US Office Outlook - Q1 2016 - JLL

Office Outlook United States | Q1 2016

U.S. office markets remain stable amidst market jitters

WHAT’S

INSIDE:

Outlooks leading into the new year called for further expansion across U.S. office markets. However, stock market tumbles driven by a weakening China and depleted oil prices shifted sentiment from that of a growth perspective to one of increased caution. Despite this, economic and real estate fundamentals remain primarily landlordfavorable through the remainder of 2016.

JLL | United States | Office Outlook | Q1 2016

2

TABLE OF

CONTENTS

5 office market trends United States office market United States office clock United States economy United States investment sales Local U.S. office markets Atlanta Austin Baltimore Boston Charlotte Chicago (CBD) Chicago (Suburban) Cincinnati Cleveland Columbus Dallas Denver Detroit East Bay Fairfield County Fort Lauderdale Hampton Roads Houston Indianapolis Jacksonville Long Island Los Angeles Miami Milwaukee Minneapolis

4 5 8 10 12 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40

Nashville New Jersey New York Northern Virginia Oakland Orange County Orlando Philadelphia (CBD) Philadelphia (Suburban) Phoenix Pittsburgh Portland Raleigh-Durham Richmond Sacramento Salt Lake City San Antonio San Diego San Francisco (CBD) San Francisco (Mid-Peninsula) Seattle-Bellevue Silicon Valley St. Louis Suburban Maryland Tampa Washington, DC Washington, DC Metro West Palm Beach Westchester County Appendix Contacts

41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 80


3

5 KEY TRENDS TO WATCH IN 2016 Oil pricing declines and global economic uncertainty set off a stock market decline early in the new year that shifted the economic outlook from one of heightened optimism and perceived stability to one in which a near-term recession was imminent. As a result, momentum in the office market slowed moderately as occupiers more carefully considered expansionary plans while waiting for a clearer economic outlook, but market fundamentals overall proved steady with supply and demand moving in lockstep.

1.

At 143.8 million, employment is at its highest level ever recorded and sustained job growth over the last several years has consistently driven occupancy growth that’s expected to continue into 2017.

2.

Though more employees may be heading into the office, the U.S. development pipeline of 96.8 million square feet remains below the previous two peaks in 2000 and 2008, at 139 million and 108 million square feet, respectively. As a result, most markets will be well positioned from a supply perspective once leasing momentum begins to slow in 2017 and 2018.

3.

Leasing activity remains dominated by both technology and financial services companies, which have been driving growth in markets across the country, but volume in the first quarter came in at its lowest level (50 m.s.f.) since the recession as concerns over the economy’s stability grew. With fears of a recession now diminished, leasing activity should begin to increase over the course of the year.

4.

Despite lower leasing volume, low vacancy and limited new deliveries kept the overall leasing environment highly competitive in the country’s most in-demand markets. As a result, rental rates increased at the highest rate thus far in the cycle with a 3.2 percent increase. In secondary and tertiary markets where development is limited or nonexistent and demand stable, rents will continue to post above-average increases.

5.

Strengthening fundamentals in secondary markets, combined with a decline in investment opportunities and high barriers to entry in primary markets has resulted in an increased focus on secondary markets with high occupancy growth. But signs of softening in select secondary markets may keep investors focused only on the highest performing.

◄ Table of contents

OUTLOOK Looking ahead, the remainder of 2016 will remain largely landlordfavorable as expansionary leases begin to take occupancy across the United States, but conditions will begin to shift in 2017 as markets work to absorb the more than 80 million square feet of new supply that will deliver over the next two years. Additionally, as markets move nearer to their inflection points in terms of rental rates and market growth, 2017 will start to see some cooling as markets stabilize— especially in primary markets that performed highly earlier in the expansion.


4

UNITED STATES

OFFICE MARKET

Over the past year-and-a-half, tenants leasing 20,000 square feet or more have done so with expansionary plans in mind. Since the third quarter of 2014, 48.7 percent of all leases signed represented occupancy growth as companies moved to accommodate record-level employment and changing workplace preferences. Over that same period, the volume of companies downsizing has remained a minimal portion of leasing activity, averaging just 8.0 percent. Though leasing activity remained largely expansionary during the first quarter, increased fear of a nearterm recession spooked many tenants, and as a result, plans for expansion were put on hold. From the fourth quarter of 2015 to the first quarter this year, the share of expansionary leasing declined from 52.0 to 40.0 percent, respectively.

Though leasing activity remained largely expansionary during the first quarter, increased fear of a near-term recession spooked many tenants, and as a result, plans for expansion were put on hold. At the sector level, retail and hospitality leasing activity across the country was entirely (100 percent) expansionary, while life sciences (85.8 percent) and food and beverage (83.1 percent) closely followed in the first quarter. However, overall leasing activity remained dominated by technology and financial services firms, with large lease transactions including Kronos’ 370,000-square-foot relocation in Boston’s suburbs and Putnam Investments’ 252,000-square-foot relocation in its CBD. Meanwhile, Allied Solutions signed an expansionary lease for 110,000 square feet in Indianapolis’ North Meridian/Carmel suburb and Uber continued its Bay Area expansion with a 93,000-square-foot lease in San Francisco’s Mid-Market. Though concern over a nonexistent IPO market looms over the technology industry, it did not prevent publicly traded companies like Facebook, LinkedIn, Microsoft and Oracle from moving forward with expansion plans on a combined 275,000 square feet of leased space. Most telling of the current office market trends, however, is the continued expansion of shared office space. During the first quarter, WeWork signed 10 new leases—each representing expansion—in markets such as Orange County, Philadelphia and Silicon Valley for a total of 715,000 square feet. Additionally, Regus signed six leases amounting to nearly 150,000 square feet during the quarter, three of which were expansionary. Other, smaller players, such as Make Offices and Centrl Office, also signed on for new office space in Washington, DC, and Portland, respectively. ◄ Table of contents

A slowdown in expansionary leasing due to limited options for growth became pronounced in Q1 70.0%

Share of activity (%)

Expansionary leasing activity slows, but tenants still keen on moving within markets

60.0%

53.8% Stable

50.0%

40.0% Growing

40.0% 30.0% 20.0%

6.2% Shrinking

10.0% 0.0%

Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Source: JLL Research

Where occupier demand is highest, so, too, are occupancy gains Typical of this cycle, occupancy growth in the first quarter shrank considerably from the fourth quarter, coming in at 7.7 million square feet versus the 18.7 million square feet of occupancy growth at year-end 2015. Desirable talent hubs and urban markets captured the largest share of gains, led by Chicago’s 1.7 million square feet of net absorption as companies, such as Kraft Heinz, moved back into the CBD from the suburbs. Technology hotbeds from both a business and talent perspective continued to drive the Seattle-Bellevue and Silicon Valley markets, which posted 839,000 square feet and 825,000 square feet of new absorption, respectively, with Google expanding into an 180,000-square-foot build-tosuit in Seattle’s Kirkland submarket, while also occupying 315,000 square feet in the last building at Moffett Place in Sunnyvale. Rounding out the top five were Austin and Philadelphia, where absorption gains came in at 775,000 and 604,000 square feet, respectively. Several large, planned vacancies hit the market in New York during the quarter at 390 Madison Avenue, 485 Lexington Avenue and 5 Manhattan West, contributing to 1.6 million square feet in occupancy losses, while in New Jersey the Route 24, Bergen North and Princeton Area submarkets contributed to more than 562,000 square feet of negative net absorption. As one of the first markets to soften in this cycle, Houston has yet to register the impact of the oil and energy sector’s decline through its market statistics. Currently, the market has roughly 9 million square feet of sublease availability on the market, but none of it has translated into occupancy losses yet. In fact, Houston recorded modest gains of 227,000 square feet net absorption during the quarter, as potential large blocks of sublease vacancy continue to wait in the wings. JLL | United States | Office Outlook | Q1 2016

5

Sublease vacancy across the United States maintained its downward trend in the first quarter at just 1.0 percent of the total U.S. inventory. Despite Houston’s looming impact and New Jersey and Westchester County’s elevated share of sublease vacancy resulting, in part, from corporate relocations into other markets, no real signs of softening exists within the greater U.S. office market. In markets where small upticks were recorded, the impact was met by overall vacancy declines. This was true in Austin, Orange County and San Diego, where overall vacancy is below average at 11.1, 11.8 and 13.5, respectively. Additionally, with most occupiers conservatively expanding during the course of this cycle, the impact of a future slowdown or contraction may be minimized by more efficient space use.

Despite dropping sharply compared to a heavy-hitting Q4, YTD 2016 totals higher than 2015 20,000,000

10,000,000

5,000,000

0

-5,000,000 2010

2011

2012

2013

2014

2015

2016

Source: JLL Research

In more recent quarters, sublease vacancy increases in primary markets like Boston, Chicago and San Francisco have been the result, in part, of companies readying for relocation and expansion into new space. Moving further into the development cycle, sublease vacancy may begin to increase as the nearly 100 million square feet under construction delivers to markets through 2019 and economic momentum begins to slow job growth and real estate expansion. Even as sublease vacancy rises in Houston and begins to rise in the Bay Area, it fell in Q1 on aggregate

Compressed vacancy rates push rental rates Supply constraints persisted across the country as demand for both quality and location remain high on the list of must-haves for occupiers. Across CBDs, 11 markets posted vacancy rates below 10.0 percent and below the CBD average vacancy rate of 12.1 percent. Compared to the suburbs, which came in at a 16.3 percent vacancy rate, six suburban markets reported single-digit vacancy rates—each benefitting from proximity to dynamic, urban CBDs that have captured occupier demand accordingly over the course of this cycle.

100,000,000

Sublease vacancy (s.f.)

Quarterly net absorption (s.f.)

15,000,000

90,000,000 80,000,000 70,000,000 60,000,000 50,000,000 40,000,000

Across CBDs, 11 markets posted vacancy rates below 10.0 percent and below the CBD average vacancy rate of 12.1 percent. CBD Oakland Portland Central City Austin New York (Midtown South) Raleigh-Durham Seattle (Downtown) San Francisco Charlotte Philadelphia CBD Salt Lake City Boston Oakland ◄ Table of contents

Total vacancy rate

Suburb

Total vacancy rate

5.1% 6.5% 6.7%

Nashville Salt Lake City Boston (Cambridge)

4.5% 5.4% 6.7%

6.9%

Portland-Eastside

7.2%

7.6% 7.7% 8.5% 8.5% 8.6% 9.2% 9.6% 5.1%

San Francisco Seattle (Eastside) Portland-Vancouver

7.5% 9.3% 9.3%

30,000,000 2009

2010

2011

2012

2013

2014

2015

2016


New supply outpaces occupancy growth, but not for long During the first quarter, total U.S. development volume increased by 9.7 million square feet—a 31.8 percent quarter-over-quarter increase in construction starts—to bring the total development pipeline to 96.8 million square feet. This marks the highest level of development thus far in the cycle as consistent expansionary activity has encouraged developers to break ground where supply constraints persist. New groundbreakings were driven by Dallas (2 million square feet), Silicon Valley (1.6 million square feet) and Orange County (1.1 million square feet), with projects that include Liberty Mutual’s 1.1-million-square-foot build-to-suit in West Plano; Menlo’s two-building, 555,000-square-foot development at 3333 Scott Boulevard in Santa Clara; and Trammell Crow’s 537,220-square-foot spec development, The Boardwalk, in Irvine.


6

Despite improved fundamentals in most U.S. office markets, however, many secondary and tertiary markets await minimal new supply, and where development is under way, high preleasing rates have reduced the supply relief tenants would like to see. Primary markets, which compose 44.8 percent of the total office market, also contribute the largest share of developments to the total pipeline with 53.8 million square feet. Conversely, among the 24 tertiary markets that JLL tracks, only 11.3 million square feet (or 1.4 percent of total inventory) is currently under construction. Additionally, eight markets, including Jacksonville, Tampa and West Palm Beach, remain without any projects in the pipeline.

Primary markets, which compose 44.8 percent of the total office market, also contribute the largest share of developments to the total pipeline with 53.8 million square feet. During the quarter, new deliveries of 10.6 million square feet outpaced the rate of occupancy growth by 38.7 percent. This was especially true in Dallas, Houston, Philadelphia and Silicon Valley, where a combined total of 5.4 million square feet in new supply was met by 1.8 million square feet of net absorption. For 2016 deliveries in total, however, occupancy growth is expected to outpace new supply, with 56.1 percent of the pipeline already preleased. As the development cycle nears its peak in 2016, deliveries will diminish slowly through 2019

Completions (s.f.)

50,000,000

Speculative (preleased) Speculative (available) BTS

40,000,000 30,000,000 20,000,000 10,000,000 0 2016

2017

2018

2019




7

UNITED STATES

OFFICE CLOCK The JLL 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. As of the first quarter, the vast majority of markets are firmly positioned on the left side of the clock. As the national office market kicked into high gear in 2015 as a result of a generally uplifted economy, leasing activity that translated into occupancy growth resulted in a swift tightening of fundamentals. A yearover-year drop of 80 basis points, combined with 44.4 million square feet of new, top-quality space, has helped to push rents up by 8.7 percent during the same period, with growth now seen across asset classes and markets. During the first quarter alone, new space was partially responsible for the 3.2 percent spike in rents seen across the 50 markets that JLL tracks, even though total vacancy rose by 10 basis points. At the market level, geographies near or within the peaking phase of the cycle continued to register accelerated rent growth during the first quarter. Space constraints driven by high-growth industries pushed vacancy rates downward in Silicon Valley, Oakland–East Bay, Nashville, San Francisco and Austin as rents increased by 15.8, 9.7, 6.7, 4.8 and 4.5 percent, respectively, compounded by minimal completions with high preleasing rates. Similarly, secondary markets have recorded gains, albeit slightly slower than peaking powerhouses. In the Carolinas, annualized rent growth in Charlotte and Raleigh-Durham totals 2.0 and 5.6 percent, respectively. Atlanta, Miami and Phoenix posted quarterly increases of 2.0, 1.4 and 1.1 percent, respectively, and the recent boost in tenant activity and residual supply from the previous cycle mean equilibrium is just now being reached. As a result, significant relief for tenants in Class A and

amenitized submarkets is years away. Further, with capital flows into these markets accelerating, rents will rise accordingly to meet pro forma expectations. Secondary markets are witnessing near-peak pricing as this movement intensifies, and in some cases new high-water marks have been set. Rent growth continues to be highly variable at the class level. Quarterly growth in CBD Class A submarkets continues to exceed the national average by 30 basis points, but this gap in lower than in earlier quarters. With a readily available supply of large, Class A blocks in the suburbs depleting, landlord confidence in that sector has risen appreciably. Asking rents in this segment increased by 1.9 percent over the quarter and 5.5 percent over the year. The spillover into Class B space has also been notable as well, with a 6.3 percent annual jump in rents. Additionally, submarkets with a large supply of creative space or in mixed-use, amenitized settings consistently outperform. Seattle’s Lake Union registered a 14.1 percent year-over-year increase for Class B space, while overall rents in New York’s SoHo rose by 24.7 percent over the same time period to $77.04 per square foot, one of the highest figures in the country. Even in slower-growth markets such as Philadelphia, Market Street East rents have climbed by 12.5 percent and overall asking rents in River West in Chicago are up 11.0 percent with new supply and renovations hitting the market. Over the course of 2016, rental rate increases will continue but may slow as markets in the peaking phase of the cycle reach an inflection point while welcoming new supply across markets. In the longer term, the eventual cooldown of the labor market and further economic uncertainty globally will likely signal a slowdown in leasing dynamics starting in 2017 and moving into 2018.

San Francisco Peninsula Denver, Silicon Valley Dallas San Francisco Austin, Nashville Los Angeles, San Diego, Seattle-Bellevue Minneapolis Atlanta, New York, Portland, Tampa Boston, United States Jacksonville, Miami, Orange County Phoenix Chicago, Indianapolis, Richmond Charlotte, Fort Lauderdale, Milwaukee, Oakland–East Bay, Orlando, Salt Lake City Cleveland, Raleigh-Durham, Sacramento, St. Louis Cincinnati, Fairfield County Hampton Roads, Long Island, San Antonio Philadelphia, Pittsburgh, Westchester County Baltimore, Detroit, Hartford, West Palm Beach Columbus ◄ Table of contents

Houston

Peaking phase

Falling phase

Rising phase

Bottoming phase

New Jersey, Washington, DC JLL | United States | Office Outlook | Q1 2016

8

UNITED STATES

CBD OFFICE CLOCK Denver Midtown South (New York), Nashville San Francisco, San Jose CBD Austin, Tampa Minneapolis, Seattle Dallas, Downtown (New York), Los Angeles Atlanta, Fort Lauderdale, Portland Boston, Miami, San Diego, United States Midtown (New York) Chicago, Jacksonville Charlotte, Oakland CBD, Orlando, Philadelphia Milwaukee, Raleigh-Durham, Sacramento Salt Lake City Cleveland, Indianapolis Fairfield County, Pittsburgh Cincinnati, Phoenix, San Antonio, West Palm Beach Detroit, Hartford, Washington, DC, White Plains Columbus, St. Louis

Houston

Peaking phase

Falling phase

Rising phase

Bottoming phase

Baltimore, Richmond

UNITED STATES

SUBURBAN OFFICE CLOCK Silicon Valley Dallas San Francisco Peninsula Denver San Francisco Bellevue, Cambridge Austin, Richmond

Houston

Peaking phase

Falling phase

Rising phase

Bottoming phase

Los Angeles, Nashville, San Diego, Seattle-Bellevue Indianapolis Atlanta, Jacksonville, Portland, Tampa Boston, Orange County, Seattle, St. Louis, United States Miami, Phoenix Minneapolis, Salt Lake City Baltimore Charlotte, Chicago, Cleveland, Milwaukee, Oakland–East Bay, Westchester County Cincinnati, Fairfield County Fort Lauderdale, Hampton Roads, Orlando, Long Island, Raleigh-Durham, Philadelphia, Sacramento, San Antonio Detroit, Pittsburgh Central NJ, Columbus, Hartford, Northern DE, West Palm Beach ◄ Table of contents

Southern NJ

Washington, DC Lehigh Valley, Northern NJ JLL | United States | Office Outlook | Q1 2016

9

UNITED STATES

ECONOMY

For the office market, global and domestic economic activity will show its impact gradually over the next few quarters, segmented by geography and industry. In addition to the roughly one-year lag between economic indicators and market movement, the wide variance among markets in terms of position within the cycle will become increasingly apparent. However, employment growth exceeding 200,000 jobs per month and the need for companies to accommodate growing workforces will keep market momentum positive, aided by the impending completion of 47 million square feet of space throughout 2016, with more deliveries expected in 2017 and 2018. GDP growth consistent, but components beginning to wobble as vulnerability increases A strengthening dollar may exacerbate the increasing trade deficit as exports become more expensive

Real imports and exports of goods and services ($ billions)

Real imports

Real exports

$0

$2,000.0

-$100

$1,000.0

-$200

$0.0

-$300

-$1,000.0

-$400

-$2,000.0

-$500

-$3,000.0

-$600 2011

2012

2013

2014

2015

Source: JLL Research, Bureau of Economic Analysis

Revised estimates showed GDP growing by 1.4 percent at seasonally adjusted annual rates during the fourth quarter, led by personal consumption expenditures (+2.4 percent), in particular durable goods ◄ Table of contents

A strengthening dollar has also begun to take its toll on net exports, which have gradually trended downward over the course of the cycle. Although the fourth quarter posted a small bump up in the trade deficit of $514.3 billion, this was largely due to a decline in year-over-year volumes of both imports and exports. As emerging markets continue to falter, markets with exposure to international trade and logistics may see a slowdown; any pullback in this sector would have knock-on effects on the rest of the labor market, as it represents nearly one-fifth of jobs and even higher shares in hubs such as Los Angeles, Dallas and Chicago. Job market resilient, but how much longer can gains last? Wage growth is gaining traction across industries, with particularly strong increases in information and finance 3.5% 2.9%

2.7%

2.6%

2.4%

2.2%

2.0%

1.8% 1.4%

1.1%

Real net exports

$3,000.0

2010

and services. Over the year, real GDP is up 3.1 percent, slower than the 3.9 percent expansion in 2014 but still well above nearly all peer economies. This slowdown is attributable to a number of gradual shifts during the second half of 2015, notably a flatlining of private domestic investment, which has yet to move above $3.0 trillion for three consecutive quarters as a number of nonresidential components slowed or even contracted moderately. The slump in business investment correlates with another quarter of declining corporate profits, which at $1.9 trillion are 11.5 percent below Q4 2014.

12-month % change

The global economic picture has become increasingly mixed of late, with political issues in emerging and resource-rich countries muting growth from previously strong sources of capital and continued uncertainty surrounding the Eurozone crisis and further stimulus from the ECB. Additionally, questions persist about how much longer the domestic labor market and general economy can continue to grow at a steady clip. Despite this, the U.S. economy remains largely stable, adding jobs at a markedly consistent rate along with solid personal consumption expenditures driving GDP growth. Other indicators, such as consumer confidence and corporate profits, continue to wobble, but general sentiment remains upbeat over the near term.

Source: JLL Research, Bureau of Labor Statistics

Even as the global economy remains up in the air, the U.S. labor market continues to display solid momentum, adding 628,000 jobs so far in 2016, a significant jump from the 570,000 added during the first three months of 2015. Throughout the cycle, year-over-year growth has been remarkably consistent, hovering between 1.9 and 2.1 percent for 24 consecutive months and showing little sign of slowing. As a testament to the sustained growth this cycle, the current level of employment (143.8 million) is the highest ever recorded and 5.3 million jobs higher than the previous peak in January 2008. JLL | United States | Office Outlook | Q1 2016

10

600

1-month net change (thousands) Federal funds rate (%)

400

6.0% 5.0%

200 4.0%

0 -200

3.0%

-400

2.0%

-600

Federal funds rate (%)

Like GDP, employment gains have become increasingly mixed at the subsector level. A combination of strength earlier in the recovery, talent shortages and diversification of growth have all impacted the office-using industries in recent months; over the past year, they have been responsible for 656,000 new jobs, or just 23.4 percent of total gains. In comparison, the office-using sector represented more than one-quarter of jobs created in 2014 and close to 30 percent in certain months earlier in the recovery. Compensating for this moderate pause has been an upswing in construction, leisure and other services, all of which benefit from a general uplift in economic momentum and hit their strides slightly later into the cycle.

Sustained employment growth may lead to another interest rate hike, but Fed action remains uncertain

1-month net change (thousands)

As a testament to the sustained growth this cycle, the current level of employment (143.8 million) is the highest ever recorded and 5.3 million jobs higher than the previous peak in January 2008.

1.0%

-800 -1,000

0.0%

Source: JLL Research, Bureau of Economic Analysis

Many high-growth markets are still holding steady, but annual gains are becoming more difficult to sustain Austin San Francisco Nashville Dallas Atlanta

2.9%

Miami

2.7%

Denver

4.3% 4.2% 4.4% 4.0% 3.8% 3.6% 4.1% 3.5% 4.3% 3.6% 4.6%

2.6%

Charlotte

4.5%

2.2% 12-month % change

2014–2015

2015–2016

Source: JLL Research, Bureau of Labor Statistics – markets ranked in terms of 2015–2016 job growth

Similarly, a number of high-growth geographies have registered a slowdown in annual employment growth as previous rates of increase have become difficult to sustain. That being said, these markets continue to be economic powerhouses: Dallas and Atlanta, for instance, have added a combined 189,300 jobs over the past 12months at a rate of more than 3.0 percent. Professional services growth has seen a slight slowdown in these geographies as well, but it is at full-throttle in Nashville (+9.2 percent), San Francisco (+7.3 percent), Raleigh-Durham (+6.7 percent), Silicon Valley (+6.4 percent) and Austin (+4.2 percent).

2016 exceeding 2015 and capping more than 60 consecutive months of net gains, the labor market logically suggests room for incremental tightening. Other metrics show a similar slow-but-steady recovery: home prices have gradually improved over the course of 2015 and into January 2016 (+10.4 percent year-over-year), initial unemployment claims remain around 250,000 per week—their lowest level since 2007— and job openings and quits are both trending upward as employee confidence increases. Tightening will also need to take place before the overall economy reaches its cyclical peak, and while there is still slack in the labor market and runway for further consumer spending as wages rise faster than inflation, just how much more room is left will depend on a wide range of domestic and international economic and geopolitical factors. Overall, the strength of the U.S. economy in contrast to murky waters globally will benefit the office market over the next four to six quarters. Unlike the previous cycle, in which the office market led the economy as a whole, the more cautious approach on the part of both investors and occupiers has enabled the market to respond better to fluctuations as it now follows macroeconomic and demographic trends. Optimism on the part of occupiers to increase headcounts will further chip away at a dwindling number of large blocks, while the lack of significant overbuilding in aggregate will ease the softening expected beginning in late 2016 and early 2017, even as job creation continues unabated.

When will the Federal Reserve raise interest rates? In December, the Federal Reserve took a critical step and raised the federal funds rate by a quarter-point, the first time in almost 10 years. Since then, it has kept the rate steady pending subsequent releases of labor, output and other macroeconomic data. With a three-month start to ◄ Table of contents


11

UNITED STATES

INVESTMENT SALES First quarter pullback in capital markets activity after five consecutive years of growth

Despite softened growth, occupancy markets remain strong and disjointed from recent capital markets slowdown

First quarter 2016 volumes increased a modest 1.0 percent year-overyear after five consecutive years of strong increases in office capital markets activity. Despite this increase, $35.4 billion of investment sales still comprises the second most active quarter of the last five years, a function broadly of 2015 deal closings. Current volatility in the macro economy, caution over pricing levels and scarcity of assets on the market drove declines in most primary markets. Chicago, following a very strong year in 2015 and the first acquisition of an office asset priced at over $1.0 billion, saw volumes decrease to $472.6 million. Silicon Valley also recorded a sharp decline after 2015 sales volume reached $3.1 billion and per-square-foot pricing of $1,300, while first quarter 2016 volumes in Silicon Valley dropped to $147.0 million. Instability in energy markets is further suppressing capital markets activity in Houston, with less than $100.0 million of transactions year-to-date in 2016. While primary market activity overall is down quarter-over-quarter, Boston and Los Angeles posted strong first quarters with $2.5 billion and $1.8 billion of transactions, respectively. Los Angeles activity was boosted by the Westside portfolio acquisition, totaling 1.7 million square feet, by Douglas Emmett Realty and Qatar Investment Authority for $1.3 billion, while in Boston, Blackstone’s acquisition of BioMed Realty Trust, 21.0 percent of asset square footage in Cambridge, elevated overall sales volume. In secondary markets, however, investment activity remains strong, reaching peak levels relative to primary markets in the first quarter, with two markets recording transaction volumes over $1.0 billion. As we move further into 2016, flat growth to moderate declines in activity are projected as a result of these dynamics.

Despite the slowdown in investment sales, office leasing fundamentals remain strong, with rents increasing across the United States by 3.2 percent. At 7.7 million square feet of absorption, take-up has slowed from the latter part of 2015, although the lack of expansionary activity is likely due to supply constraints in single-digit occupancy markets. The first quarter saw a realized divergence in occupancy and capital markets fundamentals, especially in the primary markets. Overall primary markets saw a positive absorption reading, indicating that strong leasing fundamentals are catching up to the capital markets, which drove pricing in the early stages of the cycle. As an example, Chicago, the primary market with the largest decrease in investment sales, recorded the largest quarterly absorption figure of any market in the U.S. with 1.7 million square feet. Seattle came in after Chicago in terms of absorption and posted investment volumes slightly higher than average, although below the high levels recorded at earlier points in the cycle.

Office investment sale volumes (billions of $US)

$250.0

Q1 Q2 Q3 Q4

$200.0 $150.0 $100.0 $50.0 $0.0

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: JLL Research, Real Capital Analytics (Transactions larger than $5.0m) ◄ Table of contents

Occupational markets remain strong yet disjointed from investment sales activity in Q1, notably in primary markets 7,000

Q1 2016 highest absorption markets (thousands of s.f.)

Following five consecutive years of strong growth, office transaction volumes increase by 1.0 percent year-on-year

On the other hand, leasing and capital markets fundamentals continue to move in tandem in the secondary markets. Austin, however, the highest secondary market for absorption, posted a moderate decrease in volume quarter-over-quarter. Other secondary markets leading in absorption for the quarter—Philadelphia, San Diego and Phoenix—are continuing to see upward trending investment volume. Across the U.S. this cycle, strong capital markets activity outperformed occupier markets, which had been slower to recover after the downturn. In early 2016, this outperformance has reversed, driving disjointed indicators across most markets—reflective of an underlying improvement in income fundamentals across more markets.

Chicago Silicon Valley Philadelphia

6,000 5,000

Seattle Austin Los Angeles

4,000 3,000 2,000 1,000 0 -1,000 2013

2014

2015

2016



12

2014 Q1

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

2015 Q1

2016 Q1

Stable

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

Compressing 2013 Q1


2003

Primary Secondary

$20,000 $18,000 $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0

Cap rates continue to compress with nearly 94.0 percent of markets seeing compressing or stabilizing yields

2000

Primary market investment volumes (millions of $US)

Secondary markets have strongest first quarter in three years, as primary markets in aggregate decline

Secondary markets are seeing a dichotomous trend as two clusters emerge: one leading national cap rate compression and the other showing signs of slowing. The secondary markets driving compression— Nashville, Minneapolis, Salt Lake City, Phoenix and Charlotte—have each recorded over 60 basis points of downward movement in the past 12 months. These markets are emerging as destinations for diversifying capital and, as a result, are seeing cap rates compress as the risks associated with smaller secondary markets recede. Meanwhile, select leading secondary markets are beginning to move in the opposite direction, indicating a moderation of investor confidence. RaleighDurham, Tampa and St. Louis cap rates are softening, with Dallas stabilizing. In 2016, cap rate compression will continue across most markets, though at modest levels, with perceived fully priced secondary markets beginning to show signs of stabilization or softening.

2002

Outside of the large portfolio acquisitions in the secondary markets, increased activity was concentrated in urban submarkets. In particular, Philadelphia, Atlanta, New Jersey and Oakland boosted secondary market activity with urban volumes increasing in aggregate by 165.6 percent year-over-year. Though secondary markets are recording stronger investment volume growth than primary markets, there is not a comparable level of institutional activity. Institutional acquisitions decreased, while purchases by private equity groups increased. The largest acquisition by this investor group was 70 & 90 Hudson Street in Jersey City in the Northern New Jersey market, which was acquired for $299.0 million by Spear Street Capital. The most active buyer in the secondary office market this quarter was Shorenstein, who purchased a Trophy asset in Pittsburgh and Class A assets in Philadelphia and Atlanta for a total of $566.2 million. While the primary markets are seeing activity decline, the diversification into secondary markets remains strongly evidenced, leading these markets to drive U.S. investment sale growth. This will continue through the year. However, despite resurgent economic and property market fundamentals in select small and midsized markets such as Austin, San Diego and Phoenix, institutional capital remains disciplined and selective.

Nationally, cap rates remain in compression mode, declining 30 basis points in the past 12months from 4.8 to 4.5 percent. At this level, national cap rates are below the prior peak of 4.8 percent, leading investor concerns over current pricing. Across the primary markets, all have recorded compression in the last 12 months by 39 basis points in aggregate. Of these, while New York and Chicago cap rates remain flat, West Coast markets Seattle, Silicon Valley and San Francisco continue to see strong cap rate compression, having decreased over 30 basis points over the last 12 months. However, cap rates in three primary markets—Houston, Boston and Los Angeles—have not yet surpassed their respective prior peaks. While Houston is unlikely to see further compression due to the slowdown in energy markets, strong property market fundamentals and resilient investor demand in Boston and Los Angeles are expected to drive continued compression, notably in highbarrier-to-entry submarkets.

2001

In the first quarter of 2016, 37.0 percent of total transaction volumes flowed into secondary markets, totaling $7.6 billion. Quarter-over-quarter, primary markets accounted for the overall moderation in volume growth, while secondary markets recorded a modest increase. In secondary markets in particular, this was boosted by large portfolio and entity-level acquisitions. In the largest transaction of the quarter, Blackstone acquired BioMed Realty Trust, taking over their life sciences–centric office and lab portfolio for $4.8 billion, boosting activity in San Diego as well as some of the primary markets, such as Boston’s Cambridge submarket, the San Francisco Peninsula and Seattle. In another noteworthy secondary market portfolio, Och-Ziff Capital Management purchased 58 properties of suburban product from Brandywine Realty Trust for $398.1 million, totaling 3.9 million square feet, located along the Northeast Corridor from New Jersey to Virginia.

Momentum in yield compression continues, though divergence appears, with select secondary markets beginning to show signs of slowing

Annual cap rate fluctuations

Secondary market activity increase driven by large portfolio acquisitions and urban submarkets

Softening

Source: JLL Research, NCREIF; Includes 32 major office markets; Stable defined as markets seeing fluctuations within 10 basis points year-over-year. JLL | United States | Office Outlook | Q1 2016

13

As foreign activity declines in the first quarter, European overtake Asian groups as most active source

Nationally, cap rates remain in compression mode, declining 30 basis points in the past twelve months from 4.8 to 4.5 percent

Foreign activity made up 12.1 percent of total volume in the first quarter, totaling $2.6 billion—a decrease of 20.5 percent year-over-year and slightly below established current cycle norms on a percentage basis in recent years. A factor in this decline statistically is the decline in primary market activity, where this capital remains focused with selective diversification into secondary markets. Foreign investment into the office sector reached a peak in 2015 of $22.0 billion, equating to 20.9 percent of total volume. In 2015, groups from Canada and China were the most aggressive in purchasing U.S. office real estate, accounting for 40.9 percent of total acquisitions. In the first quarter of 2016, the foreign buyer pool has shifted, with groups from Germany accounting for 37.0 percent of the total. This was driven by Deutsche Bank and Jamestown, who acquired assets in New York, Silicon Valley and Seattle. New inbound entrants to the market decreased other than smaller groups from the United Kingdom and Canada, who were active in Chicago, Atlanta and New York. In 2016, it is likely that further increases in inbound capital from European groups, including Germany, will be evident given ongoing economic and political concerns with resilient capital from Asia as well.

Germany dominates as top origin of inbound capital, surpassing active Asian and Canadian capital from prior two years

MOST ACTIVE FOREIGN INVESTORS

16.4% 9.0%

24.0%

13.5%

18.5% 5.6%

2014

2% 6%

9.5%

35.1%

2015

10% 12%

Q1 2016

37%

21.9% 15.3% Norway Germany Canada Singapore

15.5%

15.8%

22%

Canada

China

Germany

Qatar

Germany

South Korea

South Korea

Canada

Hong Kong

All others

China

United Kingdom

Source: JLL Research (Assets larger than 50,000 s.f.) ◄ Table of contents


14

LOCAL MARKETS

Looking ahead, the remainder of 2016 will remain largely landlord-favorable as expansionary leases begin to take occupancy across the United States, but conditions will begin to shift in 2017 as markets work to absorb the more than 80 million square feet of new supply that will deliver over the next two years. Additionally, as markets move nearer to their inflection points in terms of rental rates and market growth, 2017 will start to see some cooling as markets stabilize— especially in primary markets that performed highly earlier in the expansion.



15

ATLANTA - Ryan Harchar Senior Research Analyst, Atlanta

Occupiers & investors pivot to alternative segments Landlord-favorability forces occupiers to diversify, Class B benefits The first quarter of 2016 offered more evidence of strong market conditions in the Southeast’s capital. Driven by positive demand with limited supply, occupiers have resorted to diversifying both in terms of geography and the quality of product they are seeking. This compromise has led to dramatic improvements in Class B fundamentals. Landlords have noticed, increasing asking rates of large available blocks of space. Brokers point to increased tour volume and a gradual decline in competing large blocks. Expect the trend to continue as tenants justify expansion and others relocate to metro Atlanta office buildings.

Landlords increase rates of large Class B blocks

Office fundamentals offer a window for value creation Value add investors have found opportunity to buy low in metro submarkets, exhibiting both rising rental rates and pronounced spreads between the Class A and B segments. Through repositioning, renovation, and addressing deferred maintenance, investors are beginning to acquire well located A- and B+ assets at a low basis and benefit from rate appreciation. Buckhead, Northwest, and Central Perimeter indicate the most extreme delta between the two class segments. Although, many of the well-located opportunities have been spoken for in recent quarters. Buyers are now moving beyond these submarkets in search of greater yield.

Asking rate delta points to opportunity for investors

Leasing activity continues to broaden Absorption was brisk over the quarter, which led to a 30 bps decline in overall vacancy rates, a trend observed for 19 consecutive quarters. This has allowed leasing activity to broaden. Several deals were signed to Class B buildings over the first months of 2016. Well represented was the healthcare industry, including IMS Health for 22,700 square feet in Buckhead and Endochoice for 16,000 square in North Fulton. A stand-out trend was the majority of transactions occurring in the northern arc submarkets, suggesting occupiers are seeking value-oriented options outside the city’s core submarkets.

Recent Class B leasing occurred in the northern arc

Asking Rate

$19.00

Block Count

$18.00 $17.00 $16.00 Source: JLL Research

$2.68 $6.22 psf: $4.01 Average difference between $5.12 Class A&B asking rates by $5.31 submarket $6.22 $6.70 $7.05 $7.89 $11.04

South Atlanta Downtown Northlake Northeast North Fulton Midtown Central Perimeter Northwest Buckhead Source: JLL Research

Northwest North Fulton Northeast MACTEC

NORTH POINT RESOURCES

WIPRO

ECOLAB

DELTA

thyssenkrupp

68% Over last 6 months


133,507,824

325,436

$22.98

2,602,297

Total inventory (s.f.)

Q1 2016 net absorption (s.f.)

Direct average asking rent

Total under construction (s.f.)

17.2%

325,436

10.9%

44.6%

Total vacancy

YTD net absorption (s.f.)

12-month rent growth

Total preleased


50 45 40 35 30 25 20


16

AUSTIN - Travis Rogers Research Analyst, Austin

Supply allows investors the freedom to be choosy Large portfolios coming to market allow for investors to be choosy Traditionally, investors looking to acquire office product in Austin have had relatively few investment opportunities and faced fierce bidding competition. A few large portfolio owners are now bringing their properties to market, creating an array of investment options. While buyers still face intense competition, this increase in overall investment opportunities allows buyers to be more discerning in their next acquisition. There are currently over 3.2 million square feet, representing 6.5 percent of inventory, up for grabs in the Austin market.

Investment opportunities by submarket 4%

4%

9%

3,200,000 s.f. On the market

53% 2,257

30%

NW

New construction preleasing gaining momentum at delivery Four properties, representing over 340,000 square feet, delivered in Q1 2016 across three submarkets. The largest deliveries include Research Park Plaza V (173,000 square feet) and Domain 1 (125,000 square feet). Collectively, these two properties delivered 38.9 percent leased with a rumored 100,000 square feet at leases. The majority of leasing activity occurred within a few months of each delivery, representing a recent trend with speculative developments across all submarkets. The most anticipated deliveries during Q2 2016 are 5th & Colorado (180,000 square feet - CBD), The Arnold (95,000 square feet - East), Domain 5 (75,000 square feet - NW) and The Lakes at Techridge (40,000 square feet - NE). Collectively, these properties are over 60 percent preleased.

Think base rent is driving rent growth? Think again Citywide Class A rents experienced a surge of growth during the first quarter. Contributions to this growth stem from both base rent and operating expenses. Year-over-year, Class A operating expenses downtown increased an average of $2.13 per square foot (12.9 percent) while the suburban market experienced a more subtle increase of $0.69 per square foot (5.5 percent). The real estate tax portion of operating expenses is the main contributor to the increase. As properties trade, their value is reassessed by the local taxing authority to reflect the trade value. When properties trade higher than their assessed value, real estate taxes increase to reflect a higher property valuation.

CBD

FNW

C

SW

Citywide projected construction deliveries and preleasing Preleasing 69%

57%

40%

Future deliveries 59% 70%

77%

36%

39%

Available Space (s.f.)

1,000,000

Leased Space (s.f.)

750,000 500,000 250,000 0 Q3 15 Q4 15 Q1 16 Q2 16 Q3 16 Q4 16 Q1 17 Q3 17

Class A rental rate increase Y-O-Y (Base Rent vs OpEx) $60 $40 $20

CBD

Base

5.5%

OpEx

$18.61

$16.48

$30.18

Suburbs

12.9%

9.2%

$12.56

$13.25 4.6%

$32.97 2,257

$21.75

$22.75

Q1 2016

Q1 2015

Q1 2016

$0 Q1 2015

49,439,503

774,140

$33.72

2,137,233





11.1%

774,140

6.2%

48.9%

Total vacancy



Total preleased



17

BALTIMORE - Patrick Latimer Research Manager, Baltimore

Economic indicators mixed on slow absorption

Leasing activity down, but tenant-in-the-market activity steady Outside of a handful of major renewals, signed leasing activity in the first quarter of the year was tepid, falling short of 2015 by 19.1 percent. Tenants searching the market, however, remained active with over 2.2 million square feet of requirements, which is up 11.3 percent compared to the previous quarter. The largest new deal of the quarter landed in the CBD at 1 South Street, where MECU relocated within the submarket to 55,101 square feet of Class A space. Education & healthcare along with engineering and architecture firms comprised the bulk of demand in the pipeline.

Office employment trends (12-month change) Thousands jobs

Employment drivers mixed at the beginning of 2016 Office-occupying segments of the Baltimore economy grew by a net 4,300 jobs year-over-year, but performance across sectors was mixed. Professional & business services (PBS) led in gains by a wide margin, helping to offset a shrinking government sector. Losses in government were split evenly between local and state, while federal government employment stood unchanged from the prior year. Financial activities and information both started the year with neutral growth. Growth in PBS, which totaled the largest annual gains made since 2013, should help drive net absorption in the office market in the coming quarters.

Professional & Business Services Information Government Financial Activities

15.0 5.0 -5.0

2011 2012 Source: JLL Research

2013

2014

2015

2016

Healthy level of tenants in the market

Active requirements

110

S.f. of active requirements

2,247,512

S.f. of average requirement

20,432

11


Large Class A vacant blocks # of blocks

Existing Class A vacant blocks limited across metro area Limited new construction over the past three years combined with an ongoing flight to quality by tenants has left few vacant Class A blocks across the market. Vacancy for Class A space dipped to 10.0 percent, which is over a 10-year low for Baltimore. As a result, build-to-suit activity has increased and developers have moved forward on speculative development, most notably St. John Properties in Maple Lawn. Several large Class A blocks will hit the market in the coming year, however, with the largest being 152,833 square feet at 750 E Pratt Street, where Exelon will be vacating as they move to Harbor Point.

15 Baltimore City 10

10

5 0

Suburbs

6

4

2,257

25,000 - 50,000 s.f. Source: JLL Research

2

50,000 - 100,000 s.f.

> 100,000 s.f.

71,152,035

29,742

$22.99

1,437,452





12.8%

29,742

1.7%

61.8%

Total vacancy



Total preleased



18

BOSTON - Lisa Strope Research Manager, New England

The first quarter sets a positive tone for the year Tenant demand stays its course Greater Boston experienced yet another solid quarter of net absorption. Strong touring activity across the market combined with the buzz from GE’s announcement in January that it will be bringing its headquarters and 800 new jobs to the Seaport District helped to kick start the year’s positive occupancy gains. With nearly 50.0 percent of the 5.8 million-square-feet of projects under construction preleased and vacancy rates near historic lows, tenants with future growth or relocation plans may be challenged by limited availabilities for value options.

Net absorption continues its positive run

New deliveries in well-located Suburban markets drive Class A rents Suburban Class A rents surged in the first quarter of 2016 due in large part to activity in the 128/Mass Pike market. Class A rents in Boston’s most active submarket are nearing $40 per square foot and grew 5.1 percent in the first quarter alone. Much of this growth can be attributed to the increase in high quality space on the market from new deliveries such as the Atrium Center, a 287,200-square-foot speculative development at 300 Boylston street in Chestnut Hill. Further rent growth is expected as 3.5 million square feet of new supply in Suburban markets is expected to deliver in the next two years. With 53.0 percent of this space pre-leased, nearly 1.9 million square feet may deliver vacant and at above average market rents. But strong demand for highly amenitized suburban projects and continued tightening across Boston’s suburban submarkets, leaves little concern for over supply.

2011 Source: JLL Research

VC money continues to flow into the Boston area In 2015, Boston ranked as the third most popular destination for venture capital investment, after San Francisco and New York. The booming biotech sector took over 40.0 percent of the area’s largest VC deals and is the heart of the region’s startup culture. But Boston’s computer technology sector is also attracting VC investors, particularly in the cybersecurity area. Recent funding deals included Digital Guardian, Cybereason and Bit9. With 44 Massachusetts companies on CB Insights’ 2016 IPO Pipeline, the coming year is set to continue the market momentum.

1,500,000 1,000,000 500,000 0 -500,000 2012

2013

2014

2015

Q1 2016

Suburban Class A rents on the rise (year over year growth) 20% Suburbs Class A Suburbs Class B

10% 0% 2011

2012

2013

2014

2015

Q1 2016

-10%


Boston area attracting more VC dollars Funding

2500

350

Deals

250 2,257

500 2011 Q4

2012 Q4

Source: JLL Research, CB Insights

2013 Q4

2014 Q4

150 2015 Q4

165,505,659

259,388

$33.77

5,715,195





13.9%

259,388

6.0%

49.2%

Total vacancy



Total preleased



19

CHARLOTTE - Patrick Byrnes Research Analyst, Charlotte

Low vacancy helps asking rates increase CBD dominates new development Currently there is just under two million square feet of development underway in the market, with the majority taking place in the CBD. Headlining the new construction are projects at 300 South Tryon Street and 615 South College Street. Spectrum Properties is developing the 638,459-square-foot building at 300 South Tryon Street and anchor tenant Babson Capital will occupy over 200,000 square feet upon completion. Portman Holdings is behind the project at 615 South College Street, the property will total 381,263 square feet at completion. Rental rates stay rising With the current average asking rate sitting at $23.13 per square foot, jumping 0.10 cents from last quarter, it comes as no surprise that ground breakings are occurring. Developers recognize the demand for readily available space and are helping with supply. For the first time, suburban market’s rental rates are being advertised above the $30.00-per-square-foot threshold. With new developments showing strong signs of preleasing, look for rents to continue to rise in the forseeable future. Vacancy reaching historic lows The market’s direct vacancy rate has dipped to a new historic low, reaching 11.0 percent for the first time in 10 years. Since 2013, where the vacancy rate reached 17.4 percent, the rate has been on a slide. Direct vacancy has dropped by 6.4 percentage points since then to the current rate of 11.0 percent. With tenants competing to secure the best available space in the market, it is likely that vacancy will continue to tighten moving forward.

Under Construction 5,000,000.00 4,000,000.00 3,000,000.00 2,000,000.00 1,000,000.00 0.00 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: JLL Research

Asking rates continue to push $25.00 $23.00 $21.00 $19.00 $17.00 $15.00 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Q1 2016 Source: JLL Research

Direct vacancy 20.0% 15.0%

17.9%17.0%16.9%17.4% 15.5% 14.3% 10.0% 14.7%13.8% 12.7% 12.0% 11.0% 5.0% 0.0%

2,257 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Q1 2016 Source: JLL Research

47,047,960

349,090

$23.13

1,987,222



Direct average asking rate


11.6%

349,090

5.6%

55.3%

Total vacancy



Total preleased



20

CHICAGO (CBD) - Hailey Harrington Research Analyst, Chicago CBD

Strong 2015, felt in 2016 Quarter in review Strong leasing activity in 2015 continued into the first quarter of 2016. Interestingly, much of the recent activity was concentrated in submarkets that typically see fewer large deals. Historically a quiet submarket, the East Loop has surprised some office market observers this year, posting a record low Class A vacancy rate and the largest positive net absorption of any submarket, due to move-ins from Kraft Heinz, Zeno Group, and JLL’s HQ expansion, among others. This recent office activity in the East Loop is just one part of the overall energy in the area. With several hotels under development between Millennium Park and the Chicago River, and retail migrating south along Michigan Avenue, the East Loop appears poised for a strong resurgence in tenant and investor demand. Elsewhere in the CBD, many tenants have begun preleasing shadow space that will be available in high-quality assets at below market rents. This trend will likely continue as tenants expand their footprints to accommodate growth and large tenant lease expirations begin rolling in the next few years. Note that sublease availabilities increased to over three million square feet, a near record high. West of the Loop, Fulton Market continues its streak as the submarket with the most initial tenant interest, despite rising rents that now match those of more established areas..

East Loop’s historical Class A net absorption 282,536 181,877

24,851

3,072


2014

2015

Q1 2016

Total vacancy rate $35.3

$35.0

Central East Loop Loop

$39.0

$33.8

West Loop

Fulton Market


$39.9 $27.9

Far West Loop

River North

$32.1

$37.2 $25.2

River N South West Michigan Loop Ave

Outlook While investment sales activity has slowed in 2016, several high-profile Under Construction concentrated in the traditional CBD properties are now available for sale, including 1K Fulton and the still-unfinished 150 N Riverside. The demand and pricing for these assets will be important 431,000 indicators of the state of the Chicago capital markets. Additionally, the CBD development pipeline remains strong, with several boutique projects planned in Fulton Market, and a few Class A towers that could break ground if they are able to secure just a few more large tenant commitments. As new projects move Kennedy West forward, the Class A towers along Wacker Drive will be the assets to watch, either 3,127,164 for rising vacancy or quick backfill. Their occupancy will reflect the overall strength of the Chicago leasing market. Source: JLL Research

138,715,835

1,224,960

$36.90

3,558,164





11.5%

1,224,960

3.8%

55.0%

Total vacancy



Total preleased



21

CHICAGO (SUBURBAN) - Christian Beaudoin Senior Vice President, Research Central Region

Strong leasing demand, yet large blocks remain Quarter in review Despite continued concern that today’s employees prefer urban offices, the real estate market in the Chicago suburbs kicked off the year with a sequence of tenants recommitting to the suburbs. The largest of these transactions was AIM Specialty Health signing a renewal at 540 Lake Cook Road for 94,000 square feet. Also recommitting to the suburbs this quarter was Houghton Mifflin Hartcourt, which renewed its lease at 909 Davis Street in Evanston for almost 60,000 square feet.

Total net absorption (s.f.) 1,643,439

-242,577

Outlook While leasing activity is strong, the suburban vacancy rate will continue to battle against an abundance of available large blocks of space. With a series of large blocks scheduled to become available throughout 2016, the suburbs will continue to rely on tenants like Donlen, HSBC, Verizon, Lundbeck and McShane who all have moves already planned for 2016. And with tenants such as Paylocity, Conifer Health Solutions, Northwestern Medicine and Bosch out in the market Class A large blocks will be in demand.

436,164

-107,998

-283,123

-1,018,749 -2,165,869

2007

Notably, a significant portion of the leasing activity this quarter (40.8 percent of leases over 10,000 square feet), were signed by medical and healthcare tenants. Besides AIM Specialty Health, tenants including Millennium Medical, IKS Health, Advocate Healthcare and Lundbeck completed large transactions.

1,277,749

153,085

394,775

2008

2009

2010

2011

2012

2013

2014

2015

2016

Total vacancy rate 22.8% 20.0%

24.8% 25.0% 24.5% 24.6% 24.3% 22.6%

20.7% 18.5% 18.9%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Direct average asking rent ($ p.s.f.) After several years with no new speculative development in the suburbs it was announced that the Alter Group will be moving forward with Phase 4 of Corridors $24.10 North in Downers Grove. This announcement of spec development in the Eastern $23.74 $23.49 East-West Corridor strongly reflects the trend of the submarkets immediately $23.08 $23.08 $22.61 surrounding Chicago outperforming the suburbs which are further from the core. With the lowest vacancy rates and highest rents, the submarkets of the Eastern East-West Corridor and North Cook County are likely to continue to attract tenants at the expense of the farther-out submarkets.

$23.12

$23.60 $23.43 $23.40 $22.91

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

18.9% Total vacancy

436,164 YTD net absorption (s.f.)

436,164 Q1 2016 net absorption (s.f.)


753,000

13.0%



100.0% Total preleased


22

CINCINNATI - Ross Bratcher Research Analyst, Great Lakes

Large block leasing remains hot into 2016 Large block leasing builds on Q4, posts strong first quarter Large block leasing activity built on the momentum of the fourth quarter of 2015 with eight leases signed over 20,000 square feet. Large block leasing was most active in the northern suburban markets, while leases were also signed in the CBD, CBD peripheral, and Northern Kentucky submarkets. This further solidified the strength of the Cincinnati office market as large block leasing activity was focused in the Midtown and Kenwood submarkets in fourth quarter of 2015. Large block leases were signed in both Class A and B product over the last two quarters, showing positive tenant demand for both classes across the market. Office investment continues hot streak in the first quarter The Cincinnati office market has seen significant sales activity since the start of 2015. The trend continued in the first quarter as Landings I&II and McAuley Place traded for a combined total of $87.4 million. The flow of capital into the office market has been driven by out of town investment in the form of private capital groups and equity funds looking to the Cincinnati market to broaden their portfolios into secondary markets and generate a return from Cincinnati’s recent momentum. The major players in the market span from New York to California, further solidifying Cincinnati as a national destination for firms looking to invest in secondary markets. Downtown office conversion momentum continues The Central Business District has seen multiple conversions of Class B office space over the last 18 months and the first quarter proved to be no different. Both the Textile Building and the Hartford Building traded with the intent to repurpose the properties into mixed-use and residential, respectively. This trend has gained steam due to increased residential and hospitality demand in the market, as well as a lagging Class B office market in the CBD. Other notable projects include Fourth & Walnut Centre, which will be converted into a mixeduse complex that will include up to three hotels, and 309 Vine, which will be repurposed for residential units.

Large block leasing activity surges in Q1 80,000

Leased s.f. 60,000 40,000 20,000 Veritiv

United Mercy Health Health Care

Business Backer

Quotient Technology

The Potter Law Firm

Out of town office investment since Jan 1, 2015 $120

Total acquisition cost (millions)

Number of transactions

$100

8 6

$80 4 $60 2

$40

$20 0 Smith/ Hallemann Van Trust GriffinGriffin Smith/Hallemann Capital Partners Carter Validus Rubenstein Partners Apollo Global Rubenstein VanReal TrustEstate Carter Apollo Partners Partners Real Estate Capital Validus Global

Notable Downtown conversion projects Property

Owner

Bldg s.f

Fourth & Walnut Centre Hudson Holdings

375,000

309 Vine

Village Green Cos.

300,000

Textile Building

Hudson Holdings

213,000

Hartford Building

Vulcan Property Management

64,000


34,582,680

285,382

$19.25




200,000

2,257


17.4%

285,382

0.7%

28.5%

Total vacancy



Total preleased


Graydon Head


23

CLEVELAND - Andrew Batson Research Manager, Great Lakes

Market continues to strengthen, forecast is positive Public investment induces private investments near Public Square The economic theory that public investments in infrastructure will generate increased levels of private investment is proving true once again in the heart of downtown Cleveland. The $50.0 million overhaul of Public Square in the core of downtown Cleveland is fast approaching a June 2016 completion date. The 10acre transformational project has caught the interest of real estate investors, who have been active in acquiring property adjacent to the square. A handful of properties have transferred in the last two years with a combined value of $194.5 million. However, the Key Center complex, which is currently listed for sale and includes 1.3 million square feet of office space and a 400-room Marriott, could trade for more than all of the recent sales combined—as much as $285.0 million. Residential demand has a positive impact on the downtown office market Residential demand in downtown Cleveland has increased significantly over the last 15 years and this has had a positive impact on the office market. The increase in demand has been driven predominately by the millennial generation and a desire to live, work, play in the urban core. The downtown population now stands at 14,000, representing a 79.0 percent increase since 2000. The increase in demand has required a significant amount of new supply. While a portion of this added supply has been ground-up construction, the majority has been the product of residential conversions of underutilized and functionally obsolete office buildings. In total, more than 3.3 million square feet of office product has been repurposed into residential, leading to a tightening of the office market. The suburban submarkets quietly regain their footing With so much excitement and focus on downtown Cleveland and its high profile wins in recent quarters it’s easy to understand how the suburban submarkets could be overlooked. However, once considered down-and-out by many, the suburbs have quietly regained their footing. This is particularly true in the Rockside Corridor, Cleveland’s largest suburban submarket. Rockside has retained several key tenants and attracted a few new ones in recent quarters. Those tenants include Farmers, Honeywell, Vox Mobile and Chart Industries. While the average asking rate in the submarket has remained fairly flat over the last six years, the vacancy rate has recorded a substantial reduction.

Recent sales comps near Public Square Address

Use

Size

Sales price

100 Public Square

Office

815,000 s.f.

$79.0M

230 W Huron

Retail

577,000 s.f.

$56.5M

1600 W 2nd Street

Office

321,000 s.f.

$34.5M

24 Public Square

Hotel

491 rooms

$20.5M

75 Public Square Office 150,000 s.f. Source: JLL Research, Real Capital Analytics

$4.0 M

Office product taken offline for residential conversion (m.s.f.) 1.2 0.8 0.4 0.0 2012 Source: JLL Research

2013

2014

2015

Rockside Corridor office market fundamentals Average asking rent

Total vacancy

$20

35%

$19

25% 2,257

$18

15%


2012

2013

2014

2015

YTD 2016

28,121,038

95,963

$19.07

47,000





19.3%

95,963

0.3%

33.3%

Total vacancy



Total preleased



24

COLUMBUS - Ross Bratcher Research Analyst, Great Lakes

Suburban submarkets deliver strong start to year Large absorption gains recorded across every submarket cluster Strong demand for suburban office space spanning the entire market led to a huge first quarter for the Columbus market. Alliance Data, which leased 86,000 square feet at its new office campus in Easton, topped the market in the first quarter. XPO Logistics signed a 63,000-square-foot lease for former Verizon Wireless space in Dublin leading to 40,914 square feet of positive absorption in the submarket for the first quarter. The Polaris submarket recorded just over 40,000 square feet of positive absorption thanks to several leases ranging from 7,000 to 12,000 square feet. Capitol Square recorded over 41,000 square feet of positive net absorption, showing strength in the CBD.

Absorption breakdown by submarket cluster (s.f.)

Investors look to Class B product for higher returns Investors have turned to secondary markets for office investment as returns in primary markets continue to shrink. Investors looking to secondary markets such as Columbus are in search of value-add plays, often acquiring Class B assets with vacancy in the building. Through the improvement of common area facilities and aggressive tenant improvement packages, investors are able to make the properties more enticing for tenants. This trend can be seen with Lone Star Fund’s acquisition of Metro IV and V in the Dublin submarket. The Worthington submarket also saw a significant Class B trade with the sale of Three Crosswoods Center.

Notable first quarter office sales

Class B product continues to lag Class A The first quarter of 2016 showed a continued trend of Class A space outperforming Class B product in the Columbus market. The Class A vacancy rate was positively impacted by large users signing leases in the first quarter, of which six of the seven largest executed leases were for Class A space. Due to high rates of Class A absorption over the last six quarters, the market has shifted in favor of landlords due to a lack of quality space. Developers are responding to the continued tenant demand with multiple new projects in the pipeline. As the new projects are completed in late 2016 and early 2017, the vacancy rate is projected to increase slightly while tenants fill the newly delivered space.

46,544

CBD

50,177

Northeast Northeast

42,245

72,540

Northwest


Property

Buyer

Price ($M)

Bldg s.f.

Metro Center IV & V

Lone Star Funds

$16.3

320,414

2405 Columbus St

Physicians Realty Trust

$12.8

73,465

Three Crosswoods Center

Hudson Holdings

$7.5

117,309

Crosswoods Tech Center-B

RCS Crosswoods

$3.6

77,890


Vacancy Trends Class A

22.0%

Class B

18.0% 14.0% 10.0% 6.0% 2011 Source: JLL Research

2012

2,257 2013

2014

2015

Q1 2016

30,482,513

211,506

$17.51

580,692





13.1%

211,506

0.2%

25%

Total vacancy



Total preleased



25

DALLAS - Walter Bialas Vice President, Research, Dallas

Absorption pace pauses, construction remains high Vacancy beginning to rise as new construction outpaces absorption Corporate relocation and consolidation continues to be driving office demand. Two examples include McKesson’s recent purchase a 500,000-square-foot complex in Las Colinas to consolidate and expand in the region, while Spire Realty Capital will be relocating their corporate headquarters from Arizona to Uptown in mid-2016. In the first quarter of 2016, new speculative construction outpaced net absorption, moving total vacancy up slightly to 19.1 percent. While drifting upward, vacancy remains near the region’s historic low, as well as for many submarkets. We expect vacancy to increase slightly through 2016, and the slow pace of first quarter absorption seems to be more related to the market taking a pause after 2015’s a very robust pace. Rate pressure remains in place Despite the vacancy increase, rent pressure remains in effect for all submarkets. Year-over-year, direct asking rates increased for Class A and B space by 7.4 percent. Rent increases ranged from 1.0 percent in Preston Center to 18.0 percent for North Central Expressway, as tenants look for rent relief from higher rent areas like Preston and Uptown. Brokers commonly report sticker shock as some tenants are seeing renewal rates 25.0 to 40.0 percent above their existing leases. We expect new Class A construction to put upward pressure on rates as space is delivered, which is also putting upward pressure on Class B properties. There is also a move to convert typically quoted “plus-electric” rates to triple net in an effort to maximize NOI and limit expense exposure. Construction pipeline is large, strong absorption needed to keep pace While the construction pipeline is above the historic average, more than half is made of a handful of very large built-to-suits (most of which will deliver in 2017 and early 2018). In the first quarter, over one million square feet was delivered (half built-to-suit, half spec). During 2016, another 3.6 million square feet is scheduled for completion. Of that pipeline, two million square feet is not builtto-suit or preleased. Recently signed deals point to higher net absorption later in the year, but we expect vacancy to inch up in 2016 due to the high volume of spec construction.

UC pipeline large, large portion is built-to-suits 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 YTD Source: JLL Research

Class A & B rental rates by submarket p.s.f. $36 $31 $26 $21 $16


Majority of spec construction scheduled for 2016

2.5 million s.f. (vacant spec will be delivered in 2016) 2,257 Source: JLL Research

162,502,918

164,935

$24.79

8,307,051





19.1%

164,935

7.4%

66%

Total vacancy



Total preleased



26

DENVER - Amanda Seyfried Senior Research Analyst, Denver

Economy remains strong through slow first quarter Metro Denver boasts the lowest unemployment in the nation Denver has among the nation’s most diverse sector compositions, helping drive its economic expansion to a level bested by very few other metros. Further, consistent in-migration has provided companies a large pool from which to choose. Hiring has followed: up 15.2 percent in the past five years, local officeusing job growth has outpaced the U.S. and hit a record high in August 2014. In January 2016, Denver had the lowest unemployment of 51 metros with populations of one million or more, clocking in at 3.0 percent. Unemployment has been declining since 2012, and swiftly so since 2014. Decreases will likely not continue at this pace, but will continue to decline at a flatter rate. Large tenant subleases and move-outs contribute to negative absorption Negative net absorption in the first quarter can largely be attributed to sublease space becoming vacant. Specifically, Newfield Exploration and WPX Energy’s subleases at 1001 17th Street in West CBD contributed to over 240,000 square feet of the total 349,535 square feet of occupancy losses during the quarter. In the Southeast Suburban, CoBank fully vacated 225,000 square feet at its old headquarters at 5500 S Quebec Street for its shiny new build-to-suit space at 6340 S Fiddlers Green Circle, which was largely occupied in Q4 2015. Tenants including WeWork and Comcast will occupy large blocks of space in the coming quarters, which will help to dig absorption out of the red. Non-vacant availabilities on the rise With negative net absorption, the first quarter ended with a rise in vacancy at 12.6 percent direct and 13.7 percent total vacancy, including subleases. These numbers are a far cry from the 18.0+ percent total vacancy numbers seen in the midst of the recession, however availability in both vacant and non-vacant spaces is increasing rapidly throughout the market. In the CBD, total availability exceeds 19.0 percent including the large number of oil and gas subleases currently available. In Southeast Suburban, total availability north of Belleview Avenue is currently 33.6 percent, because of large blocks recently placed on the market. These numbers are expected to remain consistent in the coming quarters, with a few spaces being absorbed due to recent leasing activity.

Year-over-year change in unemployment (percentage points) 2.1%

2.0%

0.4%

0.2% -0.5% -0.7%

-0.8%

-1.7% -1.6% -1.5% 2007 2008 2009 2010 2011 2012 2013 Source: JLL Research, Bureau of Labor Statistics

2014

2015

2016

Total net absorption as a percent of inventory 2.0%

1.0% 0.5%

1.6% 1.7% 1.8%

1.4%

1.5% 0.4%

0.1% 0.0%

0.5%

0.0%

-0.3%

-0.1%

-0.5%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: JLL Research

Increase in available office space including occupied space

18.0% + 2,257

Overall market availability including non-vacant spaces Source: JLL Research

107,645,722

-349,535

$26.19

2,965,842





13.7%

-349,535

9.3%

23.0%

Total vacancy



Total preleased



27

DETROIT - Aaron Moore Research Analyst, Great Lakes

The gap between CBD and suburbs is narrowing Detroit, a bright spot in a slowing sector Nationally the real estate market feels like it’s moving into precarious times. Volatility in financial markets is hurting real estate demand. Rates of return are falling and lenders are getting stingier when it comes to funding risky U.S. real estate developments, putting pressure on landlords in need of fresh funding to keep their projects afloat. However, Detroit is feeling like a bright spot. This can be attributed to the commitment of a few to make sure Detroit never slips back to pre-bankruptcy conditions. While conventional lending is still hard to come by, unconventional lenders and the myriad sources of credit and incentives are still making Detroit development an attractive option. Positive trends continue in Detroit’s urban submarkets Detroit has a bit of a conundrum, so to speak. With one entity controlling the majority of the urban office market the question remains, what impact will one voice and vision have on the overall market? As it stands the trends remain positive. Absorption for the quarter in the urban submarket was 80,184 square feet, vacancy stood at 13.7 percent with no change quarter-over-quarter; however it decreased 2.7 percentage points year-over-year. Rents year-overyear showed a 2.7 percent uptick. Furthermore, Class A supply remains constrained, but should loosen up as more office properties undergo upgrades and renovations. Suburban submarkets are reinventing themselves Not long ago, Detroit’s suburban office markets were on edge, fearing a mass exodus of companies moving from the suburbs to the urban core. However, millennial buyers, strapped by student debt, stagnant wages, and tighter credit, are having a more difficult time renting or buying housing in the urban cores. As the largest generation in history matures and forms families, economics suggest that developers will pursue cost-effective opportunities to house them in transformed suburbs. This may explain why Detroit’s suburban office vacancy rate decreased 5.7 percentage points year-over-year. Class A suburban office remains competitive as rents continue their upward trend ending the quarter at $23.90, an increase of 2.5 percent year-over-year.

Historical Detroit vacancy rates 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 2013 Source: JLL Research

2014

2015

YTD 2016

CBD absorption and rents Total Absorption

$21.00

Rents

240,000

$20.50

180,000

$20.00

120,000

$19.50

60,000

$19.00

0

Q1 2015 Q2 2015 Source: JLL Research

Q3 2015

Q4 2015 YTD 2016

Suburban Class A rents and vacancies Rents

15.00%

Vacancy

$24.00

12.00%

$22.00 2,257 2014

9.00% 2013

$20.00 2015

2016


61,651,347

-62,018

$18.35

401,334





19.4%

-62,018

-.3%

93.8%

Total vacancy



Total preleased



28

EAST BAY - Katherine Billingsley Research Analyst, Oakland - East Bay

680 poised for a steady climb through 2016 East Bay’s labor force relevant to changing workplace trends Workplace trends are evolving in some offices from high cube partitions to open-space floorplans. Some companies view this as a tool to capture and retain new talent, and the East Bay is a hub for a viable and educated workforce. Evolving workplace trends are not specific to startups and tech companies, some traditional and corporate companies are gradually catching on as well. Workplace dynamics are changing to accommodate and attract more employees, increasing the need for parking, translating into a strong demand for locations near transit. In the last five years, BART ridership has increased 30.8 percent in the East Bay. There is nearly 400,000 square feet of tenant demand targeting transit markets; however, vacancy rates in these markets such as Downtown Walnut Creek (WC) and Pleasant Hill-BART are down to single digits (9.5 percent and 8.8 percent, respectively). Location, location, location In secondary markets along the 680, tenants are challenged to find space that will accommodate the needs of their employees. Companies view their location as a competitive advantage and are targeting offices with walkable amenities and access to transit. As a result, rental rates in core markets such as Downtown Walnut Creek have grown 8.3 percent y-o-y, while Pleasant Hill-BART rents grew by 14.0 percent y-o-y. Despite the sticker shock from increased rents in recent years, some tenants are negotiating renewals in lieu of relocating to more affordable markets or commodity space in order to keep their employees close to nearby amenities. Rent-sensitive and expanding companies are shifting demand toward markets such as Concord or the Tri-Valley where large blocks remain available. In the Tri-Valley, where BART is not an option, major office campuses have been providing free transportation to and from BART for employees. Developers are making efforts to lure tenants by providing city-like elements on campus grounds, creating a quasiurban lifestyle. Positive outlook for the remainder of 2016 Notable leases this quarter include large user deals like Cisco Systems and Trumark Commercial, who leased space in Pleasanton and San Ramon, respectively. The Tri-Valley continues to attract tenants with its greater supply of large blocks; this is a key point of differentiation in the southern end of the corridor. In the North 680, tenants continue to look into quality options that are on par with Trophy assets in other major Bay Area markets. With rent showing steady increases since last year, landlords remain optimistic and will continue to push rental rates amidst strong demand and large user activity. Additionally, investment activity is expected to accelerate moving into 2016 as major building projects come to the market in the next three to six months. Stabilized occupancies provide growth opportunities for investors and signify a positive outlook in East Bay for the remainder of 2016.

Tenants target transit markets

Of the 615,500 square feet of tenant demand along the 680 Corridor, 60.0 percent are targeting submarkets with a BART station.

60%

Source: JLL Research, tenant demand as of March 2016

Year-over-year rent growth strong in core submarkets 20.0% 14.0%

15.0%

8.3%

10.0%

4.7%

4.4%

Pleasanton

San Ramon

5.0% 0.0% PH-BART Downtown WC Source: JLL Research, Q1 y-o-y figures

Average direct asking rent along the 680 Corridor ($/psf) PH-BART

$42.12

Downtown WC

$40.68

Dublin

$32.40

Pleasanton

$31.44

San Ramon

2,257

Pleasant Hill Concord

$30.00 $29.64 $28.08

$22.80

Livermore


27,725,116

56,533

$30.84

0





13.3%

56,533

5.8%

0.0%

Total vacancy



Total preleased



29

FAIRFIELD COUNTY - Dayna McConnell Research Analyst, Fairfield County

Pockets of promise despite looming setbacks Demand for office space remains high in Greenwich Increased leasing activity in both the CBD and non-CBD contributed to a 2.2 percent rise in absorption. Landlords of Class A buildings in the CBD are taking advantage of the high demand and decreased availability; asking rents have climbed as high as $100.00 per square foot in some buildings, a rate which hasn’t been seen since before the recession. As vacant space is absorbed in Greenwich, upward pressure may be placed on the Stamford office market, likely resulting in higher asking rents in Stamford’s Class A buildings.

Vacancy rate declining in Greenwich CBD 25.0% 18.1%

20.0%

20.5% 19.1%

17.3% 17.6% 17.6% 16.2% 16.0%

15.0% 10.0% 5.0% 0.0%

Stamford CBD starts off slow as Stamford South activity increases Leasing activity in Stamford’s CBD was weak in the first quarter of 2016, while activity in Stamford South continued to gain even more momentum. Bridgewater & Castleton Commodities penned two of the largest leases, accounting for 132,000 square feet of positive absorption in Class A space at BLT’s Harbor Point. Despite a lackluster first quarter in the CBD, overall vacancy rates in the first quarter in Fairfield County were 32.1 percent, rising only slightly from 31.9 percent at the end of 2015. Longtime businesses say goodbye to Connecticut Fairfield County’s commercial real estate outlook is hazy for the year ahead as large tenants depart the market. In the first week of January, GE formally announced plans to relocate their corporate headquarters in Fairfield to Boston, MA, in effect leaving upward of 382,000 square feet of suburban office space vacant. RBS and UBS have downsized, leaving large blocks of vacant space. Beyond these finalized deals are questions involving Starwood Hotels and Charter Communications, rumored to be relocating out of Connecticut following mergers. There may be some light at the end of the tunnel; law firms and financial tenants continued to renew or lease new space in Stamford’s CBD. Additionally, the healthcare sector is growing with hospitals needing space for ambulatory care centers. This drives demand for space; owners struggling to find tenants may benefit from repositioning an office building to meet the developing needs of medical users.


2011

2012

2013

2014

2015 Q1 2016

Stamford South sees increased activity, follows trend in 2015

132,000 s.f. Positive absorption in Stamford South during Q1 Source: JLL Research

Q1 Stamford leasing activity by industry 9%

25%

7% 7% 9%

17%

11% 15%


2,257

Financial/Banking Aviation Law Firms Healthcare Business Services Accounting Tech Other

48,491,420

402,225

$31.90

0





24.4%

402,225

1.3%

0%

Total vacancy



Total preleased



30

FORT LAUDERDALE - Marc Miller Research Manager, Florida

Downtown leads the way as vacancy declines

A number of properties trade as investment in Broward County continues Activity started early this quarter as Tower 101 (along with 101 Centre) sold for $56.3 million ($245 p.s.f.) when Ivy Equites purchased the property from Banyan Street Capital. This mark the first major downtown building sale since New River Center traded in December 2014. Also notable, the Weston Pointe properties (buildings I, II, III, and IV) traded in Southwest Broward when New York Life picked up the buildings from Duke Realty. In addition to the most recent sales, Duke Realty has sold 12 other office properties (in the Western Broward suburban markets) since the start of 2014, reducing their market share in the area. Currently, their notable office ownership consists of the new Pembroke Pointe project (the first building of the project was recently delivered), just off Pines Boulevard and I-75 in Southwest Broward. The majority of leases signed in Cypress Creek are tenants staying in place Among actively tracked transactions, less than 40.0 percent of all leasing activity since mid-2014 in Cypress Creek has been from new-to-market tenants. Comparatively, 55.0 percent of leasing activity has come from tenants signing renewals or expanding at current properties. In addition, the average tenant size in Cypress Creek is just over 3,000 square feet, making spec suites a viable option for landlords trying to lease up space. Many smaller tenants (under 3,000 square feet) look for space that is turn-key and is ready to occupy faster than the more traditional larger tenants.

Downtown Class A vacancy continues to decline 40.0%

Las Olas

Off Las Olas

20.0%


A number of trades shift ownership market share Name

Buyer

Seller

Price

Tower 101 & 101 Centre

Ivy Realty

Banyan Street Capital

$56.3M

Weston Pointe I

New York Life

Duke Realty

$28.9M

Weston Pointe II

New York Life

Duke Realty

$28.7M

Weston Pointe III

New York Life

Duke Realty

$28.7M

Weston Pointe IV Source: JLL Research

New York Life

Duke Realty

$28.4M

Cypress Creek leasing activity shows strong tendency for tenants to stay in place New-to-market

22%

36% 2,257

33%

9%

Lateral relocation Renewal Expansion

22,984,000

48,000

$28.17

95,100





16.0%

48,000

2.4%

0.0%

Total vacancy



Total preleased


2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

0.0%

2000

Downtown, led by the trophy assets, had a strong start to 2016 Vacancy among Downtown Trophy assets declined for the fifth straight quarter as it reached 6.1 percent – the lowest point since the delivery of Bank of America Plaza in 2002. Thi quarter’s 50 basis point decline was driven by the move-in of Goldstein, Schechter, & Koch (CPA), which occupied 15,000 square feet in SunTrust Center. In addition, the Class A properties off Las Olas saw quarterover-quarter decline in vacancy as a number of tenants occupied space, propelling positive absorption. Further, the current vacancy spread between Las Olas Trophy assets and those off Las Olas is 250 basis points below the five year average with an 11.8 percent differential (current Las Olas total vacancy is 6.1 percent and Off Las Olas vacancy is 19.1 percent).


31

HAMPTON ROADS - Geoff Thomas Senior Research Manager, Richmond

Large block leasing activity gaining momentum Total new jobs announced (all industries) Jobs in Thousands

Economic development wins begin upward trajectory The Hampton Roads market transitioned into 2016 with major wins for the local economy. The largest attainment, ADP, will be opening a regional service center in Downtown Norfolk and move into 287,000 square feet at 2 Commercial Place (currently under renovation) by 2017. The move will expand Downtown Norfolk’s tenant tapestry, but raises questions around whether this submarket can accommodate the increased parking and housing demand from 1,800 new positions. Without the addition of any new parking structures, the relatively recent implementation of light rail in 2011 (The Tide) and new multifamily developments surrounding the CBD will be tested by this immediate influx of personnel Downtown.

6.0 5.0 4.0

4.9 3.9

3.5 3.3

2.9

3.0

2.4

3.5

3.1

2.4 2.4

1.8 1.9

2.0 1.0 0.0

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Virginia Economic Development Partnership

Blocks of available space over 50,000 square feet Some large requirements opting for non-traditional office buildings Space constraints in both the Class A and Class B office inventory guided some larger requirements to older retail centers. The most recent example is Movement Mortgage’s executed lease at the Military Circle Mall in the Central Norfolk submarket. A former 209,109-square-foot anchor space will be converted to office with Movement Mortgage initially taking on 75,000 square feet as the first tenant for their expanded operations center. Aside from the lack of large blocks, drivers for this non-traditional space have been low space costs and higher parking ratios that have allowed users to maximize space efficiencies. Modest leasing momentum pushed several loans into troubled status CMBS loans that originated during the height of the recession were nearing maturity, leaving some landlords that were unable to capture a portion of limited tenant demand in imminent default. 500 E Main Street in Downtown Norfolk was purchased by NPV Direct Invest in 2007, and was unable to secure additional tenants over the past two years. The 228,730-square-foot tower was 68.0 percent leased at the time of default and was scheduled for auction next quarter. Despite the recent partnership between Rosemont Realty and Gemini Investments, 300 E Main Street entered troubled status after losing several key tenants, most notable were USI Insurance and MMM Design.

Class A

3

Class B

1

1

Peninsula

Southside


Total office inventory with troubled CMBS loans

1,457,724 2,257 Square feet Source: JLL Research

18,612,715

311

$18.47

287,858





14.3%

311

0.1%

100%

Total vacancy



Total preleased



32

HOUSTON - Eli Gilbert Vice President, Research, Houston

2016 begins with continued market downturn

Building sales activity reflects a concerned market A combination of oil price concerns and job losses continue to cause pullbacks in the market, and the effects were seen peripherally in office sales activity. While the number of buildings trading hands remained the same as the prior quarter, there was a marked shift in size and class toward smaller Class B trades. The lack of Class A asset transactions is reflective of a market in flux, with buildings owners largely taking a cautious approach to putting Class A or Trophy assets on the market. As these buildings, for the most part, have solid tenant bases and limited roll, building owners are content to sit on the sidelines and wait out the market uncertainty as opposed to putting an asset on the market and not finding the demand and transaction terms to their liking. Market and tenants cautious as “Trough” questions remain West Texas Intermediate oil, a benchmark for American oil production, rebounded over the prior 90 days, holding near $40/bbl during the quarter. While this represents an increase over year-end 2015, the impact has yet to be felt in the market. Leasing activity overall remained sub 2.0 million square feet during the quarter, with only 11 leases greater than 20,000 square feet executed and minimal activity among tenants new to the market. 9.1 million square feet of tenants in the market await the answer to the question of has the Houston market reached it’s trough? Once answered, Houston may see companies begin to re-enter the market to take advantage of the tenant-favorable status it holds in 2016 and 2017.

Sublease space arriving to market over prior 15 months

Mar. 2016

Jan. 2016

Nov. 2015

Sep. 2015

Jul. 2015

May. 2015


Mar. 2015

2,000,000 1,500,000 1,000,000 500,000 0 Jan. 2015

New large blocks of sublease space arrive and add pressure to market 2016 continues at a record pace in terms of sublease space in Houston’s office market, with companies such as Shell, BHP Billiton and Technip adding 100,000 square feet or more to the market during the first quarter. These additions give Houston a record 9.4 million square feet of sublease options, while continued downsizing and M&A by energy firms in 2016 are expected to add additional space to market to push the total to close to 10 million square feet by year-end. Additionally, a decrease in both direct and sublease leasing velocity has total available space within the market to an all time high of 24.0 percent of stock. The combination of these factors, along with 2.7 million square feet of still to be leased new deliveries will push market vacancy to near 20.0 percent by the end of 2016 and mark the beginning of a challenging year for Houston’s office market.

3 total building sales occurred in Q1 2016 Only Class B activity occurred in Q1 2016 totaling

$76.8 million Source: JLL Research

Tenants remain cautious and waiting for bottom of market S.F. of tenant requirement in the market in preliminary or hold stages

4,173,300 s.f. 2,257 Source: JLL Research

162,600,425

227,138

$29.69

5,723,178





17.7%

227,138

0.5%

52.0%

Total vacancy



Total preleased



33

INDIANAPOLIS - Mike Cagna Senior Research Analyst, Indianapolis

Indianapolis office market off to a good start in 2016 Several large transactions kick off the new year The Indianapolis office market has started 2016 off with a bang as there have already been five leases signed in just the first three months of the year in excess of 40,000 square feet. By way of comparison, there were only seven such deals signed all of last year. There are an additional two or three significant lease transactions that may close later this year. One of which has the potential to be the single biggest lease transaction closed in Indianapolis since RollsRoyce North America signed on to lease Faris I and II in downtown Indianapolis in 2011. Construction activity heating up Several office projects are currently under construction in Indianapolis with several more scheduled to break ground soon. 580 E Carmel Drive was delivered this quarter with approximately 7,300 square feet pre-leased to the Garg Group. 22,000 square feet remains available for lease. By year’s end Lakeside Green Business Center, River North at Keystone and the Marietta on Mass will come online adding more than 140,000 square feet of Class A space to the market. In addition, deals were recently signed by Allied Solutions, Stanley Security Solutions, Braden Business Systems and Blue Horseshoe to anchor soon to be developed office projects totaling an additional 294,600 square feet. Investment activity centers on downtown Indianapolis Seven office investment transactions closed during the first quarter, five of which involved properties located in the CBD. Two of the properties were purchased by hotel operators and will be converted from Class B office space into hotels in the not too distant future. This mimics a trend being seen across the country where office buildings are being scooped up and redeveloped into multi-family or hospitality. Other examples of this trend can be seen around downtown Indianapolis as the Brougher Building was purchased last year for conversion into multi-family. Meanwhile, the Consolidated building and Illinois building are both currently being redeveloped into hotels. The non-CBD properties that traded were Glendale Tower (Midtown) and Merchants Pointe (North Meridian/Carmel).

Top leases signed this quarter Tenant

Size (s.f.)

Allied Solutions

Location

109,600 Midtown Carmel

Stanley Security Solutions

80,000 Fishers Pointe

Sallie Mae

75,558 Three Woodfield

Republic Services

68,000 Two Concourse

NextGear Capital, Inc.

44,479 City Center @ Penn

Breakdown of current office development pipeline

31.4% S.f. available S.f. pre-leased 68.6% Source: JLL Research

CBD office investment activity this quarter Location

Size (s.f.) Buyer

Lockerbie Portfolio

179,870 Gershman Partners / Citimark

210 S Meridian Street

88,564 Choice Hotels

One North Pennsylvania

82,565 NAYA USA Investment & Management

One Jackson Square

60,000 OP McCrea Indianapolis, LLC.

IBJ Building

57,625 Drury Hotels

31,569,882

-1,501

$19.00

301,050





15.6%

-1,501

0.2%

29,200

Total vacancy



YTD completions (s.f.)



34

JACKSONVILLE - Drew Gilligan Senior Research Analyst, Central Florida

Slow first quarter not a cause for concern Choppy leasing activity year-over-year From 2010-2014 the Jacksonville office market recorded an average of 1.5 million square feet of leasing activity. In 2015 leasing activity totaled more than 2.5 million square feet, a 40 percent increase from the market average. A number of large groups already in the market signed leases, explaining the large jump. However, to start the year, leasing activity is down 35.0 percent compared to average first quarter activity over the past five years, but this is likely an abnormal quarter as the next few are expected to be in line with annual averages as multiple large tenants are touring the market.

Annual leasing activity

1,800,000 1,500,000 1,200,000 900,000 600,000 300,000 0

2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: JLL Research

Little movement in rent growth, not a sign for worry Class A product is currently experiencing an all-time high in asking rates despite minimal growth in rates over the previous 24 months. Historically, rates have fluctuated between $17.00 - $20.50 per square foot, indicating that the slow growth is in line with historical trends. As the Jacksonville market continues to make national headlines as a growing financial services hub with appealing business incentives, landlords will likely push rents in 2016, particularly because few large blocks remain in the Butler Boulevard and CBD submarkets–further solidifying leverage for landlords.

Historical Class A asking rates $23.00 $21.00

$19.95

$20.73

$21.16 $19.86

$19.61 $19.41 $19.67

$20.09

$20.53 $20.88

$21.26

$19.00 $17.00 $15.00 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: JLL Research

Vacancy remains low in all submarkets Vacancy is at an all-time low for the CBD submarket at 14.6 percent. In addition, the Butler Boulevard submarket recently experienced its lowest vacancy rate two quarters ago before two negative quarters of absorption. Over the past four years, tenants have occupied more than 1.1 million square feet, dropping overall vacancy to 15.7 percent, and even lower in Class A product (11.4 percent). Butler Boulevard remains the strongest submarket in Jacksonville with vacancy fluctuating between 10.0 to 12.0 percent for Class A space, and the CBD is gaining ground quickly with a declining vacancy rate.

Total vacancy by submarket Butler Boulevard

14.5%

Jax CBD

14.6%

Southside

30.6%

2,257

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% Source: JLL Research

21,627,558

8,277

$19.26

0





15.7%

8,277

5.4%

0.0%

Total vacancy



Total preleased



35

LONG ISLAND - Sarah Bouzarouata Research Analyst, Long Island

Class A demand boosts rents, pulls down vacancy Nassau County houses lowest unemployment rate in the state Long Island unemployment rate by county Nassau County’s unemployment rate fell 70 basis points from January 2015 to January 2016, giving it the lowest unemployment rate in the state. Suffolk County’s Jan. 2015 unemployment rate also decreased, lowering the Long Island unemployment rate to 4.5 percent. Despite yearly employment gains, the Long Island office market maintained a slow pace of growth due to its continual struggle in attracting a younger workforce and retaining jobs. The slow market along with election-related Jan. 2016 uncertainty led to a spike in properties up for sale as investors sought opportunities Nassau County Suffolk County in other markets. Among these were 1981 and 1983 Marcus Avenue in Lake Source: NYS Department of Labor, JLL Research Success, as well as 900 and 990 Stewart Avenue in Garden City.

4.9%

5.6%

4.2%

4.8%

Limited large Class A blocks of space maintains upward pressures on rents Class A direct asking rental rate and vacancy trends (p.s.f.) Increased tenant demand for Class A office space could lead to an off-balance Class A asking rent Overall vacancy 20.0% between supply and demand in the upcoming years, as the market sees a slowdown $30.50 in speculative development. The Class A vacancy rate fell substantially to 13.1 percent, a decrease of 170 basis points from year-end 2015. Among the recently $30.00 15.0% completed transactions was Aon’s 60,000-square-foot lease at 900 Stewart Avenue in Garden City, while Abrams Fensterman absorbed 36,000 square feet at 3 Dakota Drive in Lake Success. The tightening Class A office market will maintain upward $29.50 10.0% Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 pressures on asking rents. Class A asking direct rents climbed to $30.08 per square Source: JLL Research foot, an increase of $0.29 from the end of 2015. Class A net absorption by submarket (s.f.) Western Nassau submarket outperforms in Class A net absorption The Western Nassau submarket posted 263,442 square feet of positive net Western Nassau absorption, which accounted for more than one-half of the nearly 306,000 square Western Suffolk Eastern Nassau feet absorbed in the Long Island Class A market. Northwell Health was the largest Southern Nassau driver of this absorption through its occupancy of more than 50,000 square feet at Eastern Suffolk 330 South Service Road in Melville, 22,000 square feet at 226 Middle Country Road Central Suffolk in Smithtown, and its plans to expand beyond the 440,000 square feet occupied at Central Nassau 2,257 1111 Marcus Avenue in Lake Success. Central Nassau was the only submarket in -50,000 50,000 150,000 250,000 Nassau County to post negative absorption. This was mostly due to the closing of Source: JLL Research JPMorgan Chase’s offices at 900 Stewart Avenue in Garden City at year-end 2015.

350,000

42,253,140

309,871

$26.22

338,885



Direct average asking rent (p.s.f.)


15.5%

309,871

-1.5%

68.7%

Total vacancy



Total preleased



36

LOS ANGELES - Henry Gjestrum Senior Research Analyst, Los Angeles

Creative industries account for majority of demand Large consolidation paves way for higher rents Douglas Emmett, along with QIA (Qatar Investment Authority), an 80 percent partner, purchased the four-building EOP/Blackstone-Westwood portfolio. The estimated purchase price was $1.3 billion with a 3.7 percent cap rate. The buyer, Douglas Emmett, already owned two properties, previously representing 15.0 percent of the market in Westwood. With the four-building addition, they now control 78.0 percent of the Class A office stock along Wilshire Boulevard. The combined portfolio has 12.9 percent vacancy and an average gross asking rental rate of $4.55 p.s.f. With control of so much stock, it would be plausible that ownership would continue to push rates.

El Segundo gets creative and tenants respond favorably Creative office properties and build-outs have resonated with a wide range of users throughout Los Angeles. As this trend expands both geographically and across industry sectors, more and more office micro-markets are joining in the trend. El Segundo, which lies just south of Playa Vista has been slowly adding creative square footage to its office base. There is currently 2.3 million square feet of existing creative product in the market and an additional 1.2 to 1.6 million square feet of conversions either under way or in the planning phases. Since 2014, and despite commanding an 18.8 percent rental rate premium over traditional Class A El Segundo office product, the market has seen consistent positive net absorption. Media and entertainment drive leasing activity The media and entertainment sectors accounted for over a third of all leasing activity during the first quarter. Large entertainment transactions included distributer and producer Netflix signing a 123,300 square foot lease in Hollywood while talent agency International Creative Management (ICM) signed for 108,300 square feet in Century City. A series of box office hits has bolstered the entertainment industry. The expansion and extension of the California Film & Television Tax Credit Program will help underpin future growth in the entertainment industry by significantly curtailing runaway productions.

Westwood purchase brings major ownership concentration 9%

13%

Center West Douglas Emmett, Inc. Tishman Speyer 78% Source: JLL Research, *Set excludes Irvine Co. owned Westwood Gateway

El Segundo creative set sees consistent positive absorption 678,236 sf

300,000 200,000 100,000 0 -100,000 -200,000 -300,000 -400,000

Apollo at Rosecrans comes online 2014

2011

2012

2013

2014

Q1 2016

Media and entertainment drove leasing activity

5%

33%

5% 12% 13%

17%

2,257

Media & entertainment Banking, finance, insurance Healthcare Law firm Consulting Other techology Aerospace and defence Non-profit Education

188,741,769

432,114

$36.60

2,309,645





15.0%

432,114

8.5%

29.0%

Total vacancy



Total preleased



37

MIAMI - Tim Powers Research Analyst, Miami

Confidence abides as demand returns to historical norms CBD, count (R) CBD, median size (L)

number 180 160 140 120 100 80 60 40

Suburbs, count (R) Suburbs, median size (L)

2,900 2,400 1,900 1,400

1Q16

4Q15

3Q15

2Q15

1Q15

4Q14

3Q14

2Q14

1Q14

4Q13

3Q13

2Q13

1Q13

4Q12

3Q12

2Q12

1Q12

4Q11

3Q11

2Q11


Demand more in line with historical norms than recent past transaction size, s.f. 23,000

CBD, standard deviation

Suburbs, standard deviation

18,000 13,000 8,000 3,000

1Q16

4Q15

3Q15

2Q15

1Q15

4Q14

3Q14

2Q14

1Q14

4Q13

3Q13

2Q13

1Q13

4Q12

3Q12

2Q12

1Q12

4Q11

3Q11

2Q11


Rate adjustment volume slows, but rate rise trend continues Rate changes*, count (R)

$ p.s.f.

Weighted average rate change* (L)

2.5

number 500

1.5

400

0.5

300 200

-0.5

100

-1.5

0

1Q16

4Q15

3Q15

2Q15

1Q15

4Q14

3Q14

2Q14

1Q14

4Q13

2,257

3Q13

2Q13

1Q13

4Q12

3Q12

2Q12

1Q12

4Q11

3Q11

2Q11

1Q11

Confidence considerations Despite some quavering in suburban submarkets, county-wide confidence remains bifurcated into the buoyant and the patient; total weighted average direct asking rates rose 1.5 percent quarter-on-quarter (up 5.7 percent year-on-year), and average rate changes to pre-existing availabilities accelerated to 1.7 percent from 2015’s quarterly average of 1.5 percent. A large contingent of landlords have seemingly paused to assess the market, however, as first quarter rate changes to spaces listed longer than three months slowed to 228 in number, down from an average count of 375 in 2015 and below the 2011-2015 five-year quarterly average of 315 rate changes.

square feet 3,400

1Q11

Bread-and-butter demand back at the forefront On an average basis, the execution of a large number of outlier/outsized lease transactions skewed the 2015 demand distribution. Q1 2016 saw the market return to normalized transaction levels, as exhibited by the the quarter’s low standard deviation of transaction sizes. This deviation shrank in the CBD to just 4,300 square feet (the smallest single-quarter standard deviation since Q1 2014, versus 2015’s average standard deviation of 12,100 square feet) due in part to 100,000+ square foot leases signed by Citibank, Akerman, and Stearns Weaver. This increased gravitation toward the mean was also witnessed in the suburbs, where the standard deviation of transaction sizes shrank to 3,200 square feet compared to last year’s average of 7,400 square feet, indicating absorption levels in the forthcoming quarters similar to those of 2013 and 2014.

Miami-Dade transaction activity 2011 - Present

1Q11

Suburban transaction volume easing, but CBD bucks the trend The pace of total office leasing activity across Miami-Dade slowed moderately to begin the year, as roughly 175 transactions of a median 2,000 square feet were signed throughout the County during Q1 2016 (versus a 2015 quarterly average of 220 transactions with a median size of 2,000 square feet). This easing follows 185 transactions last quarter – a relaxed pace itself versus historical norms – albeit, of a slightly higher median deal size of 2,300 square feet (comparatively, quarterly leasing activity between 2011 and 2015 averaged 210 transactions of a median 2,100 square feet). This trend was largely attributable to the seven suburban submarkets, where transaction activity slowed to 110 transactions of a median 1,800 square feet (in contrast with 2011-2015's quarterly average 140 deals of a median 2,000 square feet). Miami's CBD, however, bucked the trend: Brickell and Downtown Miami executed 70 transactions of a median 2,600 square feet in the first quarter (on pace with both the 2015 quarterly average 70 deals of a median 2,200 square feet and the 2011-2015 five-year quarterly average 70 deals of a median 2,300 square feet).

* Changes to spaces listed for longer than three months


37,055,065

-146,350

$35.48

694,676





13.3%

-146,350

5.7%

11.4%

Total vacancy



Total preleased



38

MILWAUKEE - Kyle Koller Research Analyst, Milwaukee

Actions in line with expectations Key metrics expected to rise over 2016 for non-manufacturing industries According to the Metro Milwaukee Association of Commerce 2016 Business Outlook Survey, in which 114 Milwaukee area firms are surveyed, sales, capital expenditures, and employment are expected to rise compared to 2015. In fact, 79.0 percent of respondents expect an increase in sales over 2016, and more than half expect employment to rise. Confirmation came in the form of those who outgrew their space beginning to move into Milwaukee’s newly constructed office tower, 833 East. The tower was over 60.0 percent preleased before opening its doors, with a majority of new tenants moving from only a few blocks away.

2016 Business outlook survey forecast predicts growth Sales 4%

Capital Expenditures

17% 41%

43% 79%

9%

16%

Rise Decline No Change

Max contiguous space by region < 5K

150

5-10K

10-25K

25-50K

50 0

50-100K

>100K

105

100

Full

78

45 55

20 16 25 15 8 3 1


Strong downtown absorption may be paid for next quarter As the delivery of 833 East falls on the cusp of the second quarter, its new tenants have yet to fully vacate their old spaces. It will not be until next quarter when a majority of the tenants moving in (including large users such as Irgens, KPMG, Jason Inc., and Colliers) see their former space hit the market. Any space that does not have new tenants in line will be taking a hit to occupancy levels, and as home to the moving firms, the Downtown East and Downtown West submarkets will feel the largest impact.

39% 52%

Source: JLL Research, MMAC

First quarter sees positive absorption but large blocks remain Apart from negative absorption in the suburbs, largely within Class B inventory in Brookfield, most submarkets saw positive quarterly absorption to start the year. Still, there remains a great supply of large blocks of space, especially in suburban submarkets. Tenants looking to occupy more than 50,000 square feet have multiple options at Park Place or on Executive Drive in Brookfield. Looking downtown, large blocks of space remain at 833 East or 330 Kilbourn as the FBI vacates.

Employment

14 6 2

CBD

Suburban

Total net absorption (s.f.) by class 250,000 200,000 150,000 100,000 50,000 0 -50,000 -100,000 Source: JLL Research

CBD Suburban

2,257

A

B

C

27,567,279

259,208

$19.03

148,924





18.5%

259,208

4.9%

49.5%

Total vacancy



Total preleased



39

MINNEAPOLIS - Carolyn Bates Senior Research Analyst, Minneapolis

Old tenants move to brand new buildings & vice versa BTS developments loosen up Northeast and Minneapolis CBD inventory In the last two quarters, 1.3 million square feet of build-to-suit (BTS) office space has been delivered, including the 1.1 million-square-foot Downtown East Wells Fargo towers in the first quarter and the 240,000-square-foot Be the Match headquarters in the fourth quarter. Both employers previously had multiple leases in a variety of multi-tenant office buildings. As such, Northeast experienced large negative absorption last quarter when Be the Match’s employees relocated to its new HQ in the North Loop. Throughout early 2016, the Minneapolis CBD will see the same trend as Wells Fargo’s employees begin to vacate its current space and aggregate in the new owner-occupied digs in Downtown East. Despite some initial increases in vacancy rates, these migrations will open up much-needed contiguous blocks for tenants in the market, the largest being 455,000 square feet at Northstar West. Legal services are creating ripples, soon waves, in vacancy rates The trend of law firms choosing to right-size in order to save money on real estate costs is creating churn in the Minneapolis CBD. Nearly 15,500 square feet of contiguous space opened up at IDS Center this quarter when law firm Wagner Falconer & Judd relocated to the Fifth Street Towers. Likewise, Lindquist & Vennum will relocate and downsize to 80,000 square feet by the end of 2016, eventually leaving120,000 square feet of vacant space on floors 40-44 of the IDS Center. This is a rare availability, considering that among Minneapolis CBD Skyline buildings, vacancy on the 30th floor and above has dropped from 10.0 to 8.0 percent year-over-year.

2015-2016 YTD delivered office product, square feet 2,000,000

Completed

1,500,000 1,000,000

1,340,000

500,000

464,560

-

203,736

212,000

Speculative

BTS

Minneapolis CBD Skyline vacancy, 30th floor and above

11.7% Projected Q3 2017 vacancy

8.9% Q1 2016 vacancy

Average age of buildings in Q1 sales transactions (years) 150

Class B repurposed office buildings are driving CBD office sales As vacancy diminishes and rental rates continue to rise, developers are getting creative in regards to office building investments. In the first quarter, all office sales in the Minneapolis CBD were for historic structures, including the Internet Exchange and The Washington, a former adult store now being converted into first-floor retail and 46,000 square feet of multi-tenant office on the upper floors. Out-of-state investors like Chicago-based R2 Companies are increasingly choosing to rehab historic Class B buildings for creative office space due to their unique architectural detail and relative affordability.

Under Construction

119

100 50

45

34

31

31

18

17

0 2,257 Source: JLL Research, RCA

69,094,277

183,049

$25.31

464,236





14.9%

183,049

1.8%

56.5%

Total vacancy



Total preleased



40

NASHVILLE - Hensley Loeb Research Analyst, Nashville

Job growth + construction activity next to none Job growth that surpasses all U.S. counties illuminates office demand Nashville’s Williamson County, home to the submarkets with the consistently lowest vacancy rates, witnessed a 6.5 percent increase in job growth in 2015, outstripping the largest counties in the country, which averaged an increase of 1.9 percent in employment growth. The sector with the largest employment increase in Williamson County occurred in professional and business services, which bodes well for office leasing. Davidson County and Rutherford County were also above the national average respectively increasing employment by 3.3 and 3.9 percent, respectively. According to the Tennessean, new business filings increased by 7.2 percent, marking it the 17th consecutive quarter for business growth. As employment growth continues in Nashville, new office options become few and far between. The overall market vacancy rate at the end of Q1 2016 is 6.3 percent, down from last quarter’s 6.7 percent. As expansions, relocations and subsequent job growth continue leasing activity will continue to rise, so long as office space can accommodate the stunning growth trends.

Nashville to grow more than any other office market in the country With 3,371,446 square feet of office under construction, Nashville has the most construction underway in the United States as a percentage of its inventory. For the six U.S. markets with inventories between 30 to 40 million square feet, the average construction as a percentage of inventory is roughly 2.5 percent. Nearly a dozen other markets also have greater than 3 million square feet under construction; however, Nashville’s projects represents 10 percent of its inventory, positioning Nashville to grow more than any other office market in the country. Two buildings delivered this quarter: 35 Music Square East (95,000 square feet) and Mallory Park Phase I (39,333 of 87,101 square feet complete). 35 MSE came to market 81.5 percent leased upon delivery and Mallory Park Phase I was 100 percent leased upon delivery. The 17,911 square feet remaining from these deliveries will not add sufficient relief for demand.

Spec development signals positive market outlook Nashville has not traditionally been a market to build speculative buildings. Historically, projects have required preleasing before construction begins; however, Nashville’s construction trends are changing. 7 of 16 projects are speculative developments in Nashville. This upward trend in speculative development can be attributed to developers’ positive outlook on the market. Economic expansion is lending itself towards increased rental rates and a vacancy that is nearing a cyclical low. Rental growth has continued at 5.0 percent over the past 12 months. Rent landed at $21.68 this quarter, and even more appealing to landlords, the rental rate average for new product is $33.88. The increasingly less vacant market has created a sufficient supply-demand imbalance. With only 1,271,035 of the 3,371,446 square feet under construction available for deliveries through 2018, speculative developments are coming online to meet market demand.

Booming business and subsequent job growth drive leasing 200

15.0%

150

10.0%

100

5.0%

50 0

0.0%

2010 2011 2012 2013 2014 2015 Q1 2016 New Business Filings Office Vacancy Rate Unemployment Rate Source: JLL Research and the Bureau of Labor Statistics

Office market construction represents 19.7 percent of total

152

92

Construction projects underway, planned and proposed

Multifamily

34

30

Hospitality

Office

Source: JLL Research and The Nashville Business Journal

Composition of construction type: BTS, preleased and spec Nashville has not traditionally been a market to build spec buildings, but market confidence is changing construction habits. 7 of 16 projects are spec.

25.0% 43.8%

31.3%

Build-to-suit

Preleased

Speculative


33,732,255

206,416

$21.68

3,371,446





6.3%

206,416

5.0%

62.3%

Total vacancy



Total preleased



41

NEW JERSEY - Steve Jenco Vice President, Research, New Jersey

Vacancy rate ticks upward as leasing volume slows Leasing velocity trails off in early 2016 After averaging more than 3.0 million square feet of leasing transactions per quarter during 2015, leasing activity in the Northern and Central New Jersey office market hit the brakes in early 2016. Approximately 2.0 million square feet of leases were signed during the first quarter, which represented the lowest volume in over three years. More than 65.0 percent of leases involved Class A buildings. Demand for Class A space was a recurring theme over the past year. Diminished leasing velocity combined with additional vacancies in the Class B office market pushed the Northern and Central New Jersey overall vacancy rate 10 basis points higher from year-end 2015 to 24.7 percent in early 2016.

Northern and Central New Jersey office leasing activity (s.f.)

Hudson Waterfront attracting diversified mix of business sectors After posting 164,180 square feet of negative net absorption during the fourth quarter, a rebound in demand for Class A space led to nearly 199,500 square feet of absorption in the Hudson Waterfront three months later. This represented the largest volume of absorption in the Northern and Central New Jersey Class A office market. While financial services firms initially populated the Waterfront, other sectors continued to establish footprints in this strategically located market. Among these companies was e-commerce startup Jet.com, which recently doubled its headquarters to 80,000 square feet, while Newell Brands leased nearly 100,000 square feet at Waterfront Corporate Center III in Hoboken.

Hudson Waterfront Class A net absorption trends (s.f.)

Mass transit-centric submarkets on the radar screen for office tenants New Jersey’s transit hub markets are characterized as areas housing a significant number of office properties in proximity to a commuter rail station. Among these markets are Hoboken/Jersey City, Metropark, Morristown, Newark, New Brunswick and Summit. Persistent demand, combined with the lack of speculative construction, have kept their vacancy rates in the teens for the past several years. This was in contrast to the state’s suburban vacancy rate, which had stubbornly remained below 30.0 percent. The state’s transit hubs will remain active in the coming year as companies pursue space options located in amenity-rich areas offering access to mass transportation.

Transit-centric vs suburban NJ vacancy rate trends

4,000,000 3,000,000

3,240,291

3,321,269

3,225,765

2,000,000 1,977,903

1,000,000 0 Q2 2015 Source: JLL Research

Q3 2015

Q4 2015

Q1 2016

300,000 200,000 100,000

228,371

203,812

199,454

0 -100,000

-164,181

-200,000 Q2 2015 Source: JLL Research

30.0%

Q3 2015

Q4 2015

Transit Hub Markets

Q1 2016

Suburban NJ

25.0% 20.0% 15.0% 2,257

10.0% 2012 Source: JLL Research

2013

2014

2015

Q1 2016

158,786,477

-562,303

$25.26

440,445





24.7%

-562,303

-1.5%

100%

Total vacancy



Total preleased



42

NEW YORK - Tristan Ashby Vice President, Research, New York City

Vacancy moves higher amid moderate activity Midtown asking rents increase despite rise in vacancy In the face of rising vacancy, some landlords have begun reducing rents in Midtown. New construction and existing space returning to the market in top-tier buildings like 390 Madison Avenue and 250 West 55th Street, however, outweighed the reductions. The Midtown Class A average asking rent recorded a 1.0 percent increase to $81.09 per square foot in the first quarter despite a dip in February. The Midtown overall average asking rent recorded greater gains— 2.4 percent year-to-date to $74.98 per square foot—as demand for Class B space has tightened vacancy.

Midtown Class A asking rent

Renewals are back Year-to-date, renewals have accounted for half of the top 20 leases in Manhattan. In contrast, relocations made up the majority of leasing activity in the first quarter of last year with only five renewals in the top 20 leases. McGraw Hill Financial signed the largest lease of the quarter, a renewal of its 900,027-square-foot space at 55 Water Street. Other large renewal activity so far this year included DLA Piper’s renewal of 199,140 square feet at 1251 Avenue of the Americas, Omnicom Group’s renewal of 167,003 square feet at 220 East 42nd Street and UBS’ renewal of 120,000 square feet at 299 Park Avenue.

Top 20 Manhattan leases by type

TAMI continues to dominate Midtown South leasing While there have been concerns about weakness in the tech sector—a potential pullback in venture capital and talk of a correction—the TAMI sector (technology, advertising, media and information) remained strong in Midtown South, accounting for 89.2 percent of first quarter leasing activity. NY1 News, Facebook, and the marketing arm of Anheuser-Busch InBev signed high-profile leases to begin the year, indicating that creative tenants continue to view a Midtown South location as a competitive advantage in attracting and retaining talent despite paying record high rental rates.

Midtown South leasing activity by industry

$82

$81.09

$81

$80.59

$80.24

$81

$80.00

$80 $80 $79 Dec-15 Source: JLL Research

3 1

Jan-16

Feb-16

Renewal

5

Q1 2015

Mar-16

3

New Sublease

6

1

Q1 2016

10

Expansion


10.8% TAMI Other 89.2% 2,257 Source: JLL Research

449,872,906

-1,580,918

$72.57

14,353,410





10.0%

-1,580,918

4.6%

47.2%

Total vacancy



Total preleased



43

NORTHERN VIRGINIA - Robert Sapunor Research Analyst, Northern Virginia

Tenant migration shifts in Northern Virginia’s favor Northern Virginia capturing inbound tenant demand from DC As market conditions have tightened in the District of Columbia and the value proposition of suburban locations has become increasingly enticing, many tenants have expanded the geographic scope of their search areas. Multiple nonprofits and associations have looked across the river into the RosslynBallston Corridor and Crystal City. This quarter, Chemonics International moved from the CBD into 53,929 square feet at 251 18th Street S and GW Medical Faculty Associates moved from the CBD into 48,900 square feet at 3811 N Fairfax Drive. The opening of the Silver Line has also enticed tenants to tour sites further west, with some groups in the Rosslyn-Ballston Corridor now considering Tysons.

NoVa regaining its foothold in tenant migration (2015-16) From Suburban Maryland From Northern Virginia

200,000

From Washington DC

100,000 0 Tenant migration to Northern Virginia

Tenant migration to Washington DC

Downsizings and moves hurt Fairfax Center and Herndon Absorption flat due to large contractor downsizing Northern Virginia posted positive net absorption for the fourth consecutive quarter, but the growth was limited by a handful of big government contractor move-outs. Booz Allen Hamilton vacated 396,490 square feet at 13200 Woodland Park Drive in Herndon and TASC vacated 79,067 square feet at 4805 Stonecroft Boulevard in Route 28 South. However, the majority of tenants in Northern Virginia are beginning to expand, including Unicom, Washington Gas and MakeOffices this quarter. Two large relocations out of Fairfax Center also involved contractions as CSRA moved to Route 28 South and Fairfax County Public Schools moved to Merrifield.

1,000,000 500,000 0 -500,000 -1,000,000 Toll Road

Fairfax RB Merrifield Crystal Tysons Route 28 Center Corridor City South

State and local incentives (per job) for major NoVa employers Incentives battle heats up Arlington County awarded $1 million in incentives (matched by the Commonwealth of Virginia) to retain Opower. It is the first time the county has given money to attract or retain a tenant. Arlington County’s Manager also proposed setting aside $1.5 million to attract tech companies between 5,000 and 20,000 square feet. There are two bills working their way through the Virginia legislature that would raise incentives to between $25 and $32 million. The fight to attract companies across the region (as well as local jurisdictions within each state) will continue to escalate with each large tenant that hits the market.

$60,000 $40,000 $20,000 $0

Source: JLL Research, Washington Post, WBJ, YesVirginia.org

148,109,769

34,617

$32.86

4,128,723





20.0%

34,617

-1.1%

77.9%

Total vacancy



Total preleased



44

OAKLAND - Katherine Billingsley Research Analyst, Oakland - East Bay

Destination: Oakland Economy boosts office market; asking rates skyrocket Leasing activity was brisk in the first quarter of 2016. Available full floors were quickly leased, as Geosyntec and Marqueta took full floors at 1111 Broadway and 180 Grand, respectively. In Alameda, Cost Plus and American Cancer Society leased over 100,000 square feet of office space at Marina Village and total leasing activity for the Oakland metro this quarter was north of 270,000 square feet. Demand for quality office space in the CBD has been particularly high; as a result rents for Class A buildings have reached $51.00 per square foot, a 33.6 percent increase since last year and on an upward trend. This is the strongest y-o-y rent growth in CBD history.

CBD Class A rents surpass $50 $60.00

$51.00

$50.00 $38.16

$40.00 $30.00

$27.24 $29.04

$33.48 $31.92 $31.56 $31.57 $31.75 $32.00 $33.48

$20.00 $10.00 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: JLL Research, Q1 average asking rents

Scarcity plays big role in Oakland Rent differentials continue to be a major driver for east bound relocation, and Outsized demand for a shrinking supply of space tenant demand remains steady. However, rising occupancy creates scarce availability, and the vacancy rate in the CBD is down to 5.1 percent. This is 2,000,000 spurring rent growth and sparking greater interest for space in non-CBD 1489499 1,500,000 submarkets. There is over 2.0 million square feet of active requirements targeting Oakland metro, 75.0 percent of which is focused on the CBD alone. 1,000,000 744105 Tenant makeup is a diverse mix of industries. While demand across a variety of 500,000 industries is driving the East Bay market, non-profits and professional services dominate peripheral market demand as they continue to be priced out of markets 0 across the Bay Bridge. Active CBD requirements Current Available Space Is this a big year for Oakland development? Demographic trends favor the cities east of San Francisco. The majority of the Bay Area workforce lives in Alameda and Contra Costa Counties, and the growing cost and shrinking availability of housing is pushing stronger population growth east, prompting developers to plan new projects. On the other hand, current rental rates have not reached levels required to support new office development. Developers are waiting for another Uber-like tenant to hit the market. Kaiser Center and 2000 Franklin are notable transactions this quarter, with additional buildings in line to come to the market this year. The East Bay story continues to evolve - Oakland has become a destination rather than a side trip for Bay Area tenants.


Q1 2016 Sales activity by building class ( > 10,000 s.f.) $250,000,000 $200,000,000 $150,000,000 $100,000,000 $50,000,000 $0

$224,325,000

$197,000,000

2,257

A

$27,325,000 B

Grand Total


24,417,059

49,097

$48.12

0



CBD direct average asking rent


11.6%

49,097

35.0%

0.0%

Total vacancy



Total preleased



45

ORANGE COUNTY - Jared Dienstag Senior Research Analyst, Orange County

New building deliveries push rental rates up Asking rental rates rise The Orange County office market began in 2016 the same way it ended the previous year; by increasing rental rates. Although monthly average asking rents have risen 32.4 percent since the end of 2012 to $2.58 per square foot, full service gross, this remains below the 2007 peak rate of $2.74 per square foot, full service gross, leaving room for further growth. Not only are average asking rents feeling upward pressure from higher rates of existing space, but they are also being lifted by new buildings recently delivered to the market, including 200 Spectrum Center, The Source Tower in Buena Park and the newly renovated buildings of Avalon in Newport Beach, Intersect in Irvine and 33.7 North in Tustin. Driven by occupancy gains and the completion of new and renovated buildings, rents are projected to continue on this path throughout 2016. Medical technology industry expands Growth of the local medical sector continues to have a positive impact on Orange County’s economy and commercial real estate market. Specifically, the local medical technology field has been experiencing high growth, made evident by the strong venture capital funding in the industry. According to PwC Moneytree, 2015 venture capital funding totaled $366.2 million, increasing in volume each quarter of the year. Top companies that received funding include Alphaeon ($107.1 million), Axonics Modulation Technologies ($55.8 million) and Reshape Medical ($38.0 million). As firms expand their operations, real estate footprints subsequently grow as well, thus benefitting market fundamentals. Airport Area leads the market to positive net absorption The Airport Area submarket recorded occupancy gains of 194,868 square feet during the first quarter, which accounted for nearly 85.0 percent of Orange County’s net absorption total. Four of the five submarkets experienced positive net absorption with the exception of Central County. Despite the positive demand, the direct vacancy rate for the overall market increased 20 basis points to 11.2 percent from the previous quarter; however, this was only due to the delivery of 574,252 square feet of new space to the market.

Class B rental rate appreciation year-over-year South County

15.3%

Airport Area

11.5%

Central County

9.4%

North County

8.0%

West County

3.1%


Expected office deliveries (SF) 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0

1,065,424

1,100,000 750,000

574,252


2017

2018

2019

Class A Vacancy 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007

2,257 9.8%

0.0% 5.0% Source: JLL Research

10.0%

12.6% 12.0% 14.3% 14.9% 17.1% 18.4% 19.4% 17.1% 14.5% 15.0%

20.0%

25.0%

95,731,037

229,551

$31.00

1,065,424





11.8%

229,551

11.3%

0.0%

Total vacancy



Total preleased



46

ORLANDO - Valerie Mnayarji Research Analyst, Central Florida

Orlando’s record job growth provides positive economic outlook Job growth represents a record 11-year high, supporting decreasing vacancy rates According to the most recent employment figures, the Orlando MSA added 52,200 jobs in 2015, increasing employment by 20.0 percent year-over-year and making this yearly employment gain the highest amount since 2004. Employment growth in the market equated to about 150 jobs added per day. Within the industries directly supporting office demand, the professional and business services industry represented one of the largest employment gains at 8.6 percent year-over-year, helping propel overall occupancy 170 basis points to 85.2 percent. This is driven by a recent increase in employment service firms facilitating local office expansions in technology, healthcare and legal sectors, directly impacting office demand and particularly in the CBD and Lake Mary.

Industry sector job loss/gain (12-month change) Leisure and Hospitality Trade, Transportation, and Utilities Professional and Business Services Education and Health Services Financial Activities Construction Total Government Other Services Manufacturing Information -600 -2,000

15,900 6,400 400 8,200 1,600 2,100 2,900 2,000

Source: JLL Research, Florida DEO

6,000 10,000 Number of Jobs

14,000

18,000

Growing theme park attendance supports local occupancy Magic Kingdom Animal Kingdom Universal Studios Celebration and Tourist Corridor occupancy

Epcot Hollywood Studios Islands of Adventure 85.0%

100.0

Millions of visitors

Theme park expansions provide leasing opportunities to local submarkets Given the record breaking number of visitors to Orlando’s Tourist Corridor last year (over 62.5 million people) nearly every major theme park has announced expansion plans and hotel developments, thus increasing demand for office. Most notably, Disney’s planned Star Wars attraction, when completed, will be Disney’s largest “themed-land” expansion in history. With theme park expansions underway, Universal and Disney on-site office spaces are being redeveloped to make room for additional amusement-related uses, resulting in spill-over tenant demand for neighboring Southwest and Celebration submarkets. Last year, over 200,000 square feet of space renewed by tourism related tenants, and continued demand from theme park operations will continue given expansionary plans. Suburban tenant activity is outpacing CBD demand Suburban submarket demand in both leasing and absorption are outpacing the CBD. While the volume of tenants touring suburban submarkets only increased marginally quarter-over-quarter, tenant requirements increased by 8.0 percent over the same time period to about 1.7 million square feet. This is compared to requirements in the CBD, which declined by nearly 13.7 percent to 500,000 square feet. Tenant demand shifting to suburban submarkets is evinced by absorption gains in these areas, which increased by over 100,000 square feet and represented 0.7 percent of total stock, a larger absorption figure than the CBD which only accounted for 0.5 percent of total stock. The competitive advantage of the suburban submarkets derives from the high parking ratios, as well as lower rental rates for comparative, Class A spaces.

10,000 8,600

80.0% 50.0 75.0%

70.0%

0.0 2009

2010

2011

2012

2013

2014

Source: JLL Research, Themed Entertainment Association

Large block tenant activity in suburban submarkets Tenant

Location

Axium Healthcare Pharmacy Lake Mary

Square feet

Deal type

157,000 Lease/purchase

Asurion

Southwest

72,000 New

CDM Smith

Maitland

65,000 Relocation

NBC Universal

Southwest

47,800 Relocation within

29,242,500

213,700

$20.92

271,000





14.9%

85.2%

2.3%

39.8%

Total vacancy

Occupancy percent


Total preleased



47

PHILADELPHIA (CBD) - Clint Randall Research Analyst, Philadelphia

Creative renovation and new construction surging as jobs grow and tenant activity remains strong Market East asking rents drive strong year-over-year growth across CBD Overall rental rate increases year over year Class B product is undergoing dramatic repositioning and bringing rates up quickly CBD Overall 5.5% with them across the submarket. Thylan hopes to repeat its success at the Biddle Building (now fully occupied) at the adjacent Bailey Building (50,000 square feet), Navy Yard 3.8% while Brickstone Realty is marketing several boutique buildings between 11th and Market East Broad, including the Hale, Steele, and Shwartz. On the east side of the submarket, University City the forthcoming vacancy at Dow creates a large block in a landmark building, while -4.1% the nearby Public Ledger and Independence Collection properties are in the early Market West 4.2% stages of major upgrades. With so many buildings renovating to a Class A and Source: JLL Research creative standard, asking rates are pushing into the $30 range east of Broad for the first time, with some of the highest rates in former B space.

Total Vacancy

Total percentage vacancy by space type Is creative space the new trophy? 15.0% The vacancy rate among trophy towers (4.3 percent) is half the overall CBD average. The next tightest segment is the creative property set, which saw 9.5% 8.3% 10.0% vacancy below 3.0 percent last year and is now seeing 8.3 percent total vacancy as owners race to renovate older and quirkier product to a non-traditional standard. 4.3% 5.0% Boutique buildings and flexible floor plates are compelling options for small and growth-oriented companies. With more than half of known tenants in the market 0.0% requiring 10,000 square feet or less, and a growing number of companies Trophy Creative A Source: JLL Research relocating from the suburbs, it’s not surprising unique space is gaining traction.

12.5%

10.2%

B

Square feet

Construction pipeline continues to evolve with Schuylkill Yards unveiling Speculative office proposals and construction by submarket Drexel and Brandywine Realty Trust revealed a new name and more articulated 1,200,000 vision for their gateway to University City. The mega-project’s first phase – Under construction Proposed 1,000,000 including a new park, renovated Bulletin Building, and 700,000-square-foot tower – 800,000 will move forward over the next 12-24 months. Office construction is likely to pick 600,000 up significantly in the coming months with 3675 Market, 2400 Market, and One 400,000 Franklin all preparing to break ground. The CBD’s ability to grow net new demand 200,000 2,257 (between new-to-market tenants, suburban relocations, and organic expansions) 0 University City Market East Market West Navy Yard will be critical to monitor as speculative development increases. The city’s 2.4 Source: JLL Research percent job growth above its pre-recessionary peak is cause for optimism.

44,135,010

54,390

$28.56

2,447,264





8.6%

96,146

5.5%

85.2%

Total vacancy



Total preleased



48

PHILADELPHIA (SUBURBAN) -Lauren Gilchrist Vice President, Research, Philadelphia

Fundamentals continue to improve in PA Suburbs Quarter-over-quarter core suburban submarket rent growth 2.5% 2.0% 1.5% 1.0% 0.5% 0.0%

1.3%

1.9%

1.5%

0.1% Plymouth Conshohocken Meeting / Blue Bell

Radnor

King of Prussia / Malvern / Exton Wayne


2013

2014

$400,000,000

2015

$343,900,000 $261,800,000

$300,000,000 $200,000,000

10.9%

14.0%

2012

12.5%

20.0%

12.0%

Direct Class A vacancy

Direct Class A vacancy reaches lowest level in four years While leasing activity for Q1 was relatively slow in the Pennsylvania suburbs at 15.0% just 700,000 square feet, several large move-ins contributing to more than 383,000 square feet of positive net absorption brought the overall vacancy rate to less than 10.0% 11.0 percent for direct Class A space. Highlights include Incyte Pharmaceuticals’ occupancy of 48,000 square feet at 200 Endo Boulevard and SEI occupying 5.0% 45,500 square feet at 52 E Swedesford Road. With several known absorption 2011 events on the horizon for the duration of 2016, select suburban submarkets should Source: JLL Research continue to experience declining vacancy rates and ongoing tightening throughout the year. Sales volumes Q1 2016 sales volumes surpass every quarter of 2015 2016 got off to a strong start for office sales in the Pennsylvania suburbs. Nearly 1.5 million square feet traded hands, not including assets that were part of Brandywine’s 58 building, $389 million suburban office portfolio sale to Och Ziff Capital Management. Saint Gobain’s headquarters and 300 Four Falls Corporate Center both traded in excess of $300 per square foot, at $382 and $330, respectively, setting the bar for the upper end of the market for well-located, high quality suburban assets.

1.5%

13.1%

Core suburban submarkets post strong quarter-over-quarter Class A rent growth The Pennsylvania suburbs’ core submarkets all experienced quarter-over-quarter Class A rent growth, with Malvern/Exton leading the way with a 2.0 percent increase over Q4 2015. Comparison to the Central Business District, which has experienced significant market tightening over the past few years, puts these rental rate increases into current context. While asking rental rates at Trophy buildings in the CBD remained virtually unchanged quarter-over-quarter at $34.97 per square foot, and non-Trophy Class A averaged $29.00 per square foot, most core suburban submarkets averaged $30.00 per square foot or more in Class A asking rates, with Radnor and Conshohocken exceeding Trophy asking rates at $39.41 and $35.11 per square foot, respectively.

$120,700,000

$100,000,000

$160,000,000 $76,800,000

2,257

$0 Q1 2015

Q2 2015

Q3 2015

Q4 2015

Q1 2016


52,962,909

383,527

$25.02

347,064





14.8%

383,527

1.0%

0%

Total vacancy



Total preleased



49

PHOENIX - Kiana Cox Senior Research Analyst, Phoenix

Strong market fundamentals as 2016 begins Steady absorption with continued Phoenix growth The Phoenix metro area office market picked up where it left off at the end of last year. Built on a stable economic foundation of strong job growth and calculated construction, new office space is being absorbed almost as fast as it is being delivered. In the first quarter of 2016, 423,748 square feet of office space was absorbed in Phoenix, a 48.5 percent increase from one year prior. The total vacancy rate in the Valley has decreased 720 basis points from a peak of 28.1 percent in the second quarter of 2011 to a low 20.9 percent at the end of the first quarter this year. Overall vacancy is expected to decline further in 2016 as officeusing employers continue to expand and relocate to the Valley. Construction continues as developers assess market In the first quarter of 2016, 450,000 square feet of vacant speculative office space was delivered in Metro Phoenix, a 57.0 percent decline from just over 1.0 million square feet of speculative space completed in the previous quarter. The total vacancy rate remained unchanged at 20.9 percent, with nearly 424,000 square feet of total absorption reducing the impact of new vacant space added to the market. More than 2.2 million square feet of office space (including 439,530 square feet of speculative space) is currently under construction in Greater Phoenix with 80 percent of it preleased.

Deliveries

Absorption

Vacancy

2,500,000

30% 25%

1,500,000 20%

500,000 -500,000

15% 2010

2011

2012

2013

2014

2015


YTD 2016

Metro Phoenix speculative deliveries per quarter 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0

Available

Q1 2015

Q2 2015


Leased

Q3 2015

Q4 2015

Q1 2016

Office employment trends (12-month change) Professional & Business Services Government Information Financial Activities

40.0 in thousands

Office employment sectors driving Phoenix forward Phoenix has experienced a much more diverse recovery during this economic growth cycle, steadily adding a healthy balance of jobs in contrast to previous cycles when the Valley would be flooded with construction employment. Officeusing employment sectors continue to experience strong growth over the past year, recording an annualized net gain of 23,500 jobs (3.1 percent) across the MSA. Office employment gains are translating into greater absorption of office space in some of the Valley’s premier submarkets. Year-over-year employment gains were led by the professional & business services, adding 16,100 jobs (5.1 percent) and financial activities gaining 8,600 jobs (5.3 percent).

Net new supply, net absorption and total vacancy 3,500,000

20.0 0.0

2,257

-20.0 2011


2012

2013

2014

2015

2016

82,688,661

423,748

$23.75

2,217,644





20.9%

423,748

$27.59

80.0%

Total vacancy


Class A average asking rent

Under construction preleased



50

PITTSBURGH - Andrew Batson Research Manager, Great Lakes

Market performance remains solid, investors notice Attractive returns drive investment activity

The development pipeline remains full, driven by tenant demand In the first quarter nearly 400,000 square feet of for-lease office space was delivered in the Pittsburgh market. In addition to that, another 672,000 square feet remains in the development pipeline and is scheduled for completion over the next four quarters. Among secondary markets in the Great Lakes region, construction levels have been among the highest in Pittsburgh, driven by robust tenant demand. Two notable projects delivered in the first quarter, including the 128,000-square-foot Tower Two-Sixty development in the CBD submarket and the 209,000-square-foot Bakery Square 2.0 project in the Oakland/East End submarket. Preleasing at the two projects exceeded 60.0 percent.

Office demand keeps pace with new supply

Southpointe softens further as commodities remain in turmoil The prolonged downturn in the oil and gas industry continues to have an adverse effect on the Southpointe submarket. Nearly all of the energy companies with operations in the region have located their corporate offices in Southpointe, and while Class A vacancy in this submarket stood below 5.0 percent less than two years ago, market conditions have softened dramatically in recent quarters in tandem with falling commodity prices. Vacancy in the submarket has increased 10.6 percentage points within the last year while the average asking rate decreased by $1.39 per square foot. However, the deteriorating submarket conditions are most evident when analyzing the space available for sublease, which has more than tripled over the last 12 months.

Total sales volume

Total sales volume ($M) $800

Average sales price ($ p.s.f.) $150

$600

$100

$400 $50

$200 $0

$0

2007 2009 2011 Source: JLL Research, Real Capital Analytics

Office deliveries (s.f.)

2013

2015

Total net absorption (s.f.)

1,000,000 750,000 500,000 250,000 2010 Source: JLL Research

2011

2012

2013

2014

2015

Q1 2016

Sublease space on the market in Southpointe (s.f.) 150,000

Class A

Class B

Total

100,000 50,000

2,257

0 2010 2011 Source: JLL Research

2012

2013

2014

2015

Q1 2016

50,677,398

28,632

$23.06

592,000





16.4%

28,632

3.0%

68.0%

Total vacancy



Total preleased


Average sales price

Shorenstein’s acquisition is the latest in a string of high-profile trades With primary markets oversold during the current cycle, investors have turned to secondary markets for opportunities with attractive returns. Investors have been particularly active in Pittsburgh, thanks to the diversified economy and solid office market fundamentals. Shorenstein’s recent acquisition of the 1.0 millionsquare-foot One Oxford Center in downtown Pittsburgh for $148.8 million was just the latest in a string of high-profile trades. Prior transactions include Faros Properties’ $67.5 million acquisition of Allegheny Center, M&J Wilkow’s $38.4 million acquisition of the Penn Center East development and The Davis Companies’ 14.0 million acquisition of the Union Trust Building.


51

PORTLAND - Tim Harrison Research Analyst, Portland

Boomtown, USA 10.0% 5.0% 0.0%


CBD asking rents and absorption CBD Absorption

$32 $30 $28 $26 $24 $22 $20

CBD Rents

1,900 900 -100

Q3 2013 Q1 2014 Q3 2014 Q1 2015 Q3 2015 Q1 2016 Source: JLL Research

Hundreds

Skyline buildings getting makeover The Portland Skyline is defined as buildings that have a significant impact due to their size, quality of space or iconic status. The skyline set includes 15 existing assets and one being delivered this year. The buildings were built between 1972 and 2016, but not all Skyline buildings are performing at the same level. Vacancy in the Skyline set ranges from below 2 percent to greater than 22 percent and asking rents range from $28 to almost $42 full service. Their performance depends greatly on how well the properties have aged and if their amenity set has kept pace with tenant demand. Plans are underway for lobby renovations and building repositions for several older Skyline properties as owners seek to keep their buildings relevant and competitive.

Portland metro area unemployment rate

Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

Economy firing on all cylinders The area’s economy is standing tall. In February, Bloomberg released a report declaring Oregon the best-performing economy in the US as measured by a variety of business, financial and industrial factors. Bloomberg’s Economic Evaluation of States reviews employment performance, home prices and personal income, among other measures, and determined that Oregon’s economy was the most improved in 2015. With the current metro area unemployment sitting at 4.3 percent, its lowest level since early 2000, and job growth for 2015 among the strongest of all major metro areas in the country, it is no wonder that Portland’s population has been growing seven times faster than the US average. All factors driving the area’s office market performance.

-1,100

Demand from tenants in the market Tenant demand surges, concentrated in CBD and tech March saw demand from tenants in the market surge to record levels. JLL is tracking almost 4 million square feet of tenants in the market, a level 11.0 percent higher than any previous month on record. 32.0 percent of this demand can be attributed to tech/information services tenants and 13.0 percent of this demand is coming from professional and business services tenants. In terms of tenants’ geographical preferences, 60.0 percent of the demand is coming from tenants looking for space in the CBD, that number grows to 66.0 percent for tenants seeking options in the close in urban areas.

3,919,525 s.f. 2,257

Demand from tenants in the market Source: JLL Research

58,709,017

178,251

$25.12

1,607,791





8.3%

659,639

8.7%

57.4%

Total vacancy

Avg. Annual net absorption (s.f.)


Total preleased



52

RALEIGH-DURHAM - Ashley Lewis Senior Research Analyst Raleigh-Durham

New year firing off with new construction Breaking ground in first quarter 2016 started off with four speculative construction starts in Raleigh-Durham. The new developments were spread across the entire market, including Orange County, West Raleigh and both central business districts. With over 1.5 million square feet under construction, developers are finally catching up with tenant demand. Although the first quarter’s total net absorption is at a two-year quarterly low, it is simply an indicator that the market is tight until these new projects deliver. Preleased at an average of 43.0 percent, new product continues to drive up the market’s average asking rate with these developments in particular asking up to $35.00 per square foot. With four new cranes in the sky this quarter, the market expects to see three new office deliveries this year.

Construction finally catching up with demand? The Dillon Preleased s.f.

Forty540

Total s.f.

One City Center Carolina Square 0 Source: JLL Research

50,000 100,000 150,000 200,000 250,000 300,000 s.f.

Downtown Durham availabilities bleak While Downtown Raleigh’s vacancy up-ticked slightly this quarter, Downtown Durham has hit an all-time vacancy low. With 384,000 square feet under renovation at The Chesterfield and 150,000 square feet under construction at One City Center, both properties are already pre-leased at an average of 54.1 percent. Tenants may see slight relief when some of this new inventory delivers later in the year but not for long due to a dry pipeline for the submarket. Total direct vacancy for the submarket is sitting at 2.4 percent and Class A vacancy under 2.0 percent with few sublease vacancies to speak of. The most notable expansion is Duke University who signed leases to expand its footprint downtown at both new buildings.

Downtown Durham hits historic vacancy rates

Prominent Raleigh-Durham buildings hit the market Coming off the highest year in office sales volume in eight years, two high profile offers hit the market first quarter. The first offer brought on March 2nd consists of five prominent buildings at Imperial Center in Durham. Combined, they make up a total rentable square footage of 367,717 and are 98 percent occupied. The second offer brought Quintiles Plaza to market by Easdil Secured. This highprofile asset sits right on Interstate 40 at Imperial Center. It is fully occupied for another 10 years by Quintiles’ corporate headquarters. Both offers expect numerous looks from national and international investors.

High sales volume expected to continue

Inventory 2,000,000 1,900,000 1,800,000 1,700,000 1,600,000 1,500,000 s.f. 2010 2011 2012 Source: JLL Research

6

buildings

Class A vacancy Rate 20.0% 15.0% 10.0% 5.0% 0.0% 2013

2014

2015

627,248 99%

Q1 2016

square feet

2,257

averaging

occupied


44,363,957

-55,594

$20.82

1,667,451





11.9%

-55,594

0.9%

43.0%

Total vacancy



Total preleased



53

RICHMOND - Geoff Thomas Senior Research Manager, Richmond

Downtown continues to refresh its aging inventory Downtown remains a tenant’s market as another Trophy tower rises The timing of James Center’s anchor tenant, McGuireWoods, relocation to a new Trophy tower and the maturity of their 10-year CMBS loan this year proved fateful. The ownership of three Class A towers transferred to the special servicer, LNR Partners, with only 31.1 percent of the 244,000 square feet vacated leased. Now a second Trophy tower is set to deliver by the end of 2017, this time luring a Class B tower’s anchor tenant, SunTrust Bank. The move will place over 200,000 square feet on the market at 919 E Main Street and question near-term fundamentals for this class segment.

Historical CBD availability rates Class A

Class B 31%

20%

19% 10% 2010

15%

10% 2011

19%

2012

21% 21%

19% 20%

2013

2014

16% 18%

21%

2015

2016


Richmond’s largest employers consolidating and shifting footprints The second arm of SunTrust’s real estate reorganization will possibly shift operations to the Innsbrook submarket’s last vacant building, Westmark One, totaling 227,000 square feet. SunTrust currently leases a total of 158,360 square feet between two suburban locations and owns two other operation centers in Manchester and the Parham East submarket totaling over 607,157 square feet. However, it is unclear how many of their personnel or current suburban office footprint will be repositioned. The move will overlap Capital One’s consolidation of their leased offices to their West Creek campus (owner-occupied) later this year, vacating 135,375 square feet at Liberty Plaza II by the third quarter. Creative office development increases in the urban submarkets Manchester and Scotts Addition have been the hotbed of activity over the past four quarters with three projects currently under construction or breaking ground this year. In Scotts Addition, the Sauer Office Building is currently under construction with the entire project available for lease—17,000 square feet in total. In addition, Spy Rock’s The Symbol was completing the demolition phase of 1800 Highpoint Avenue and should start construction on the 40.0 percent preleased, 60,000-square foot office/retail development next quarter. Manchester’s City Lofts project also locked in its second tenant, AuthX, for the small office phase of the mixed-use development that delivered this quarter.

SunTrust’s footprint in Richmond Downtown

Suburban

714,386 339,517

513,000

Current

535,657

Future


Creative office developments to deliver or commence in 2016

90,500 2,257 Square feet Source: JLL Research

25,116,317

-16,121

$18.84

17,000





14.3%

-16,121

5.3%

0%

Total vacancy



Total preleased



54

SACRAMENTO - John Sheaffer Senior Research Analyst, Sacramento

Rising market tide lifting all boats in 2016 Government agencies and healthcare groups drive office growth The unemployment rate in the Sacramento region dipped to 5.4 percent in February 2016, falling to a new post-recession low. Nearly 50.0 percent of payroll gains during the past 12 months are attributed to the region’s two major economic engines, the government and healthcare-related groups, which have helped tip the scales in their respective submarkets with significant expansions. The State led employment growth among government agencies, adding 1,600 jobs and nearly every healthcare group in the area is aggressively exploring footprint expansion options. The 2016-2017 Governor’s budget and the healthcare sector’s long-term longevity indicate healthy and sustained office demand over the next 12 months.

Region adds 23,300 jobs over past 12 months Healthcare and Social Assistance State gov't

31%

54%

Local gov't Federal gov't

7% 6%

Other

2% Source: JLL Research

Expect CBD rental rates to continue their climb in 2016

Highway 50 Corridor, the last large block frontier Asking rents continue to climb among all submarkets, due in part to the dwindling supply of options for large users. A disproportionate share of available blocks greater than 15,000 square feet remain along the Highway 50 Corridor, where over 71.0 percent of available space qualifies as large block. As a result, the submarket has posted major absorption swings recently and is the last battleground for large users seeking multiple, contiguous options. Rent growth along the Highway 50 Corridor is expected to accelerate in 2016, as competition for space ramps up.

Class A asking rent

$2.90

$2.87

Class A taking rent

$2.80

$2.80

$2.70 $2.60 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016


Highway 50 Corridor absorption swings s.f.

CBD rents poised to accelerate in 2016 The CBD submarket, as did every other submarket in the region, posted significant positive annual rent growth at the onset of 2016. State agency expansions and tenant in-migration from neighboring submarkets have compressed the vacancy rate to the lowest figure since 2007, falling to 13.0 percent, and limited space has given landlords more negotiating leverage, in addition to selling the prospect of a revitalized urban core experience. The average Class A taking rent outpaced the average asking rent in the first quarter of 2016, signaling rent growth momentum observed downtown in 2015 shows no sign of slowing in 2016 and will likely increase in velocity with no deliveries in near sight.

200,000 100,000

59,589

47,874

Q1 2015

2,257 Q2 2015

155,437

133,447

Q3 2015

Q4 2015

0 -100,000 -200,000

(110,594) Q1 2016


43,791,678

260,541

$22.92

0





15.4%

260,541

2.6%

0.0%

Total vacancy



Total preleased



55

SALT LAKE CITY - Christian Forbes Research Analyst, Salt Lake City

Office-using industries propel widespread gains Jobs market continues to fire on all cylinders Salt Lake City (SLC) payroll growth is white-hot, rising nearly twice as fast the national average over the last 12 months. Leading the way has been a steady, substantial expansion in the white-collar jobs market—especially prevalent in the high-tech and financial services sectors. These industries continue to reap the benefits of a growing population, a well-educated workforce, and low business costs; consequently, SLC has been gaining jobs and seeing marked expansions and new entries by tech and financial firms alike. The metro is poised to continue attracting those companies opting for a lower cost environment or those priced out of more expensive areas like New York City and Silicon Valley.

Tech + Finance: projected growth in SLC outpaces U.S.

Statistical gap between CBD and Suburban narrowing During the last several quarters, SLC has routinely placed among the nation’s lowest vacancy rate markets. In turn, it has been increasingly targeted by developers searching for opportunity throughout the entire market, but particularly so in suburban markets like Utah County and Draper. Over the last 15 months, the vacancy spread between Downtown properties and their suburban counterparts has narrowed, as has the asking rent premium between the geographies. Total vacancy rates and direct asking rents are at their closest in the last five years; SLC’s suburbs are clearly high in demand.

CBD compared to Suburban markets—gap between the two

SLC financial services SLC high-tech

Annual growth

4.0%

U.S. financial services U.S. high-tech

3.0% 2.0% 1.0% 0.0%

Basis points

2016 Source: JLL Research, Moody's

2017

2018

2019

750

20.0%

600

15.0%

450

10.0%

300

5.0%

150 0

0.0% 2012

2013

2014

2015

Vacancy rate


YTD Asking rent

Red-hot construction pipeline thanks to strong user demand Million square feet

Will 2016 new construction deliveries meet and surpass tenant demand? Following two straight years of strong positive absorption—including a 2015 that broke 1.0 million square feet of tenant demand—net absorption for January through March sits at a two-and-a-half-year quarterly low. Still, this is more a sign of just how tight the market remains rather than a slackening in user demand. In fact, record levels of new construction are illustrative of a market in which developers have struggled to build quickly enough. For the year ahead, 2.8 million square feet of new product is set to deliver—a figure that, if met, would significantly best the previous ten-year record (set in 2007). Nearly half (49.4 percent) is being built speculatively. Users should see some measure of relief when this new, spec inventory is delivered, but nearly one-third of it already spoken for.

5.0%

3.0 2.5 2.0 1.5 1.0 0.5 0.0


2.8

Historical completions

2,257 2011

2012

2013

2014

2015

2016

45,865,424

15,110

$20.66

2,765,312





6.5%

15,110

3.5%

60.6%

Total vacancy



Total preleased



56

SAN ANTONIO - Travis Rogers Research Analyst, Austin

Build-to-suit activity remains strong Northwest and North Central dominate with new product Ridgewood Plaza delivered Far North Central during the first quarter. Of the 147,000 square feet available, 26.5 percent of the building was preleased by EOG. There are four other properties currently under construction. These properties are Vista Corporate Center (150,735 square feet), Security Service FCU (270,000 square feet), 1900 NW Loop 410 (57,000 square feet) and Huntington Center (52,000 square feet). Both Security Service FCU and 1900 NW Loop 410 are build-to-suits, 100 percent preleased to Security Service FCU and The Bank of San Antonio, respectively. Collectively, there is approximately 530,000 square feet under construction with 61.7 percent preleased.

Square feet under construction by class and submarket 10%

529,735 s.f. under construction North Central

Northwest

90%

Average asking rent by submarket and class One submarket experiences rent growth above the rest The Far North Central submarket recorded significant rental rate growth quarterover-quarter. Not only did the Far North Central submarket experience the highest rent growth at 6.3 percent, it also has the lowest spread between Class A and B rental rates. Overall, San Antonio marketed rents have increased approximately 2.4 percent year-over-year. Looking at the market as a whole, spreads are the lowest in northern San Antonio and highest in the south or downtown. This is a result of newer and/or higher quality Class B office product in a booming northern corridor. Most submarkets experience a slight increase in vacancy San Antonio’s total vacancy rate experienced a slight uptick quarter-over-quarter. The market generally bounces between 14.5 and 15.9 percent vacancy. With over two million square feet of new construction delivered between 2014 and 2015, tenants are moving between projects. While preleasing for new construction is high, the majority of the leasing activity comes from build-to-suit projects. As speculative developments, such as Ridgewood Plaza, deliver vacancy will temporarily increase in advance of tenants taking occupancy of their new space.

$30 $20

$30.05 $26.48 $26.23 $26.38 $25.77 $22.09 $20.22 $19.05 $18.00

$25.87

$23.30

$10 $0 CBD

Far North Central

North Central

Northeast Northwest

South

Class A

Class B

Total vacancy by submarket South

20.9%

Northwest

16.5%

Northeast

9.6%

North Central

12.6% 2,257

Far North Central

17.3%

CBD

21.7%

26,513,851

395,164

$23.09

529,735





15.7%

395,164

2.4%

61.7%

Total vacancy



Total preleased



57

SAN DIEGO - Josh Brant Senior Research Analyst, San Diego

Developers remain bullish on spec construction Pipeline of offices under construction

Bosa Development is most active investor in Downtown offices Bosa Development is best known for its residential condo development projects, in Downtown San Diego. However, in the past 18 months Bosa has acquired three separate offices in Downtown, investing a total of $83.8 million dollars. The three acquisitions are more than any other investor in Downtown during that time frame. The largest and most recent of these transactions was the 232,900square-foot office at 530 B St., for $53.3 million. Bosa’s office portfolio Downtown previously consisted of only the Paladion building. Additionally, over the past six months, Bosa has invested $79.1 million in six other Downtown land-banking transactions for future residential projects.

Bosa’s 18-month total investment in Downtown offices

The Irvine Company single-handedly suppressed Q1 Class A rent growth Countywide Class A asking rents were effectively flat quarter-over-quarter. However, UTC was the only major submarket in the county to record quarterover-quarter declines in asking rental rates with a 3.0 percent decrease versus the fourth quarter. The Irvine Company owns 60 percent of the Class A offices in UTC. During the first quarter, The Irvine Company’s asking rents in UTC were cumulatively marked down 5.3 percent, driving the overall Class A rent decrease in the submarket. The Irvine Company also reduced its asking rate on a few availabilities in Downtown as well.

Quarter-over-quarter Class A asking rental rate change

s.f.

San Diego’s office construction pipeline is now 100 percent speculative For the first time in five years, the pipeline of offices under construction is entirely comprised of speculative projects. Most of the projects under construction are in the county core areas of Del Mar Heights, Sorrento Mesa and UTC/Eastgate. The exception is Regent Properties’ 230,000-square-foot Atlas renovation project in Carlsbad. The current offices under construction have not preleased any of their available space yet. 2015 saw the most speculative office projects deliver of the past five years, and 2015 recorded the least amount of positive net absorption of the past five years. We anticipate the offices currently under construction to act as a headwind against occupancy growth as they deliver.

2,000,000

Build-To-Suit

Speculative

1,500,000 1,000,000 500,000 0 2011 Source: JLL Research

2012

2013

2014

2015

2016

$83.8 million Source: JLL Research

Carlsbad Rancho Bernardo Del Mar Heights Sorrento Mesa UTC -3.0% Kearny Mesa Mission Valley Downtown

0.0% 1.4% 2.7% 0.0% 2.3% 2.3% 2,257

0.0%

-4.0% -3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% Source: JLL Research

79,312,880

442,206

$30.00

451,841





13.5%

442,206

2.5%

0.0%

Total vacancy



Total preleased



58

SAN FRANCISCO - Jack Nelson Research Analyst, San Francisco

Tenants taking a harder look at total costs Major move-ins drive absorption Despite growing concerns regarding the stock market and VC funding in early Q1 2016, San Francisco saw continued net absorption gains totaling more than 150,000 square feet. Activity was driven primarily by two major move-ins with Salesforce moving into a portion of their new space at 350 Mission Street and LinkedIn at 222 2nd Street. Dropbox is scheduled to move into their new headquarters at 333 and 345 Brannan Street in Q2 2016 further driving absorption into 2016. Large expansionary lease deals from WeWork (73,348 square feet), Quantcast (94,889 square feet), and Twilio (91,823 square feet) will further contribute to absorption figures into 2016, driving down vacancy and limiting large block availabilities.

LinkedIn and Salesforce headquarter moves boost absorption

Sublease space, a growing secondary market Sublease availabilities continue to grow into 2016, with more than 2.3 million square feet now on the market, up 14.0 percent since Q4 2015. However, demand for sublease space is strong: 5 of the top 8 sublease spaces have pending leases which would cut availabilities by 670,000 square feet when the transactions complete. Tech firms represent the majority of demand in San Francisco at more than 40.0 percent. With a slowdown in VC funding and more firms focusing on the bottom line, the demand for plug-and-play space is robust. As the cost of construction has risen 47.0 percent in the past five years, second generation space requiring large capital expenditures has become a less attractive option.

Tech subleases on the market for shortest period of time

Pre-leasing activity on new construction up from Q4 2015 Several large pre-leasing deals transacted in Q1 2016, totaling more than 200,000 square feet. With asking rates for new construction well above market averages, attracting tenants is a balance between design features catered to the modern workplace, added amenities, and competitive concession packages. There is currently 2.9 million square feet of space set to deliver over the next two years, providing more opportunities for pre-leasing. Tenants will have options, but at a premium.

235,000 Square feet absorbed by Salesforce and LinkedIn


Months

6.0 4.0

3 months

2.0 0.0 Technolgy

Legal

Financial Services

Professional Services

Industry Source: JLL Research

New construction opportunities still available 37.0%

2,257

63.0%

Pre-leased Available


75,553,912

153,135

$72.04

4,669,927





8.2%

153,135

10.6%

37%

Total vacancy



Total preleased



59

SAN FRANCISCO MID-PENINSULA - Eduardo Romero Research Analyst, Silicon Valley

Funding crunch looms, tech giants gobble up space Jittered investors mull tech valuations, but Peninsula companies resilient There are growing concerns that a VC funding crunch could jeopardize the growth of young tech startups, triggering an abrupt release of office space. However, the impact would be very limited in the Mid-Peninsula for two reasons. First, the highest concentrations of young tech startups in the region are found in downtown micro-markets where they occupy 45.0 percent of leased office space. These areas represent only 15.0 percent of the Mid-Peninsula’s total inventory; a steep decline in venture capital funding would have a limited impact on the overall market. Second, downtown micro-markets have historically backfilled vacant space quickly as vacancy rates have been below 10.0 percent for the past 15 quarters. The array of tenants in the Mid-Peninsula will likely insulate the market from severe disruptions caused by a pullback in venture capital funding.

Google ramped up its Mid-Peninsula presence in past 2 years

1.9 m.s.f. of office space to be recently acquired by Google Source: JLL Research

Young tech companies cluster in downtown micro-markets Technology giants sprawl in the Mid-Peninsula Google and Facebook have gobbled up a combined 5.7 million square feet of office and R&D space within the past two years and are expected to continue expanding. However, a considerable amount of this is currently occupied by many legacy tenants. There are at least 1.2 million square feet of potential future demand that could be created as tenants are likely to become uprooted in the market. It is uncertain as to what Google and Facebook plan to do with the space they now control, but their rapid expansion will generate additional future demand for space in the Mid-Peninsula over the course of the next 12 to 18 months.

In Q1 2016, 45% of leased office space in the Mid-Peninsula downtown micro-markets was occupied by tech companies founded in the last 6 years.

45%


Vacant large blocks of space in short supply 30 Class A

# of blocks

New proposed development meets bullish sentiment on the market Amid strong rent growth and high demand for Class A space, developers continue to bring to market development proposals in core submarkets like Redwood City and San Mateo. With more than 1.2 million square feet currently under construction, developers still believe future demand will not be satiated with current supply levels. For instance, large blocks of space are still in short supply in the Mid-Peninsula, with only four buildings offering contiguous spaces greater than 100,000 square feet. Such options are specially appealing to large Silicon Valley tenants who cannot find similar options in core submarkets or are unwilling to pay high rent premiums.

Class B

20 1

10 0

3 2,257 50,000 - 100,000 s.f. 100,000 - 200,000 s.f. 7

1 > 200,000 s.f.


27,335,762

121,596

$56.41

1,271,229





12.7%

121,596

15.8%

33.3%

Total vacancy



Total preleased



60

SEATTLE-BELLEVUE - Alex Muir Research Manager, Seattle-Bellevue

Strong demand pushes vacancy to 15-year low Development activity continues on its upward momentum Google’s new 180,000-square-foot campus in Kirkland and Fairview Research Center II, a 140,000-square-foot state of the art laboratory and office building in Lake Union, were delivered in the first quarter. With another 2.9 million square feet scheduled to deliver this year, 2016 is poised to surpass 2015 as the most active year for office development since prior to the recession. Declining vacancy and strong tenant demand have lessened the concern of overbuilding in the market, but with nearly 6.8 million square feet of product currently under construction, the development pipeline will continue to be a major topic of discussion. Preleasing rates of new construction space currently stands at 38.4 percent and average asking rents are being marketed at $48.55 per square foot, full service, representing a 39.6 percent premium over the regional average. Sales volume exceeded $1.0 billion despite a lack of CBD transactions in the first quarter In the first quarter alone, more than $1.2 billion in office investment transactions occurred in the Puget Sound region. Interestingly, the high volume of sales occurred without any CBD buildings trading. 62.5 percent of the buildings sold this quarter are in suburban submarkets such as Kent Valley and Redmond. Following on last year’s strong performance, Lake Union far surpasses other submarkets with year-to-date sales volume of $499.4 million. The largest transaction in Q1 was the sale of West 8th, a 28-story Trophy office tower built in 2009, for $370.0 million to Deutsche Asset & Wealth Management. The skyline asset fetched an impressive $716 per square foot. Market vacancy hits its lowest level since 2001 838,562 square feet of space was taken down in the first quarter. Total vacancy in the Seattle-Bellevue area currently stands at 9.1 percent, which is the lowest it has been since the dot-com bubble in the early 2000s. Subsequently, average asking rents are up 8.3 percent year-over-year to it’s current rate of $34.77. First quarter leasing activity was driven primarily by technology tenants, with the 286,000-square-foot deal at Urban Union being the largest. Other tenants that signed major leases include Saltchuk, Moss Adams, The Everett Clinic, and Qualtrics.

Square feet of office product delivered 3,000,000

2,251,966

2,000,000 1,000,000 128,904

283,545

462,312

480,000

2011

2012

2013

2014

320,000

0 2015

YTD 2016


Sales volume by submarket ($mil) $499.4

Lake Union Queen Anne I-90 Corridor Kent Valley Redmond Federal Way Suburban Bellevue Source: JLL Research

$40.4 $29.1 $26.5 $25.6 $22.8 $18.3 $0

$200

$400

Millions

Vacancy in single digits on both sides of the lake

Downtown Seattle 7.7% 2,257

Eastside 9.3%


92,656,684

838,562

$34.77

6,755,651





9.1%

838,562

8.3%

38.4%

Total vacancy



Total preleased



61

SILICON VALLEY - Christan Basconcillo Research Manager, Silicon Valley

Tech giants and redevelopment prop demand Net absorption fueled by pre-leased new construction Silicon Valley recorded a significant volume of occupancy gains during the quarter. However, much of the growth was driven by large corporate tech companies occupying pre-leased new development. This trend will continue to keep the Valley’s growth on an upward swing this year; there is still 1.7 million square feet of office space under construction that will eventually be occupied over the next 18 months. Despite the growing concerns over the stock market, future move-ins represent established viable tech tenants that have enough capital to weather a volatile business climate. Even if the economy shifts from bull to bear, market trends will slowly taper off and cool instead rather than experience a dot-com era crash.

Valley continues to see consistent occupancy gains

Demand volume pushed by redevelopment and cost of Class A Vacancy rose slightly from last quarter, caused by the addition of approximately 1.0 million square feet of completed, but vacant, Class A office product. However, office demand has been high enough to ease some landlord worries. Full floor tenants in the market continue to carve away at big block availability. Additionally, redevelopment projects like Santa Clara Square are uprooting tenants in the market. However, rising rents for brand new space is becoming a deterrent for companies more concerned with costs. For this reason, North San Jose and Downtown San Jose are gaining more momentum—availability and rents are still relatively tenantfavorable. With demand volume still high, vacancy will maintain a steady decline, albeit slowing in pace compared to 12 months prior.

Class A vacancy edges up slightly due to new product

1,500,000 500,000 -500,000 Q4 10 Q3 11 Q2 12 Q1 13 Q4 13 Q3 14 Q2 15 Q1 16 Source: JLL Research

40.0% 30.0% 20.0% 10.0% 19.4%

24.7%

30.7% 28.6%

27.1% 17.2% 16.1%

0.0%

13.9% 11.9% 12.2%

2007 2008 2009 2010 2011 2012 2013 2014 2015

Q1 2016


Valley still attracting VC funding, but velocity slowing VC’s shift capital to later stage companies, slowdown on the horizon? Though the funding spigot has yet shut off, investors are beginning to focus more attention toward established, late-stage startups. The slashing of unicorn valuations combined with a very thin IPO pipeline is expected to cool VC funding over the next 12 months. From a real estate perspective, the Valley will see fewer high-flying tech startups overcommitting to prime Class A space. As stock market volatility is causing some pull-back among investors, heavily funded tech companies that aggressively expanded could begin to release sublease space, signaling a potential slowdown in market trends.

$3,000.0

Funding volume ($M)

$2,000.0 $1,000.0 $0.0 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 12 12 13 13 13 13 14 14 14 14 15 15 15 15 Source: JLL Research, PwCMoneytree

69,004,122

824,960

$49.04

3,483,727





12.3%

824,960

15.7%

47.8%

Total vacancy



Total preleased



62

ST. LOUIS - Blaise Tomazic Senior Research Manager, St. Louis

Leasing activity signals future gains Office employment growth bounces back Employment in the office occupying sectors maintained a steady annual growth rate of 1.0 percent over the past 12 months, doubling the previous year. Several companies have announced plans to increase head counts including: Bunge, Thomson Reuters, and Moneta Group. Unfortunately, some tenants have also announced plans to leave the market. Hardee’s (CBD) is relocating its corporate office to Nashville in 2017. Similarly, AEP (West County), which was acquired last year by, American Commercial Lines, will be moving to Louisville. Both tenants will leave behind space in excess of 40,000 square feet.

Annual change in employment (in thousands) 15

Financial Activities Information

Professional and Business Services Government

10 5 0 (5)

2013

2014

2015

2016

Source: JLL Research, BLS

Activity focused to the west More than half of the leasing activity in the first quarter was done in West County, further sustaining the trend of tenants looking toward the suburbs. The spread between Class A and B buildings widened further this quarter. Vacancy for Class A buildings is now 460 basis points lower. Activity is no different, almost 65.0 percent of leases this quarter were in Class A buildings. The gap in asking rates between classes is now over $6.00 per square foot. As a result, the available space in Class B buildings is lowering rental rates across the market.

Leasing activity by submarket (leases over 10,000 s.f.) CBD

22.22%

Clayton Northwest County

5.56%

55.56% 11.11%

St. Charles County

5.56%

West County


Quarterly absorption since 2014 s.f.

Market takes a pause After a banner year in 2015, the market took a breath in the first quarter posting negative absorption for only the second time since 2014. In a reversal of recent trends, losses were led by the suburban markets, which absorbed over 700,000 square feet last year. The CBD offset some of the losses, gaining 42,000 square feet. The losses are not expected to continue. More than 250,000 square feet of expansions were signed this quarter, with most commencing in the next six months.

Absorption

300,000 225,000 150,000 75,000 0 -75,000 -150,000

2,257


2015

2016

42,125,546

-74,190

$19.05

125,000





14.9%

-74,190

-3.9%

60.0%

Total vacancy



Total preleased



63

SUBURBAN MARYLAND - Sara Hines Senior Research Analyst, Suburban Maryland

Large tenants drive leasing activity

Absorption trends positive in the first quarter After years of large-scale tenant consolidations, the Montgomery County office market experienced modest occupancy growth in the first quarter of 2016. SunEdison moved into 16,051 square feet at 7550 Wisconsin Avenue. Toole Design moved into 37,758 square feet at 8484 Georgia Avenue in Silver Spring. Another large move-in was the Montgomery County government, which leased 101,200 square feet at 1401 Rockville Pike. The Class A sector experienced a significant amount of growth, recording 272,829 square feet of positive net absorption in Montgomery County. Prince George’s County’s office market has never fully recovered from the consolidations that occurred in the mid-2000s and continues to show signs of softness as National Center for Health Statistics gave back 49,634 square feet at 3311 Toledo Road. Technology and life science sectors experience growth The federal government remains a dominant industry sector in Suburban Maryland, however, all of the federal leases signed in the first quarter were renewals and contributed no net new growth to the market. The tenant base showed signs of diversifying beyond its government and contractor focus, as technology and life science companies expanded. Education technology company 2U signed the largest lease of the first quarter and a new life science start-up, Nextcure, expanded by 25,000 square feet in Prince George’s County. Nextcure was launched in 2015 and the company raised $67.0 million in series A financing in the first quarter of 2016.

Large block leasing activity (leases over 20,000 s.f.)

Square feet

1,000,000

500,000

0 Q1 2015 Source: JLL Research

Q2 2015

Q3 2015

Q4 2015

Q1 2016

Absorption levels by county (s.f.) 300,000

264,307

200,000 Square feet

Leasing activity continues to build Large-block leasing activity in Suburban Maryland increased 77.7 percent from last quarter. This increase was largely due to a few large leases. 2U signed a 252,952-square-foot lease at 7900 Harkins Road. The U.S. Food and Drug Administration renewed at 7500 Standish Place for 113,730 square feet. DAI, a consulting firm, decided to renew at 7600 Wisconsin Avenue for 50,000 square feet and gave back approximately 20,000 square feet. Along with an increase in leasing activity there was a slight uptick on length of deals compared to a year ago. The average lease term in the first quarter was 102 months.

100,000

25,035

0 -100,000 Frederick County


Montgomery County

-58,449 Prince George's County

Leasing activity by industry sector (leases over 20,000 s.f.) 3% 5% 7%

40%

14% 2,257 24% Source: JLL Research

Technology Government Accounting consulting research strategy Nonprofit Law firm Engineering Life sciences Real estate

66,044,257

230,893

$26.76

183,888





20.0%

230,893

-0.1 %

0.0%

Total vacancy



Total preleased



64

TAMPA - Drew Gilligan Senior Research Analyst, Central Florida

Tampa Bay in line for a strong 2016 Three industries dominate space requirements in the market Groups in the professional and business services, financial services and scientific industries account for 81.5 percent of current space requirements in Tampa Bay, totaling 1.3 million square feet. There are currently no buildings under construction and only 20 Class A spaces greater than 30,000 square feet available in all of Tampa Bay. Of the 1.3 million square feet in requirements, 80 percent of that total is seeking space in Hillsborough County, which only has 16 spaces larger than 30,000 square feet. Something has to give as current availabilities can’t support the demand, which could lead to build-to-suit developments or office buildings with a portion pre-leased. Highest demand for STEM jobs in the state As tracked by Florida Department of Economic Opportunity, Florida has over 80,000 STEM jobs currently available, which is in line with numbers from a year ago. Health care, professional and business services, and finance and insurance are the industries seeking the most talent in terms of available positions. Hillsborough County ranks first in available jobs of any county in the state with over 10,000 postings, while Pinellas ranks seventh with 4,500 postings. This alludes to sustained growth in the local economy through 2016 and a strong indicator for continued strength in the office market. Asking rates continue to climb Overall Tampa Bay Class A asking rates have risen $1.16 per square foot (4.4 percent) in the past 12 months and $1.93 per square foot (7.4 percent) in the past 24 months. The increase in price is even more prevalent in the Tampa CBD and Westshore submarkets. While rents in the Tampa CBD have increased only 3.3 percent, which is still strong, landlords have pushed rents on average $2.66 per square foot (9.8 percent) over the previous 24 months. The Westshore and I75/I-4 Corridor submarkets have experienced something similar, with both submarkets experiencing over 8.0 percent rent increases for Class A space. Leverage continues to remain with landlords, but some tenants are balking at some of the asking rates for high quality spaces, explaining the slowdown in rent growth from last quarter.

Tenants in the market by industry 5.6% 6.2% 6.2%

Professional and business services Financial services Scientific and technical Logistics and distribution Healthcare and Life Sciences Creative Retail

31.8%

22.3% 27.4%


Counties with most STEM job availabilities 12,000 10,338 7,000 2,000 -3,000

Source: JLL Research, FDEO

Historical Class A asking rates $27.00

$26.14

$26.00

$25.05

$25.00 $24.00

$24.47

$24.98 $23.96

$23.38

$23.76 $23.49 $23.59

$24.21

$23.00 2,257

$22.00

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: JLL Research, BLS

34,348,959

170,908

$23.18

0





14.6%

170,908

1.4%

0%

Total vacancy



Total preleased



65

WASHINGTON, DC - Carl Caputo Senior Research Analyst, Washington, DC

Large vacancies hit, but may soon be backfilled Law firm rightsizings and consolidations continue to impact the core During the first quarter, Miller & Chevalier relocated to the newly delivered 900 16th Street, NW from Metropolitan Square, leaving behind 133,000 square feet of vacant space and rightsizing its footprint by 28 percent. In a similar vein, Cleary Gottlieb signed a lease to relocate its office to a new development at 2112 Pennsylvania Avenue, NW, and will rightsize by 20 percent when it moves in 2018. While a majority of law firms in Washington, DC have rightsized in the current cycle and a very limited number of large firms have upcoming lease expirations, several firms have put large sublet blocks on the market and continue to look for ways to achieve greater efficiency.

Long-term sublet options hit the market as firms rightsize

Emerging sectors continue to generate occupancy gains Continued growth from coworking providers, tech companies and quasigovernment institutions helped offset limited demand from the legal and federal sectors and generate occupancy gains. During the first quarter alone, creative coworking providers such as WeWork, MakeOffices and Spaces leased 230,000 square feet, doubling the total space leased by the sector in all of 2016. Additional expansions in the market came from the International Monetary Fund, which leased 36,000 square feet at 1899 Pennsylvania Avenue, NW and FiscalNote, which grew 12,000 square feet in its move to 1 Thomas Circle, NW.

Creative coworking providers showing tremendous growth

Activity is slowly flowing into the Class A+ segment Over the past 36 months, limited deliveries and elevated demand for top-quality space, primarily from government affairs groups and law firms, has caused a tightening in the Trophy segment of the market, while the repositioning of Class B space and growing demand from tech, nonprofits and creative users has reduced options priced below $50 full-service. The tightening from the top-down and bottom-up has left the Class A+ segment, space typically priced in the $65-$75 full-service range, with an elevated number of options. However, over the past 12 months, activity has started to flow into this segment as tenants such as CACI and Universal Services Administrative Company signed deals for more than 75,000 square feet at 1099 14th Street, NW and One Metro Center, respectively.

Law firm sublet block > 20,000 s.f. 1001 Pennsylvania Ave NW 401 9th St NW

150,000 100,000 50,000 0 2020

2021

2022 2023 2024 Term through


2025

2026

300,000 200,000 100,000 0 2013 Source: JLL Research

2014

2015

Q1 2016

Options > 20,000 s.f. in $65-$74 FS range remain abundant $35-$44 FS

9

14

12

$45-$54 FS $55-$64 FS $65-$74 FS

27

19 2,257

$75+ FS


115,670,408

-173,290

$54.77

2,173,626





12.3%

-173,290

4.0%

32.1%

Total vacancy



Total preleased



66

WASHINGTON, DC (Metro) - Scott Homa Senior Vice President, Research, Washington, DC

Diversification of tenant base continues Tech offsets stagnant federal government and legal services sectors Regional employment growth remained near cyclical highs during the first quarter of 2016, with 68,800 jobs added year-over-year overall. Over half of all regional job growth (58.6 percent) was concentrated within the technology sector, while the federal government and the financial and legal services industries remained largely stalled in terms of new job creation. Leasing activity mirrored these employment trends, with first quarter transactions by tech firms 2U, Opower and Intelligent Automation among the largest in the region. Meanwhile, several law firms added sublease blocks to the market, and space compression among federal agencies and law firms negated a large portion of growth by other industry types.

Tech industry driving regional employment growth Technology

40.3

Federal government

2.8

Financial services

1.6

Legal services

0.5 0.0

Jobs added year-over-year (in thousands) 10.0

20.0

30.0

40.0

50.0

Large-block leasing activity picks up in off-core locations Suburban Maryland and Northern Virginia claim a growing share of activity The suburbs accounted for 69.5 percent of regional leasing activity in Q1 2016, up substantially from a 52.9 percent share in 2015. Although tech firms, government contractors and healthcare groups were active in Northern Virginia and Suburban Maryland, the District of Columbia experienced an unusually slow period of activity, partially a result of limited law firm lease expirations and continued financial pressure within that sector. Suburbs lead regional net absorption Northern Virginia and Suburban Maryland registered significant occupancy growth in Q1 2016, driven by expansions of several tenants, including Unicom, Washington Gas, MakeOffices and 2U. In Route 28 South, Unicom took occupancy of the remaining vacant space at 15000 and 15010 Conference Center Drive, moving its regional headquarters for 40 divisions to the buildings and contributing to 459,000 square feet of positive net absorption. In Suburban Maryland, education tech company 2U signed a 252,952-square-foot lease at 7900 Harkins Road, nearly tripling its current footprint. Lobbying activity remained a bright spot in downtown DC, as nine of the past 10 government affairs lease transactions represented growth.

Northern Virginia

31% 41%

Suburban Maryland District of Columbia

28%

Suburban markets drive occupancy gains Route 28 South Tysons Crystal City CBD Merrifield RB Corridor Rockville Pike Bethesda CBD

528,770 209,726 107,931 99,574 86,166 78,113 71,307 63,909 -

YTD net absorption

100,000 200,000 300,000 400,000 500,000 600,000

329,824,434

92,220

$36.93

6,486,237





17.3%

92,220

2.2%

60.3%

Total vacancy



Total preleased



67

WEST PALM BEACH - Ilyssa Shacter Research Analyst, Fort Lauderdale

Investment in new development may diversify in the coming year. Suburban West Palm Beach market fundamentals strengthen Market fundamentals in Suburban West Palm Beach have improved over the previous 18 months, as Class A rents (NNN) increased 7.7 percent to $18.10 per square foot and vacancy decreased 490 basis points to 14.4 percent – the lowest point since late 2006. Propelling these trends were a number of leases signed in late 2015 which commenced during the first quarter. Notably, Gallagher Benefit Solutions moved into 8,300 square feet in Emerald View (2056 Vista Parkway) and Travelers Insurance leased 2,600 square feet in Northpoint Corporate Center (701 Northpoint Parkway).

Vacancy in Suburban WPB reaches nine year low $25.00

Asking rate (NNN)

$15.00 $10.00 $5.00 $0.00 2006

Strong start for 2016 – Investment in West Palm Beach continues Since the start of 2014 there have been 20 trades in the Core CBD and Suburban West Palm Beach submarkets combined. Specifically, half of the Downtown Class A buildings have traded over that period. Most recently, Northbridge Tower sold late in the first quarter as Crocker Partners and Greenfield Partners purchased the property from Gaedeke Group for $68.2 million ($145 per square foot). In addition, The Fourm, an office complex comprising three Class B properties located in Suburban West Palm Beach, traded for $20.5 million ($74 per square foot) when Crimson Peak purchased the properties from Panther Real Estate.

2009

2012

2015

Four buildings trade for a strong start to 2016 15 Core CBD

Suburban West Palm Beach

10

4

5

3

3

6

2

0

2

2014

Palm Beach County development pipeline grows The development pipeline downtown is growing as a number of major players have announced new projects in recent months. Most notably, Jeff Greene announced plans for a new mixed-use center, One West Palm, which would likely included an office component (early reports note the project would include approximately 340,000 square feet of office). More recently, Related, which has a few other projects in the works, announced plans for a 30-story, 300,000square-foot, Class A office tower on land currently owned by the First Church of Christ, Scientists. In addition to the many speculative mixed-use projects which are still in the early planning stages, there are a number of residential projects under construction downtown. Currently there are four projects with a combined 700 residential units expected to come to market before year-end 2017.

35.0% 30.0% 25.0% 20.0% 15.0% 10.0%

Vacancy

$20.00

2015

2016

Diversification of development pipeline Name

Developer

Phase

Type

3 Thirty Three

Kolter Group

Under-Construction

Multi-Family

City Place*

Related

Proposed

Mixed-Use

One West Palm

Jeff Greene

Proposed

Mixed-Use

Transit Village

Michael Masanoff 2,257

Proposed

Mixed-use

The Cosmopolitan

US Hospitality Group/ PrivCap Holdings

Proposed

Mixed-Use

* Denotes multiple projects proposed

20,570,000

-47,800

$30.20

0





17.4%

-47,800

4.7%

0.0%

Total vacancy



Total preleased



68

WESTCHESTER COUNTY - Dayna McConnell Research Analyst, Fairfield County

Healthcare and renewals drive Westchester activity Healthcare and medical office space users lead Westchester activity First quarter leasing activity across Westchester County showed continued strength in the healthcare sector, with two of the largest transactions totaling over 115,000 square feet. Columbia Hospital signed in White Plains CBD for 50,000 square feet at 1 North Broadway, while the Hospital for Special Surgery (HSS) leased over 65,000 square feet at 1133 Westchester Avenue, located in the I287 East submarket.

Leasing activity by industry Financial Svcs/Banking

16%

18%

Healthcare

3% 6%

Consumables Law firm

18%

39%

Government Other


Landlords holding tight to existing tenants In response to Westchester’s continued high vacancy rates, landlords are making the effort to maintain their existing tenants. Merrill Lynch had the largest renewal in White Plains CBD at 360 Hamilton Avenue, keeping 46,122 square feet of space. Law firms also located in the CBD are signing in-place renewals in prime buildings; Keane & Beane renewed for 26,000 square feet at White Plains Plaza and Delbello, Donnellan, Weingarten, Wise & Wiederkehr, LLP retained their 27,000 square feet at 1 North Lexington. Outside of the CBD, Sabra Dipping Company and the Visiting Nurses Association renewed at 777 Westchester Avenue and 540 White Plains Road, respectively, for a combined 60,000 square feet of space, appriximately.

Renewals account for the majority of Q1 transactions Renewal with expansion New to market Renewals Relocation Extension Expansion

14,272 58,430 224,316 114,359 15,810 14,272 -


50,000 100,000 150,000 200,000 250,000

450 Mamaroneck Avenue – Harrison Building investment market heats up while office leasing market stays cool Though office leasing activity in this market has remained relatively unchanged over the past few quarters, major properties in Westchester are piquing the interest of potential buyers, including the 700 series on Westchester Avenue, 44 South Broadway in downtown White Plains, and 100 Manhattanville Road in Purchase. Typically new owners enter the market looking for growth, which will likely translate into better quality space, higher asking rents, and increased demand from tenants to be in Trophy buildings.

$39.6M Harrison Plaza, a Class A building in the I-287 East Corridor, boasts the highest sale price in Westchester Source: JLL Research

32,333,229

56,382

$24.68

0





22.9%

56,382

4.8%

0.0%

Total vacancy



Total preleased



69

APPENDIX:

Stats Employment Rankings Leases Sales Developments



70

UNITED STATES Market totals (CBD and Suburban)

Atlanta Austin Baltimore Boston Charlotte Chicago Cincinnati Cleveland Columbus Dallas Denver Detroit Fairfield County Fort Lauderdale Hampton Roads Hartford Houston Indianapolis Jacksonville Long Island Los Angeles Miami Milwaukee Minneapolis Nashville New Jersey New York Oakland–East Bay Orange County Orlando Philadelphia Phoenix Pittsburgh Portland Raleigh–Durham Richmond Sacramento Salt Lake City San Antonio San Diego San Francisco San Francisco Peninsula Seattle–Bellevue Silicon Valley St. Louis Tampa Bay Washington, DC West Palm Beach Westchester County United States totals ◄ Table of contents

OFFICE STATISTICS

Quarterly YTD total YTD total net total net net Direct Total absorption Inventory (s.f.) absorption absorption vacancy vacancy (including (including (% of (%) (%) subleases) subleases) Inventory)

Current quarter YTD Under Quarterly Under direct Completions / construction percent construction average deliveries as % of change (s.f.) marketed (s.f.) inventory rent ($p.s.f.)

133,507,824 325,436 49,439,503 774,647 71,152,035 29,742 165,505,659 259,388 47,047,960 298,170 235,598,374 1,655,104 34,582,680 285,382 28,121,038 95,963 30,482,513 211,506 162,502,918 164,935 107,645,722 -349,535 61,651,347 -62,018 48,491,420 402,225 22,564,674 40,671 18,612,715 311 26,374,513 -495,116 162,502,374 227,138 31,569,882 -1,501 21,627,558 8,277 42,253,140 309,871 188,741,769 432,114 37,345,817 -146,340 27,567,279 259,208 69,094,277 183,049 33,732,255 206,416 158,786,477 -562,303 449,872,906 -1,580,918 54,680,995 122,940 95,731,037 229,551 29,145,997 213,699 124,092,821 604,158 82,688,661 423,748 50,677,398 24,279 58,709,017 178,251 44,363,957 -55,594 25,116,317 -16,121 43,791,678 260,541 45,865,424 15,110 26,513,851 395,164 79,312,880 442,206

325,436 774,647 29,742 259,388 298,170 1,655,104 285,382 95,963 211,506 164,935 -349,535 -62,018 402,225 40,671 311 -495,116 227,138 -1,501 8,277 309,871 432,114 -146,340 259,208 183,049 206,416 -562,303 -1,580,918 122,940 229,551 213,699 604,158 423,748 24,279 178,251 -55,594 -16,121 260,541 15,110 395,164 442,206

0.2% 1.6% 0.0% 0.2% 0.6% 0.7% 0.8% 0.3% 0.7% 0.1% -0.3% -0.1% 0.8% 0.2% 0.0% -1.9% 0.1% 0.0% 0.0% 0.7% 0.2% -0.4% 0.9% 0.3% 0.6% -0.4% -0.4% 0.2% 0.2% 0.7% 0.5% 0.5% 0.0% 0.3% -0.1% -0.1% 0.6% 0.0% 1.5% 0.6%

16.4% 10.3% 12.4% 11.5% 11.0% 13.6% 16.6% 18.4% 12.9% 18.3% 12.6% 19.4% 22.1% 15.4% 13.9% 15.8% 15.7% 15.3% 15.2% 14.3% 14.3% 12.8% 18.0% 14.0% 6.1% 22.3% 8.5% 11.7% 11.4% 14.7% 11.8% 20.0% 14.3% 7.9% 10.6% 12.8% 15.1% 6.0% 15.5% 12.6%

17.2% 11.1% 12.8% 13.9% 11.6% 14.5% 17.4% 19.3% 13.1% 19.1% 13.7% 19.4% 24.4% 16.1% 14.3% 16.7% 17.6% 15.6% 15.6% 15.5% 15.0% 13.3% 18.5% 14.9% 6.3% 24.7% 10.0% 12.2% 11.8% 14.9% 12.2% 20.9% 16.4% 8.3% 11.9% 14.3% 15.4% 6.5% 15.7% 13.5%

$22.98 $33.72 $22.99 $33.77 $23.15 $29.75 $19.25 $19.07 $17.51 $24.79 $26.19 $18.35 $31.90 $28.17 $18.47 $20.68 $29.82 $19.00 $19.26 $26.22 $36.60 $35.48 $19.03 $25.31 $21.68 $25.26 $72.57 $34.52 $30.96 $20.92 $24.02 $23.75 $23.07 $25.12 $20.82 $18.84 $22.92 $20.66 $23.09 $30.00

2.0% 4.5% 0.3% -0.8% 0.5% -0.4% 0.1% -0.2% 0.1% 1.7% 2.2% -0.3% 0.2% 0.4% -0.3% 1.0% 0.1% 0.6% 0.7% -0.5% 1.9% 1.4% 2.7% 0.6% 6.7% 0.4% 1.6% 9.7% 3.9% 0.9% 1.2% 1.1% 1.9% 2.2% 1.4% 0.6% -0.5% 0.0% 0.5% 0.4%

0 2,602,297 347,445 2,137,233 486,354 1,437,452 639,200 5,715,195 0 2,223,472 0 4,311,164 0 200,000 0 47,000 204,400 580,692 1,096,910 8,307,051 120,768 2,965,842 0 401,334 0 0 0 95,098 0 287,858 0 25,484 1,296,600 5,723,178 29,200 301,050 0 0 0 338,885 0 2,309,645 134,552 694,676 0 148,924 0 464,236 135,000 3,276,446 0 440,445 0 14,353,410 0 0 574,252 1,065,424 0 271,000 1,078,035 3,600,593 445,000 2,217,644 367,000 592,000 64,682 1,607,791 0 1,667,451 44,378 0 0 0 51,600 2,765,312 147,000 529,735 65,500 451,841

1.9% 4.3% 2.0% 3.5% 4.7% 1.8% 0.6% 0.2% 1.9% 5.1% 2.8% 0.7% 0.0% 0.4% 1.5% 0.1% 3.5% 1.0% 0.0% 0.8% 1.2% 1.9% 0.5% 0.7% 9.7% 0.3% 3.2% 0.0% 1.1% 0.9% 2.9% 2.7% 1.2% 2.7% 3.8% 0.0% 0.0% 6.0% 2.0% 0.6%

75,553,912 153,135 27,335,762 121,596 92,656,684 838,562 69,004,122 824,960 42,125,546 -74,190 34,348,959 170,908 329,824,434 92,220 20,573,002 -47,791 32,333,229 98,326 3,950,820,312 7,666,904

153,135 121,596 838,562 824,960 -74,190 170,908 92,220 -47,791 98,326 7,666,904

0.2% 0.4% 0.9% 1.2% -0.2% 0.5% 0.0% -0.2% 0.3% 0.2%

7.2% 10.7% 8.5% 10.6% 14.3% 14.0% 16.4% 17.1% 20.6% 13.7%

8.2% 12.7% 9.1% 12.4% 14.9% 14.6% 17.3% 17.4% 19.1% 14.8%

$72.04 $56.41 $34.77 $49.04 $19.05 $23.18 $36.93 $30.20 $27.26 $32.28

4.8% 0 4,669,927 4.5% 280,614 1,121,229 2.3% 320,000 6,755,651 15.8% 1,912,031 3,483,727 -3.4% 0 125,000 0.8% 175,998 0 0.1% 618,855 6,486,237 -0.2% 0 0 2.9% 0 0 3.2% 10,635,374 96,773,145

6.2% 4.1% 7.3% 5.0% 0.3% 0.0% 2.0% 0.0% 0.0% 2.4%


71

UNITED STATES

EMPLOYMENT

Market

Atlanta Austin Baltimore Boston Charlotte Chicago Cincinnati Cleveland Columbus Dallas–Fort Worth Denver Detroit Fort Lauderdale Hampton Roads Hartford Houston Indianapolis Jacksonville Long Island Los Angeles Miami Milwaukee Minneapolis–St. Paul Nashville New Jersey New York Oakland-East Bay Orange County Orlando Philadelphia Phoenix Pittsburgh Portland, OR Raleigh–Durham Richmond Sacramento Salt Lake City San Antonio San Diego San Francisco San Jose (Silicon Valley) Seattle–Bellevue St. Louis Stamford, CT (Fairfield County) Tampa Washington, DC West Palm Beach White Plains, NY (Westchester County) United States

Total nonfarm jobs 12-month net change (000s) 88.4 43.4 24.1 37.2 30.6 68.2 11.7 11.7 20.2 113.7 34.8 35.2 28.3 4.2 4.1 16.4 23.2 28.1 18.7 93.3 23.3 5.7 33.1 35.4 72.0 111.6 29.6 40.1 55.5 58.2 67.1 0.2 34.0 23.5 26.7 24.4 16.9 27.6 38.2 43.7 38.6 54.6 15.8 0.1 44.3 70.6 19.7 16.3 2,802.0

Total nonfarm jobs 12-month percent change

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

3.5% 4.7% 1.8% 1.4% 2.8% 1.5% 1.1% 1.1% 2.0% 3.4% 2.6% 1.9% 3.6% 0.6% 0.7% 0.6% 2.4% 4.5% 1.5% 2.2% 2.1% 0.7% 1.8% 4.0% 1.8% 2.7% 2.8% 2.7% 4.9% 2.1% 3.6% 0.0% 3.1% 4.2% 4.2% 2.7% 2.6% 2.9% 2.8% 4.3% 3.8% 3.0% 1.2% 0.0% 3.6% 2.3% 3.4% 2.4% 2.0%

16.6 8.8 5.8 13.5 9.8 2.3 1.9 0.7 4.6 30.0 11.7 20.5 9.5 -0.2 1.5 -9.8 2.1 2.7 3.0 27.3 6.1 -3.4 5.4 15.6 14.8 37.9 1.9 10.1 9.3 21.6 26.9 -0.1 10.9 8.4 10.7 3.0 5.9 5.5 9.0 22.8 19.7 19.2 5.1 -1.4 15.6 17.9 6.0 2.8 656.0

Office jobs* 12-month percent change 2.3% 3.7% 1.9% 1.9% 3.4% 0.2% 0.8% 0.3% 1.7% 3.3% 3.0% 4.0% 4.5% -0.1% 1.1% -1.5% 0.9% 1.6% 1.2% 2.7% 2.4% -1.8% 1.1% 7.2% 1.5% 2.9% 0.8% 2.4% 3.3% 3.1% 5.2% 0.0% 4.3% 5.5% 6.7% 1.7% 3.2% 2.4% 2.8% 6.0% 6.2% 4.3% 1.6% -1.2% 4.6% 1.9% 3.9% 2.1% 2.2%

Unemployment Unemployment (2015) (2014)

5.2% 3.2% 5.1% 4.3% 5.3% 6.7% 5.2% 4.9% 4.8% 3.8% 3.0% 5.7% 4.7% 5.1% 6.0% 4.8% 4.6% 4.9% 4.5% 6.0% 5.6% 5.3% 3.9% 3.7% 4.7% 5.3% 4.4% 5.5% 4.7% 4.8% 4.6% 5.5% 4.7% 4.8% 4.4% 5.5% 3.4% 3.7% 4.7% 3.2% 3.9% 5.6% 5.2% 6.0% 4.8% 4.2% 4.9% 4.5% 5.0%

12-month unemployment change (bp)

6.2% 3.8% 6.1% 5.1% 5.8% 6.9% 5.5% 5.8% 5.1% 4.5% 4.6% 7.2% 5.5% 5.7% 6.7% 4.6% 5.7% 5.9% 5.3% 7.9% 6.2% 5.5% 4.2% 5.2% 6.9% 6.3% 5.5% 7.2% 5.7% 6.1% 5.8% 6.0% 5.8% 4.9% 5.3% 6.7% 3.8% 4.2% 5.9% 4.0% 4.9% 5.1% 5.8% 6.6% 5.8% 5.0% 5.3% 5.3% 5.5%

-100 -60 -100 -80 -50 -20 -30 -90 -30 -70 -160 -150 -80 -60 -70 20 -110 -100 -80 -190 -60 -20 -30 -150 -220 -100 -110 -170 -100 -130 -120 -50 -110 -10 -90 -120 -40 -50 -120 -80 -100 50 -60 -60 -100 -80 -40 -80 -50

Source: JLL Research, Bureau of Labor Statistics * Office jobs include professional and business services, information and financial activities sectors * United States totals represent national employment, not sum of markets above * Data as of March 2016 (national) and February 2016 (local) ◄ Table of contents


72

UNITED STATES

OFFICE RANKINGS

Inventory

Total vacancy rates (including sublease) Nashville Salt Lake City San Francisco Portland Seattle-Bellevue New York Austin Charlotte Orange County Raleigh-Durham Oakland-East Bay Philadelphia Silicon Valley San Francisco Peninsula Baltimore Columbus Miami San Diego Denver Boston Hampton Roads Richmond Chicago Tampa Bay St. Louis Minneapolis Orlando Los Angeles Sacramento Long Island Jacksonville Indianapolis San Antonio Fort Lauderdale Pittsburgh Hartford Atlanta Washington, DC Cincinnati West Palm Beach Houston Milwaukee Westchester County Dallas Cleveland Detroit Phoenix Fairfield County New Jersey

New York Washington, DC Chicago Los Angeles Boston Dallas Houston New Jersey Atlanta Philadelphia Denver Orange County Seattle-Bellevue Phoenix San Diego San Francisco Baltimore Minneapolis Silicon Valley Detroit Portland Oakland-East Bay Pittsburgh Austin Fairfield County Charlotte Salt Lake City Raleigh-Durham Sacramento Long Island St. Louis Miami Cincinnati Tampa Bay Nashville Westchester County Indianapolis Columbus Orlando Cleveland Milwaukee San Francisco Peninsula San Antonio Hartford Richmond Fort Lauderdale Jacksonville West Palm Beach Hampton Roads 0


100 200 300 400 Square feet (millions)

500

0%

5%

10% 15% 20% 25% 30% Vacancy rate (%)


73

UNITED STATES

OFFICE RANKINGS

YTD total net absorption (including sublease)

Marketed rents

Chicago Seattle-Bellevue Silicon Valley Austin Philadelphia San Diego Los Angeles Phoenix Fairfield County San Antonio Atlanta Long Island Charlotte Cincinnati Sacramento Boston Milwaukee Orange County Houston Orlando Columbus Nashville Minneapolis Portland Tampa Bay Dallas San Francisco Oakland-East Bay San Francisco Peninsula Westchester County Cleveland Washington, DC Fort Lauderdale Baltimore Pittsburgh Salt Lake City Jacksonville Hampton Roads Indianapolis Richmond West Palm Beach Raleigh-Durham Detroit St. Louis Miami Denver Hartford New Jersey New York

New York San Francisco San Francisco Peninsula Silicon Valley Washington, DC Los Angeles Miami Seattle-Bellevue Oakland-East Bay Boston Austin Fairfield County Orange County West Palm Beach San Diego Houston Chicago Fort Lauderdale Westchester County Long Island Denver Minneapolis New Jersey Portland Dallas Philadelphia Phoenix Tampa Bay Charlotte San Antonio Pittsburgh Baltimore Atlanta Sacramento Nashville Orlando Raleigh-Durham Hartford Salt Lake City Jacksonville Cincinnati Cleveland St. Louis Milwaukee Indianapolis Richmond Hampton Roads Detroit Columbus

-2,000


-1,000 0 1,000 Square feet (thousands)

2,000

$0.00

$20.00 $40.00 $60.00 $ per square foot

$80.00


74

UNITED STATES

OFFICE RANKINGS

Under construction

Under construction as % of inventory

New York Dallas Seattle-Bellevue Washington, DC Houston Boston San Francisco Chicago Philadelphia Silicon Valley Nashville Denver Salt Lake City Atlanta Los Angeles Charlotte Phoenix Austin Raleigh-Durham Portland Baltimore San Francisco Peninsula Orange County Miami Pittsburgh Columbus San Antonio Minneapolis San Diego New Jersey Detroit Long Island Indianapolis Hampton Roads Orlando Cincinnati Milwaukee St. Louis Fort Lauderdale Cleveland Hartford Fairfield County Sacramento Tampa Bay Oakland-East Bay Westchester County Jacksonville Richmond West Palm Beach

Nashville Seattle-Bellevue San Francisco Salt Lake City Dallas Silicon Valley Charlotte Austin San Francisco Peninsula Raleigh-Durham Houston Boston New York Philadelphia Denver Portland Phoenix Baltimore San Antonio Washington, DC Atlanta Columbus Miami Chicago Hampton Roads Los Angeles Pittsburgh Orange County Indianapolis Orlando Long Island Minneapolis Detroit Cincinnati San Diego Milwaukee Fort Lauderdale St. Louis New Jersey Cleveland Hartford Fairfield County Sacramento Tampa Bay Oakland-East Bay Westchester County Jacksonville Richmond West Palm Beach 0


10,000,000 Square feet

20,000,000

0.0% 2.0% 4.0% 6.0% 8.0% 10.0%12.0%


75

SELECT LARGE LEASES

> 100,000 SQUARE FEET Market

Tenant

New York Boston Chicago Suburban Maryland Boston Houston Northern Virginia

McGraw Hill Kronos CNA Financial 2U Putnam Investments United CACI

Silicon Valley

Toshiba

New York New York New York Austin Orange County Charlotte Boston Austin New York Chicago Orlando Detroit Salt Lake City Dallas Miami Chicago Phoenix New York Boston Minneapolis Dallas Los Angeles New York Salt Lake City Washington, DC Washington, DC Suburban Maryland Washington, DC Boston New Jersey Chicago Chicago Orange County Indianapolis Dallas Los Angeles Austin Chicago Washington, DC Denver Northern Virginia New Jersey

Salesforce Citadel DLA Piper Home Depot Volt Duke Energy Shire YETI Omnicom Group Cars.com Axium ZF TRW Solar City Securus Telemundo Constellations Brands CVS ING Optum ECMC Fannie Mae Netflix UBS Wells Fargo WeWork Cleary Gottlieb U.S. Food and Drug Administration U.S. Bureau of Prisons WeWork Linde WeWork Beam Sunatory Mazda Allied Solutions Multiview ICM Accenture Holland & Knight Universal Services Administrative Company Urban Lending Solutions Sinclair Broadcasting Newell Brands


Sorted by lease size and completed during Q1 2016 Address 55 Water Street 900 Chelmsford Street 151 N Franklin Street 7900 Harkins Road 100 Federal Street 609 Main Street 14360/14370 Newbrook 55 W Trimble/2610–2630 Orchard Parkway 1095 Avenue of the Americas 425 Park Avenue 1251 Avenue of the Americas 13011 McCallen Pass 2401–2421 N Glassell Street 400 S Tryon Street 45–55 Hayden Avenue 7601 Southwest Parkway 220 E 42nd Street 300 S Riverside Plaza 3200 Lake Emma Road 34605 W 12 Mile Road 12832 S Frontrunner Boulevard 4000 International Parkway 12400 NW 25th Street 131 S Dearborn Street 444 N 44th Street 1133 Avenue of the Americas 1325 Boylston Street 111 Washington Avenue 15601 Dallas Parkway 5808 W Sunset Boulevard 299 Park Avenue 299 S Main Street 655 15th Street NW 2112 Pennsylvania Avenue NW 7500 Standish Place 370 L'Enfant Plaza SW 31 Saint James Avenue 200 Somerset Corporate Boulevard 125 S Clark Street 222 Merchandise Mart 200 Spectrum Center Drive Midtown Carmel 7701 Las Colinas Ridge 10250 Constellation Boulevard 3110 Esperanza Crossing 131 S Dearborn Street 701 13th Street NW 11802 Ridge Parkway 1100 Wilson Boulevard 221 River Street

Size (s.f.)

Lease type

900,027 370,812 275,000 252,952 252,000 225,000 220,551

Renewal Relocation within market Relocation within market Relocation within market Relocation within market Relocation within market Renewal

218,645

Relocation within market

202,678 200,000 199,140 198,000 190,000 184,358 177,000 175,000 167,003 158,000 157,000 155,898 155,000 154,298 150,000 150,000 138,240 132,400 126,004 125,010 123,652 123,221 120,000 118,970 117,000 114,958 113,730 113,301 113,067 112,720 112,000 112,000 110,628 109,600 109,000 108,259 105,000 104,376 102,348 101,678 100,000 99,960

Relocation within market Relocation within market Renewal Expansion in market Relocation within market Renewal Expansion in market Expansion in market Renewal Relocation within market N/A New Expansion in market Relocation within market New Relocation within market Expansion in market Relocation within market Relocation within market Relocation within market Renewal Expansion in building N/A Renewal Expansion in market Relocation within market Renewal Relocation within market Expansion in market New Expansion in market New Expansion in market Expansion in market Renewal Expansion in building Relocation within market Extension (< 36-month term) Relocation within market Renewal Renewal New


76

SELECT LARGE SALES

> 100,000 SQUARE FEET Market

Building

RBA (s.f.)

Sale price $

Sorted by total sales price and completed in Q1 2016 Price per square foot ($ p.s.f.)

Buyer

Seller

Citigroup

SL Green AXA Investment David Werner BioMed Realty Trust

New York

388–390 Greenwich Street

2,634,670

$2,000,000,000

$759

New York New York Boston

787 Seventh Avenue 5 Times Square 3 Blackfan Circle

1,761,781 1,101,779 702,940

$1,932,900,000 $800,000,000 $630,424,951

$1,097 $1,452 $897

Los Angeles

10960 Wilshire Boulevard

576,018

$476,500,000

$827

Los Angeles Philadelphia

10880 Wilshire Boulevard Multiple

534,047 3,900,000

$433,500,000 $398,100,000

$812 $102

CalPERS RXR Realty (50%) Blackstone Douglas Emmett Realty (60%) JV Qatar Investment Authority (40%) Douglas Emmett Realty (60%) JV Qatar Investment Authority (40%) Och-Ziff Capital Management

Seattle-Bellevue Philadelphia

2001 Eighth Avenue 2970 Market Street

516,985 862,692

$370,000,000 $354,000,000

$716 $410

Deutsche Bank Korea Investment Holdings

AEW Capital Management Brandywine Realty Trust

Boston Northern and Central NJ

500 Kendall Street

349,325

$313,288,753

$897

Blackstone

BioMed Realty Trust

70 & 90 Hudson Street

857,940

$299,000,000

$349

Spear Street Capital

CBRE Global Investors

New York

63 Madison Avenue

815,000

$290,376,334

$727

Jamestown (49%)

New York

200 Madison Avenue

750,000

$273,123,317

$743

Jamestown (49%)

Boston

675 Kendall Street

302,919

$271,669,980

$897

BioMed Realty Trust

Los Angeles

1100 Glendon Avenue

334,000

$271,000,000

$811

Blackstone Douglas Emmett Realty (60%) JV Qatar Investment Authority (40%)

San Diego

7525–7555 Torrey Santa Fe Road

465,812

$262,300,000

$563

Intuit

Kilroy Realty Corp

San Diego

465,812

$262,300,000

$563

Intuit

Kilroy Realty

Los Angeles

7525–7555 Torrey Santa Fe Road 55 S Lake Ave and 800 E Colorado Boulevard

439,650

$257,000,000

$585

CBRE Global Investors

Beacon Capital Partners

Washington, DC Atlanta

1615 L Street, NW 600 Peachtree Street NE

417,852 1,294,590

$229,000,000 $220,000,000

$548 $168

Carr Properties Shorenstein Properties

SF Mid Peninsula 1111 Bayhill Drive

515,000

$215,000,000

$417

Google

Spitzer Enterprises CW Capital Asset Management Hudson Pacific Properties JV Farallon Capital Partners

San Francisco

284,000

$203,871,581

$718

Blackstone

BioMed Realty Trust

1,024,090

$202,358,000

$198

Facebook

RREEF OBO SWIB

918,656

$200,000,000

$218

Metropark Investor LLC Ivanhoe Cambridge JV Callahan Capital Partners

Tishman Speyer

Shorenstein Properties Rockpoint Group (75%) TIAA-CREF JV Alexandria Real Estate (40%)

Nightingale Properties Swig Company Alexandria Real Estate Trammell Crow JV Washignotn Capital Management

800 Gateway Boulevard

SF Mid Peninsula 1601 Willow Road Northern and Central NJ 190 Wood Avenue S

Blackstone Brandywine Realty Trust

George Comfort & Sons JV Loeb Partners Realty George Comfort & Sons JV Loeb Partners Realty

Chicago

180 North LaSalle Street

781,670

$198,000,000

$253

Philadelphia East Bay San Francisco

1700 Market Street 300 Lakeside Drive 499 Illinois Street

841,172 811,005 455,069

$198,000,000 $197,000,000 $189,672,759

$235 $243 $1,042

Seattle

1124 Columbia Street

228,000

$185,682,833

$814

San Francisco Washington, DC Boston

180 Montgomery Street 733 10th Street, NW 200 Sidney

304,162 170,813 191,904

$182,497,200 $180,000,000 $172,107,249

$600 $1,053 $897

Los Angeles

10940 Wilshire Boulevard

207,000

$168,000,000

$812

Sidra (HNW) Investcorp Group JV ScanlanKemperBard Blackstone Douglas Emmett Realty (60%) JV Qatar Investment Authority (40%)

San Francisco New York

580 California Street 142 West 57th Street

313,000 240,000

$165,000,000 $162,073,041

$703 $675

JP Morgan GreenOak JV Mitsubishi (99%)

Northern Virginia Northern and Central NJ

7555-7574 Colshire Drive 100, 989, 993, 997, 1000, 1009, 1200, 2000 Lenox Drive

574,588

$158,000,000

$276

Northrop Grumman

800,546

$156,000,000

$195

JFR Global Investments

Pittsburgh

301 Grant Street

1,011,000

$148,752,900

$147

Shorenstein Properties


Blackstone

Heitman JV NexCore Group

Blackstone

Beacon Capital Partners

CBREI Jamestown BioMed Realty Trust Blackstone LaSalle Investment Management JV Prudential BlackRock JV L&L Holding Dividend Cap Diversified Property Fund Prism Capital Partners Oxford Development Company


77

SELECT DEVELOPMENTS UNDERWAY

> 100,000 SQUARE FEET Market New York New York New York Dallas New York Phoenix New York San Francisco Philadelphia Chicago Dallas Houston Chicago Houston Northern Virginia New York Boston Chicago Seattle-Bellevue Seattle-Bellevue Chicago San Francisco Seattle-Bellevue Seattle-Bellevue New York Northern Virginia San Francisco Denver New York Charlotte Philadelphia Houston Philadelphia Northern Virginia Columbus Orange County Dallas San Francisco Houston Milwaukee Nashville Boston Austin Atlanta Boston Atlanta Northern Virginia Nashville Chicago Salt Lake City New York ◄ Table of contents

Submarket World Trade Center Penn Plaza/Garment Penn Plaza/Garment Far North Dallas Penn Plaza/Garment Tempe Penn Plaza/Garment South Financial District Market Street West West Loop Far North Dallas Westchase West Loop CBD Tysons Corner Grand Central North West Loop Seattle CBD Seattle CBD Schaumburg South Financial District Renton/Tukwila Bellevue CBD Hudson Square Eisenhower Avenue Mission Bay West CBD Plaza District CBD University City Galleria Market Street West Rosslyn North Central Irvine Uptown South Financial District Katy Freeway Downtown East Downtown 495/Mass Pike CBD Buckhead Seaport District Midtown Tysons Corner Downtown Clybourn Corridor CBD World Trade Center

Building 3 World Trade Center 30 Hudson Yards 1 Manhattan West Toyota HQ 10 Hudson Yards Marina Heights 55 Hudson Yards 415 Mission Street Comcast Innovation and Technology Center 150 N Riverside Plaza Liberty Mutual Campus Phillips 66 HQ 444 W Lake Street 609 Main Street Capital One HQ 390 Madison Avenue Partners Healthcare HQ 151 N Franklin Street The Mark Madison Centre Zurich HQ 250 Howard Street Southport Office Campus 400 Lincoln Square One SoHo Square 2415 Eisenhower Avenue 1800 Owens Street 1144 15th Street 425 Park Avenue 300 S Tryon Street FMC Tower BHP HQ 2400 Market Street 1201 Wilson Boulevard 3100 Easton Square Drive The Boardwalk McKinney & Olive 375 Beale Street Energy Center V 330 E Kilbourn Avenue Bridgestone 1 Boston Scientific Place (Building 3) 500 W 2nd Street Three Alliance 100 Northern Avenue NCR HQ 1775 Tysons Boulevard Capitol View - HCA 4000 W Diversey Avenue 111 S Main Street 3 World Trade Center

Sorted by square feet and underway as of Q1 2016 Construction type Speculative Speculative Speculative BTS Speculative BTS Speculative Speculative BTS Speculative BTS BTS Speculative Speculative BTS Speculative BTS Speculative Speculative Speculative BTS Speculative Speculative Speculative Speculative BTS Speculative Speculative Speculative Speculative Speculative BTS Speculative Speculative BTS Speculative Speculative Speculative Speculative Speculative BTS BTS Speculative Speculative BTS BTS Speculative BTS Speculative Speculative Speculative

RBA s.f.

Preleased %

Expected delivery year

2,861,402 2,600,000 2,300,000 2,100,000 1,725,250 1,698,000 1,556,136 1,420,081 1,334,000 1,229,064 1,100,000 1,100,000 1,073,100 1,056,658 975,000 858,710 850,000 825,000 766,779 764,000 753,000 751,000 730,000 724,693 700,000 700,000 680,000 670,000 670,000 638,459 635,000 600,000 559,740 552,781 550,000 537,224 530,000 529,232 524,328 520,900 514,000 510,878 500,436 500,000 500,000 485,000 476,913 475,000 450,000 440,452 2,861,402

37.0% 100% 32.5% 100% 92.8% 100% 5.4% 57.8% 100% 89.4% 100% 100% 94.0% 28.3% 100% 0.0% 100% 48.5% 32.2% 1.3% 100% 0.0% 0.0% 6.3% 7.7% 100% 0.0% 5.7% 29.9% 54.4% 54.4% 100% 38.6% 64.6% 100% 0.0% 40.5% 73.9% 0.0% 69.7% 100% 70.6% 41.6% 0.0% 72.0% 100% 26.2% 100% 0.0% 39.7% 37.0%

2018 2019 2019 2017 2016 2017 2018 2017 2018 2017 2017 2016 2017 2016 2018 2017 2017 2018 2017 2017 2016 2018 2018 2016 2016 2017 2017 2018 2018 2016 2016 2016 2017 2018 2016 2017 2016 2016 2016 2016 2017 2017 2017 2016 2016 2018 2016 2016 2018 2016 2018


78

TENANTFAVORABLE BY

2017?

High levels of preleasing activity paired with sustained tenant demand for both new and expansionary office space will continue to encourage landlords to increase rental rates across most U.S. office markets. However, with economic momentum expected to slow over the next 12 to 18 months at the same time that new, vacant supply settles into the market, conditions are expected shift moderately more toward neutral conditions in 2017.



79

For more information, please contact: Julia Georgules Director Office Research +1 415 354 6908 [email protected]

Sean Coghlan Director Investor Research +1 215 988 5556 [email protected]

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

Rachel Johnson Research Analyst Capital Markets +1 312 228 3017 [email protected]

About JLL JLL (NYSE: JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. A Fortune 500 company with annual fee revenue of $4.7 billion and gross revenue of $5.4 billion, JLL has more than 230 corporate offices, operates in 80 countries and has a global workforce of approximately 58,000. On behalf of its clients, the firm provides management and real estate outsourcing services for a property portfolio of 3.4 billion square feet, or 316 million square meters, and completed $118 billion in sales, acquisitions and finance transactions in 2014. Its investment management business, LaSalle Investment Management, has $56.0 billion of real estate assets under management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit www.jll.com. About JLL Research JLL’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.

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