2.5%

7.0%

7.8%

-80

MSA

White Plains (Westchester Co.) U.S. totals

Source: Bureau of Labor Statistics, Jones Lang LaSalle * Office jobs include the professional and business service, information and financial activities sectors


United States office statistics Market Totals (CBD and Suburban)

Inventory (s.f.)

Atlanta

133,567,101

404,476

547,934

1,904,080

1.4%

20.3%

21.0%

$19.86

-1.1%

612,034

Austin

46,010,880

142,912

176,229

701,715

1.5%

11.8%

12.6%

$29.72

5.4%

1,522,263

Baltimore

67,791,994

697,996

80,251

280,946

0.4%

14.4%

15.3%

$21.90

-2.6%

663,160

Boston

Quarterly total net absorption (inc. sublease) (s.f.)

YTD total net absorption (inc. sublease) (s.f.)

YTD total net absorption (as % of inventory)

Direct vacancy (%)

Total vacancy (%)

Current quarter average marketed rent ($ p.s.f.)

YTD completions (s.f.)

Quarterly percent change

Under construction (s.f.)

159,581,036

0

-4,877

758,917

0.5%

13.8%

19.6%

$31.11

1.4%

3,881,000

Charlotte

46,702,076

771,586

184,502

1,304,126

2.8%

13.3%

14.0%

$21.96

1.5%

105,500

Chicago

235,143,001

0

-199,289

740,938

0.3%

16.4%

19.1%

$27.11

-1.1%

861,000

Cincinnati

34,839,088

0

113,448

243,373

0.7%

17.7%

18.6%

$19.68

0.3%

636,000

Cleveland

28,077,603

450,000

121,828

612,954

2.2%

16.5%

17.1%

$19.36

-1.1%

220,000

Columbus

31,228,148

0

111,349

528,439

1.7%

15.2%

15.7%

$18.01

3.2%

541,000

Dallas

160,253,612

489,029

1,427,694

2,991,066

1.9%

18.9%

19.6%

$21.29

0.3%

4,278,173

Denver

113,576,984

414,034

426,159

1,518,200

1.3%

12.9%

13.9%

$23.47

1.7%

1,274,142

Detroit

59,997,187

0

273,460

750,878

1.3%

25.0%

25.4%

$19.49

4.9%

0

Fairfield County

48,564,914

0

146,678

88,070

0.2%

20.2%

22.5%

$33.47

-1.9%

0

Fort Lauderdale

22,948,469

31,750

112,031

343,212

1.5%

16.5%

17.6%

$26.12

-0.3%

0

Hampton Roads

19,976,971

267,980

151,280

190,147

1.0%

16.5%

16.8%

$18.55

2.1%

221,600

152,083,838

2,240,409

1,072,949

4,518,277

3.0%

13.5%

15.4%

$28.75

2.0%

6,779,336

42,929,340

104,699

-38,913

627,414

1.5%

11.8%

12.3%

$17.47

3.1%

133,000

Houston Indianapolis Jacksonville

20,714,551

0

-169,908

214,376

1.0%

16.7%

17.7%

$18.13

0.1%

0

Los Angeles

189,206,334

102,113

683,878

489,312

0.3%

16.1%

17.0%

$32.98

0.1%

1,100,002

Miami

35,688,822

84,990

188,414

622,887

1.7%

16.8%

17.4%

$31.40

1.0%

206,652

Milwaukee

27,641,272

0

86,871

242,153

0.9%

19.2%

20.3%

$16.61

-0.6%

0

Minneapolis

66,030,154

0

15,346

58,704

0.1%

16.1%

17.4%

$24.44

0.0%

0

New Jersey

159,473,897

1,151,274

-413,509

919,361

0.6%

22.0%

24.9%

$24.69

-0.4%

1,379,500

New York

444,228,244

5,014,150

4,866,670

4,278,848

1.0%

9.1%

11.1%

$61.81

1.1%

5,456,522

Oakland-East Bay

54,820,596

0

-53,198

649,817

1.2%

14.3%

14.9%

$26.10

2.1%

390,500

Orange County

93,117,183

0

-908

1,025,358

1.1%

14.1%

14.5%

$22.84

0.0%

1,259,000

Orlando

28,231,143

0

127,341

503,613

1.8%

17.5%

17.9%

$19.75

-1.1%

0 1,077,185

Philadelphia

142,536,074

644,086

299,012

1,101,338

0.8%

14.3%

15.1%

$24.28

0.1%

Phoenix

73,632,664

174,203

379,550

999,435

1.4%

23.1%

23.8%

$20.64

0.5%

565,623

Pittsburgh

48,379,722

383,000

-202,436

-113,901

-0.2%

12.7%

14.2%

$22.24

0.3%

1,466,000

Portland

58,106,985

213,800

95,223

989,864

1.7%

10.5%

11.1%

$21.18

-0.6%

422,934

Raleigh-Durham

42,456,898

301,000

216,518

815,876

1.9%

12.5%

12.8%

$19.98

0.9%

0

Richmond

25,100,714

0

170,947

295,066

1.2%

12.4%

13.4%

$18.19

1.1%

321,000

Sacramento

44,376,754

130,000

128,091

1,588,640

3.6%

18.9%

19.5%

$22.28

1.1%

0

San Antonio

25,253,262

397,728

20,014

219,640

0.9%

16.0%

17.0%

$21.77

6.6%

0

San Diego

77,973,078

248,882

167,205

822,067

1.1%

13.8%

14.6%

$26.04

0.0%

539,459

San Francisco

74,549,701

1,020,539

582,771

1,399,651

1.9%

10.5%

11.1%

$56.88

1.4%

2,422,093


28,552,958

58,963

38,654

-33,526

-0.1%

15.2%

17.1%

$45.56

-0.8%

327,425

Seattle-Bellevue

88,460,367

324,602

313,071

2,585,636

2.9%

12.0%

12.5%

$30.40

0.5%

1,290,992

Silicon Valley

61,717,690

1,754,253

877,580

1,868,361

3.0%

13.8%

15.4%

$38.90

5.1%

2,830,476

St. Louis

42,973,507

0

168,839

293,792

0.7%

16.3%

17.1%

$19.80

0.6%

0

Tampa Bay

34,428,542

376,000

43,424

357,543

1.0%

18.9%

19.5%

$21.44

0.8%

0

Washington, DC

330,057,384

4,371,191

320,803

-116,722

0.0%

15.1%

16.2%

$36.42

0.8%

4,474,425

West Palm Beach

21,180,130

0

93,895

141,060

0.7%

21.2%

21.7%

$27.65

0.2%

0

Westchester County

32,366,229

0

-505,255

-334,671

-1.0%

18.4%

20.2%

$26.53

1.0%

0

United States totals

3,774,527,097

22,765,645

13,241,616

39,986,329

1.1%

15.1%

16.6%

$29.83

0.4%

47,257,996


United States office rankings Inventory

Marketed rents New York

New York

Washington, DC

San Francisco

Chicago


Los Angeles

Silicon Valley

Dallas

Washington, DC

Boston

Fairfield County

New Jersey

Los Angeles

Houston

Miami

Philadelphia

Boston

Atlanta

Seattle-Bellevue

Denver

Austin

Orange County

Houston

Seattle-Bellevue

West Palm Beach

San Diego

Chicago

San Francisco

Westchester County

Phoenix

Fort Lauderdale

Baltimore

Oakland-East Bay

Minneapolis

San Diego

Silicon Valley

New Jersey

Detroit

Minneapolis

Portland

Philadelphia

Oakland-East Bay

Denver

Fairfield County

Orange County Sacramento

Pittsburgh

Pittsburgh

Charlotte

Charlotte

Austin

Baltimore

Sacramento

San Antonio

St. Louis

Tampa Bay

Indianapolis

Dallas

Raleigh-Durham

Portland

Miami

Phoenix

Cincinnati

Raleigh-Durham

Tampa Bay

Atlanta

Westchester County

St. Louis

Columbus

Orlando


Cincinnati

Orlando

Detroit

Cleveland

Cleveland

Milwaukee

Hampton Roads

San Antonio

Richmond

Richmond

Jacksonville

Fort Lauderdale

Columbus

West Palm Beach

Indianapolis

Jacksonville

Milwaukee

Hampton Roads 0

100

200

Square Feet (Millions)

300

400

$0

$10

$20

$30

$40

$/Square Foot

$50

$60

$70


United States office rankings Total vacancy rates (including sublease)

YTD total net absorption (including sublease) Houston

Detroit

New York

New Jersey

Dallas

Phoenix

Seattle-Bellevue

Fairfield County

Atlanta

West Palm Beach

Silicon Valley

Atlanta

Sacramento

Milwaukee

Denver

Westchester County

San Francisco

Dallas

Charlotte

Boston

Philadelphia

Tampa Bay

Orange County

Sacramento

Phoenix

Chicago

Portland

Cincinnati

New Jersey

Orlando

San Diego

Jacksonville

Raleigh-Durham

Fort Lauderdale

Boston

Minneapolis

Detroit

Miami

Chicago


Austin

St. Louis

Oakland-East Bay

Cleveland

Indianapolis

San Antonio

Miami

Los Angeles

Cleveland

Hampton Roads

Columbus

Washington, DC

Orlando

Columbus

Los Angeles

Houston

Tampa Bay

Silicon Valley

Fort Lauderdale

Baltimore

Richmond

Philadelphia

St. Louis

Oakland-East Bay

Baltimore

San Diego

Cincinnati

Orange County

Milwaukee

Pittsburgh

San Antonio

Charlotte

Jacksonville

Denver

Hampton Roads

Richmond

West Palm Beach

Raleigh-Durham

Fairfield County

Austin

Minneapolis

Seattle-Bellevue


Indianapolis

Pittsburgh

San Francisco

Washington, DC

New York

Westchester County

Portland 0

1,000

2,000

3,000

Square Feet (Thousands)

4,000

0%

5%

10%

15%

20%

25%

Vacancy rate (includes sublease)

30%


United States office rankings Under construction

Under construction as % of inventory

Houston

Silicon Valley

New York

Houston

Washington, DC

Austin

Dallas

San Francisco

Boston

Pittsburgh

Silicon Valley

Dallas

San Francisco

Boston

Austin

Cincinnati

Pittsburgh

Columbus

New Jersey

Seattle-Bellevue

Seattle-Bellevue

Washington, DC

Denver

Orange County

Orange County

Richmond

Los Angeles

New York

Philadelphia


Chicago

Denver

Baltimore

Hampton Roads

Cincinnati

Baltimore

Atlanta

New Jersey

Phoenix

Cleveland

Columbus

Phoenix

San Diego

Philadelphia

Portland

Portland

Oakland-East Bay

Oakland-East Bay


San Diego

Richmond

Los Angeles

Hampton Roads

Miami

Cleveland

Atlanta

Miami

Chicago

Indianapolis

Indianapolis

Charlotte

Charlotte

Fairfield County

Fairfield County

West Palm Beach

West Palm Beach

Westchester County

Westchester County

Fort Lauderdale

Fort Lauderdale

Minneapolis

Minneapolis

Sacramento

Sacramento

San Antonio

San Antonio

Tampa Bay

Tampa Bay

Raleigh-Durham

Raleigh-Durham

St. Louis

St. Louis

Orlando

Orlando

Detroit

Detroit

Jacksonville

Jacksonville

Milwaukee

Milwaukee 0

1

2

3

4

5

6

Square Feet (Millions)

7

8

9

0%

1%

2%

3%

4%

5%

6%

7%

Need

Into 2014 and 2015, the spreading and enhancement of growth nationally across industries and geographies highly benefits diversified economies like Dallas, Chicago, Los Angeles, Philadelphia, Atlanta, Phoenix, among others.

About Jones Lang LaSalle Jones Lang LaSalle (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. With annual revenue of $3.9 billion, Jones Lang LaSalle operates in 70 countries from more than 1,000 locations worldwide. On behalf of its clients, the firm provides management and real estate outsourcing services to a property portfolio of 2.6 billion square feet and completed $63 billion in sales, acquisitions and finance transactions in 2012. Its investment management business, LaSalle Investment Management, has $46.7 billion of real estate assets under management. For further information, visit www.jll.com.

About Jones Lang LaSalle Research Jones Lang LaSalle’s research team delivers intelligence, analysis and insight through market-leading reports and services that illuminate today’s commercial real estate dynamics and identify tomorrow’s challenges and opportunities. Our more than 400 global research professionals track and 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.

For further information please contact: Americas research

Benjamin Breslau Director - Americas research [email protected] tel +1 617 531 4233

Marisha Clinton Director - Capital markets research [email protected] tel +1 212 812 6488

John Sikaitis Director - Office research [email protected] tel +1 202 719 5839

Phil Ryan Research Analyst - Office and Economy research [email protected] tel +1 202 719 6295

www.us.am.joneslanglasalle.com/research © 2014 Jones Lang LaSalle IP, Inc. All rights reserved. No part of this publication may be reproduced by any means, whether graphically, electronically, mechanically or otherwise howsoever, including without limitation photocopying and recording on magnetic tape, or included in any information store and/or retrieval system without prior written permission of Jones Lang LaSalle. The information contained in this document has been compiled from sources believed to be reliable. Jones Lang LaSalle or any of their affiliates accept no liability or responsibility for the accuracy or completeness of the information contained herein and no reliance should be placed on the information contained in this document.