U.S. office sector posts highest
quarterly absorption of the recovery
United States Office Review Q2 2014
Rents are running away from tenants in
urbanized quality cores with level of increase
expected to escalate due to capital ...
Fundamentals are tightening across markets, particularly
absorption and development
2
Source: JLL Research
Leasing activit...
Nearly half of all markets (49.0 percent) reported an increase in
leasing activity in Q2 compared to Q1
3
0%
10%
20%
30%
4...
In turn, leasing volumes rose by 6.2 percent to 61.9 million
square feet after two consecutive quarters of declines
4
0
10...
While 0.2 percent higher than Q2 2013 leasing activity, this was
slightly below the Q2 average since 2007
5
62,856,296
62,...
Outside of top markets, leasing activity relatively even across
geographies, similar to previous quarters
6
0
1,000,000
2,...
Q2 represents highest quarterly absorption throughout the
recovery so far (13.9 million square feet)
7
-1.0%
-0.5%
0.0%
0....
As a result, YTD absorption represents roughly 56.4 percent of
last year’s occupancy gains
8
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
...
Class A space, both in CBDs and suburbs, continues to lead the
way in take-up of space
9
-10,000,000
-5,000,000
0
5,000,00...
Although tech and energy continue to make strong gains in
absolute terms, their share of absorption is decreasing as the
r...
Only nine markets have experienced a net loss of occupancy
YTD, of which less than half are more than -200,000 square feet...
Energy, tech and Sunbelt markets all posting above-average
absorption; Sunbelt surpassing energy in some cases
12
0.5%
1.0...
Gains in NYC, Boston and much of the Sunbelt push up East
Coast to top share of absorption during Q2
13
-100%
-80%
-60%
-4...
Even though Atlanta and South Florida are nearing 2013
absorption levels already, rest of the East Coast is catching up
14...
-3,000,000
-2,000,000
-1,000,000
0
1,000,000
2,000,000
3,000,000
4,000,000
2010 2011 2012 2013 2014
Netabsorption(s.f.)
At...
Quarterly Class B absorption over the past four quarters is taking
place 3.4x faster than from 2010 to Q2 2013…
16
Source:...
…although 5.8x as much Trophy and Class A space has been
absorbed than B and C during the same time period
17
Source: JLL ...
Class A space saw its highest share of quarterly absorption this
quarter since Q2 2012
18
133.5%
93.9%
74.5% 76.3%
295.2%
...
At the same time, all total net absorption took place in Class A
space during Q2
19
166.2%
90.4% 88.8%
80.8%
100.0%
106.1%...
Although higher than in Q1 2014, suburbs display the opposite,
trend, with only two-thirds of absorption in Class A space ...
Limited Class A options, particularly for larger tenants, have
boosted YTD Class B absorption in certain CBDs
21
2.7%
2.3%...
Still, Class A continues to trump Class B according to most
indicators
22
Source: JLL Research
of absorbed space in 2014
h...
Due to high levels of take-up, total vacancy fell by 579,661
square feet over the quarter to 16.3 percent, or 30 basis poi...
Still, vacancy levels remain closer to historical highs than lows
24
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0...
Total vacancy is stable or declining in all segments of the market;
CBD Class A experiences largest drop (-50 basis points...
Industry Real estate footprint Most affected markets
State government Contracting California, Illinois, New Jersey
Federal...
Demographics and technology are driving productivity and
utilization and the next evolution of office space use
27
Source:...
Many of these changes show stark pre- and post-recession
contrasts
28
Source: JLL Research
Floor plates
Floor plates are u...
And, as a result, law firms are shifting
29
Source: JLL Research
15.2%
Giveback by law firm
across the U.S. when
relocatin...
Consulting and accounting are shifting
30
Source: JLL Research
25.0%
Giveback by consulting
firms across the U.S.
when rel...
Technology companies are shifting
31
Source: JLL Research
22.0%
Percent increase in
high-tech service jobs
since 2009
13.6...
Banks are shifting
32
Source: JLL Research
10.1%
Give-back by average bank
across the U.S. when
renewing (flat headcount)
...
Even the federal government is shifting
33
Source: JLL Research
170 s.f.
Target utilization rate per
employee for federall...
As office-using employment increases by 199,000 net new jobs,
vacancy declines to 16.3 percent
34
15.0%
15.5%
16.0%
16.5%
...
CBD and suburban vacancy both inch downward, this quarter to
13.7 percent and 18.0 percent, respectively
35
5.0%
7.0%
9.0%...
Following declines in total and direct vacancy, sublease space
falls to 53.7 million square feet, or 1.3 percent quarter-o...
After 13 consecutive quarters of growth, rents decline slightly
due to Class A space removals and drops in Washington, DC ...
Year-on-year, rents are still rising faster than before, up 2.7 and
1.7 percent for Class A and B space, respectively
38
$...
U.S. office market continues to move along the clock as fewer
available options exist for tenants, spurring development
Pe...
Peaking
phase
Falling
phase
Rising
phase
Bottoming
phase
CBDs remain in the lead, with falling vacancy pushing rents in
co...
Peaking
phase
Falling
phase
Rising
phase
Bottoming
phase
The suburbs are also on the rise, having witnessed quarterly rent...
After spiking, CBD rents fall due to removals of quality space;
suburban rents on the up quarterly and are more stable
42
...
As a result of drops in CBDs due to removals and steady
improvement in the suburbs, the gap has narrowed by $0.27 per
squa...
A similar trend has emerged regarding the Class A premium vs.
overall rents, which is down $0.05 per square foot to $4.97 ...
After jumping up earlier in the year, concessions have flatlined of
late
45
3.5
4.1
5.1
6.1 6.2
5.7
5.5
5.3 5.3
$23.00
$24...
New supply coming to market is slowly increasing, but still well
below historic norms
46
0
20,000,000
40,000,000
60,000,00...
The vast majority of new completions are Class A, the majority
of which is arriving in suburban markets rather than CBDs
4...
Construction volumes jumped 38.4 percent compared to YE
2013, led by Houston
48
0
20,000,000
40,000,000
60,000,000
80,000,...
The majority of new construction is now in suburbs rather than
CBDs and the share continues to grow thanks to Silicon Vall...
35.3 percent of markets reported an increase in construction starts
over the quarter…
50
0%
10%
20%
30%
40%
50%
60%
70%
80...
…resulting in almost 21.0 million square feet of starts during the
first half of the year, nearly equivalent to all of 201...
Houston once again leads construction starts, with Silicon Valley
and Washington, DC close behind
52
2,545,988
1,982,305
1...
Strong preleasing activity is helping new developments go ahead,
but is also reducing the ability to ease supply constrain...
Most landlords and investors of U.S. office
product are optimistic about the recovery
across most markets, but more pessim...
COPYRIGHT © JONES LANG LASALLE IP, INC. 2014
John Sikaitis
Managing Director – Office and Local Markets Research
+1 202 71...
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U.S. office market statistics: Q2 2014

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The U.S. office sector posted the highest quarterly absorption of the recovery to date, 13.9 million square feet. Q2 also posted 61.9 million square feet of leasing activity, with levels up 6.2 percent from Q1. Vacancy dropped by 30 basis points to a recovery low of 16.3 percent. Asking rents declined by 0.7 percent to $30.00 per square foot, but that number is deceiving as blocks of Class A space have been taken off the market.

Overall, the leasing environment continues to favor landlords, putting tenants in tough negotiation positions.

Get your free copy of our complete report on the state of the U.S. office market, and expectations for the rest of 2014, at http://bit.ly/1qc52ot

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U.S. office market statistics: Q2 2014

  1. 1. U.S. office sector posts highest quarterly absorption of the recovery United States Office Review Q2 2014
  2. 2. Rents are running away from tenants in urbanized quality cores with level of increase expected to escalate due to capital demand (investment sales) having just as big of an impact on rent growth over the next 24 months as leasing demand due to increasingly bullish underwriting projections from sales / refinancings.
  3. 3. Fundamentals are tightening across markets, particularly absorption and development 2 Source: JLL Research Leasing activity • Q2 posted 61.9 million square feet of leasing activity. • Leasing levels up 6.2 percent from Q1 2014. • Compared to Q2 2013, leasing volume is up 0.2 percent. Absorption • Absorption levels increase, resulting in the 17th consecutive quarter of occupancy growth. • The 13.9 million square feet of net absorption during Q2 represents the highest quarterly occupancy growth during this cycle so far. • This quarter’s biggest contributors to absorption were New York, Boston, Houston, Chicago, Philadelphia Seattle, Los Angeles and San Francisco. Vacancy • Vacancy dropped by 30 basis points to a recovery low of 16.3 percent. This comes after two quarters at 16.6 percent. • Both CBDs and suburbs played a role in this decline, falling to 13.7 percent and 18.0 percent, respectively. Rents • Despite improved market conditions, asking rents declined by 0.7 percent to $30.00 per square foot. This was mostly the result of blocks of quality Class A space being taken off the market in many markets, compounded with falling rents and elevated vacancy in Washington, DC. • In supply-constrained CBDs, this was more pronounced, as rents fell by 1.0 percent. In the suburbs, asking rents increased slightly to $24.23 per square foot. Construction • YTD construction starts have totaled almost 21.0 million square feet. This is nearly equal to all starts posted in 2013. • Although Houston remains the leader in construction, 18 markets registered more than 1.0 million square feet as volumes have jumped by 38.4 percent to 65.4 million square feet nationally.
  4. 4. Nearly half of all markets (49.0 percent) reported an increase in leasing activity in Q2 compared to Q1 3 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2011 2012 2013 2014 Up Neutral Down Source: JLL Research
  5. 5. In turn, leasing volumes rose by 6.2 percent to 61.9 million square feet after two consecutive quarters of declines 4 0 10,000,000 20,000,000 30,000,000 40,000,000 50,000,000 60,000,000 70,000,000 80,000,000 90,000,000 2007 2008 2009 2010 2011 2012 2013 2014 Leasingactivity(s.f.) Source: JLL Research
  6. 6. While 0.2 percent higher than Q2 2013 leasing activity, this was slightly below the Q2 average since 2007 5 62,856,296 62,499,312 54,446,297 66,724,307 67,948,333 63,411,335 61,762,387 61,906,383 0 10,000,000 20,000,000 30,000,000 40,000,000 50,000,000 60,000,000 70,000,000 80,000,000 Q2 2007 Q2 2008 Q2 2009 Q2 2010 Q2 2011 Q2 2012 Q2 2013 Q2 2014 Leasing activity (s.f.) Source: JLL Research
  7. 7. Outside of top markets, leasing activity relatively even across geographies, similar to previous quarters 6 0 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 7,000,000 8,000,000 9,000,000 10,000,000 NewYork Chicago Washington,DC LosAngeles Boston Philadelphia Dallas SanFrancisco OrangeCounty NewJersey Denver SanDiego Seattle Phoenix SiliconValley Houston Minneapolis Portland St.Louis FairfieldCounty Austin Charlotte Detroit Baltimore Oakland-EastBay Indianapolis Miami Pittsburgh SanFranciscoPeninsula Atlanta Sacramento KansasCity Tampa Cincinnati HamptonRoads Cleveland Columbus Raleigh-Durham Orlando WestchesterCounty Jacksonville FortLauderdale WestPalmBeach Milwaukee LongIsland SaltLakeCity SanAntonio Richmond Leasingactivity(s.f.) Source: JLL Research 38.9% 20.6% 40.5%
  8. 8. Q2 represents highest quarterly absorption throughout the recovery so far (13.9 million square feet) 7 -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2008 2009 2010 2011 2012 2013 2014 Quarterlynetabsorption(as%ofinventory) Source: JLL Research 15-year trailing annual average
  9. 9. As a result, YTD absorption represents roughly 56.4 percent of last year’s occupancy gains 8 -4.0% -3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 YTDnetabsorption(as%ofinventory) Source: JLL Research 15-year trailing annual average
  10. 10. Class A space, both in CBDs and suburbs, continues to lead the way in take-up of space 9 -10,000,000 -5,000,000 0 5,000,000 10,000,000 15,000,000 2010 2011 2012 2013 2014 Quarterlynetabsorption(s.f.) Class A (CBD) Class A (suburban) Class B (CBD) Class B (suburban) Class C (CBD) Class C (suburban) Source: JLL Research
  11. 11. Although tech and energy continue to make strong gains in absolute terms, their share of absorption is decreasing as the recovery gains momentum elsewhere 10 Source: JLL Research NYC and DC (*excludes Midtown South) Tech markets (*includes Midtown South) Energy markets Sunbelt All other markets 70.0% 29.7% 6.4% 2010 5.1% 33.5% 19.0% 18.4% 23.9% 2011 5.1% 33.5% 19.0% 18.4% 23.9% 2012 11.1% 21.6% 22.3% 18.6% 26.4% 2013 7.5% 25.2% 16.7% 24.6% 26.0% 2014
  12. 12. Only nine markets have experienced a net loss of occupancy YTD, of which less than half are more than -200,000 square feet 11 -1,000,000 -500,000 0 500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 NewYork Houston Atlanta Boston SiliconValley LosAngeles Phoenix Denver Chicago Seattle-Bellevue Baltimore Dallas OrangeCounty SanFrancisco Charlotte Portland Detroit Miami Philadelphia St.Louis SaltLakeCity Milwaukee Raleigh-Durham WestPalmBeach Cincinnati FortLauderdale FairfieldCounty SanFranciscoPeninsula LongIsland KansasCity Minneapolis Austin Sacramento Columbus Indianapolis Cleveland SanDiego HamptonRoads Oakland-EastBay Jacksonville SanAntonio TampaBay WestchesterCounty Pittsburgh Richmond Orlando NewJersey Washington,DC YTDnetabsorption(s.f.) Source: JLL Research
  13. 13. Energy, tech and Sunbelt markets all posting above-average absorption; Sunbelt surpassing energy in some cases 12 0.5% 1.0% 1.4% 1.0% 0.9% 1.0% 0.9% 2.1% 1.3% 1.4% 1.3% 0.7% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% YTDnetabsorption(s.f.) Source: JLL Research Energy Tech Sunbelt U.S. average
  14. 14. Gains in NYC, Boston and much of the Sunbelt push up East Coast to top share of absorption during Q2 13 -100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% 2010 2011 2012 2013 2014 Shareofquarterlynetabsorption East Coast Central West Coast Source: JLL Research
  15. 15. Even though Atlanta and South Florida are nearing 2013 absorption levels already, rest of the East Coast is catching up 14 Source: JLL Research -10,000,000 -5,000,000 0 5,000,000 10,000,000 15,000,000 20,000,000 2010 2011 2012 2013 2014 Netabsorption(s.f.) Atlanta South Florida Rest of the East Coast
  16. 16. -3,000,000 -2,000,000 -1,000,000 0 1,000,000 2,000,000 3,000,000 4,000,000 2010 2011 2012 2013 2014 Netabsorption(s.f.) Atlanta Chicago Los Angeles Miami Philadelphia Phoenix Diversified markets hit another recovery high with 3.1 million square feet of occupancy gains, this quarter led by Chicago 15 Source: JLL Research Atlanta and Phoenix have absorbed a combined 13.0 million square feet since 2010, or 65.1 percent of cumulative total.
  17. 17. Quarterly Class B absorption over the past four quarters is taking place 3.4x faster than from 2010 to Q2 2013… 16 Source: JLL Research 10,975,302 10,604,042 0 2,000,000 4,000,000 6,000,000 8,000,000 10,000,000 12,000,000 2010-Q2 2013 Past four quarters ClassBnetabsorption(s.f.) 783,950 s.f. per quarter 2,651,011 s.f. per quarter
  18. 18. …although 5.8x as much Trophy and Class A space has been absorbed than B and C during the same time period 17 Source: JLL Research Trophy and Class A net absorption 118.4 m.s.f.2010-2014 Class B and C net absorption 20.5 m.s.f.2011-2014
  19. 19. Class A space saw its highest share of quarterly absorption this quarter since Q2 2012 18 133.5% 93.9% 74.5% 76.3% 295.2% 98.5% 82.0% 78.3% 45.2% 73.4% 63.5% 80.9% 57.3% 82.3% 0.0% 50.0% 100.0% 150.0% 200.0% 250.0% 300.0% 350.0% 2011 2012 2013 2014 ClassAshareofquarterlyabsorption Source: JLL Research
  20. 20. At the same time, all total net absorption took place in Class A space during Q2 19 166.2% 90.4% 88.8% 80.8% 100.0% 106.1% 74.8% 0.0% 88.1% 86.5% 49.6% 92.0% 48.8% 100.9% 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 120.0% 140.0% 160.0% 180.0% 2011 2012 2013 2014 ClassAshareofquarterlyabsorption Source: JLL Research
  21. 21. Although higher than in Q1 2014, suburbs display the opposite, trend, with only two-thirds of absorption in Class A space in Q2 20 116.9% 97.9% 62.3% 75.1% 167.8% 102.5% 84.3% 85.3% 43.2% 73.4% 72.8% 70.3% 61.1% 67.6% 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% 120.0% 140.0% 160.0% 180.0% 2011 2012 2013 2014 ClassAshareofquarterlyabsorption Source: JLL Research
  22. 22. Limited Class A options, particularly for larger tenants, have boosted YTD Class B absorption in certain CBDs 21 2.7% 2.3% 2.2% 2.1% 1.8% 1.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% Milwaukee Oakland CBD Greenwich CBD Atlanta Phoenix Silicon Valley CBD YTDCBDClassBnetabsorption(%ofinventory) Source: JLL Research U.S. average
  23. 23. Still, Class A continues to trump Class B according to most indicators 22 Source: JLL Research of absorbed space in 2014 has been Class A per square foot difference between Class A and B space… rate at which Class A rates are growing compared to Class B year-on-year difference between Class A and Class B total vacancy
  24. 24. Due to high levels of take-up, total vacancy fell by 579,661 square feet over the quarter to 16.3 percent, or 30 basis points 23 15.0% 15.5% 16.0% 16.5% 17.0% 17.5% 18.0% 18.5% 19.0% 2009 2010 2011 2012 2013 2014 Totalvacancy(%) Source: JLL Research
  25. 25. Still, vacancy levels remain closer to historical highs than lows 24 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0% 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Totalvacancy(%) Source: JLL Research
  26. 26. Total vacancy is stable or declining in all segments of the market; CBD Class A experiences largest drop (-50 basis points) 25 10.0% 12.0% 14.0% 16.0% 18.0% 20.0% 22.0% 2010 2011 2012 2013 2014 Totalvacancy(%) Class A (CBD) Class A (suburban) Class B (CBD) Class B (suburban) Class C (CBD) Class C (suburban) Source: JLL Research
  27. 27. Industry Real estate footprint Most affected markets State government Contracting California, Illinois, New Jersey Federal government Contracting Washington, DC Media/print Contracting LA, NYC Finance/banking Contracting NYC, Charlotte, Chicago, Palm Beach, Pittsburgh Law firms Contracting (rightsizing) Washington, DC, NYC, SF, Atlanta, LA Consulting Contracting (rightsizing) NYC, Chicago, Washington, DC Accounting Contracting (rightsizing) Chicago, NYC, LA Telecom Stable NJ, Dallas, Atlanta Retail/consumer goods Stable NYC, Atlanta, Los Angeles Education Growing Everywhere Media (digital and TV) Growing Atlanta, NYC, LA, Philadelphia, Washington, DC Green energy/clean technology Growing Pittsburgh, Silicon Valley, Denver Real estate (residential) Growing Southern CA, Nevada, AZ, FL, GA, Carolinas Technology Growing Silicon Valley, San Francisco, Austin, Seattle, Portland, Midtown South NYC, Cambridge, MA Shared office space providers / co-working spaces Growing All markets particularly coastal markets and Chicago Natural gas/oil/energy Growing Denver, Houston, Dallas, Pittsburgh Biotech/pharmaceutical Growing San Francisco, San Diego, NJ/Phil, Boston, RDU Office growth being driven by atypical tenant industries 26 Source: JLL Research
  28. 28. Demographics and technology are driving productivity and utilization and the next evolution of office space use 27 Source: JLL Research 15% space reduction by U.S. law firms and financial services relocating 72% of global CREs plan to aggressively increase density in next 3 years 150 Square-foot-per- employee average target density, down from 225 in 2009 50% of the U.S. workforce was baby boomers in 2010. Gen Y will be 50% by 2020
  29. 29. Many of these changes show stark pre- and post-recession contrasts 28 Source: JLL Research Floor plates Floor plates are up from 25,000 square feet before the recession to 60,000 square feet. Personal space Before the recession, employees had around 300 s.f. per person; now they have 200 s.f. Interaction Employees have gone from rarely running into others to a nine-in-ten change of bumping into a coworker. Building features Aesthetic and building features such as increased roof heights and floor-to-ceiling windows are “in.”
  30. 30. And, as a result, law firms are shifting 29 Source: JLL Research 15.2% Giveback by law firm across the U.S. when relocating 20.5% Giveback by law firm across the top seven U.S. markets when relocating 24.7% Giveback by law firm across DC when relocating • Going digital • Elimination of law libraries • One-sized fits all office • Higher administrative ratios • Migration to glass boxes • Migration to long and lean • Migration to smaller floorplates
  31. 31. Consulting and accounting are shifting 30 Source: JLL Research 25.0% Giveback by consulting firms across the U.S. when relocating 225 s.f. Average space per consultant in years past 90 s.f. Average space per consultant in the most efficient firms today • Benching • Work flexibly and client officing • Offices gone, collaboration rooms in • Increasingly looking at new construction to meet efficiency standards • Industry giving back most space
  32. 32. Technology companies are shifting 31 Source: JLL Research 22.0% Percent increase in high-tech service jobs since 2009 13.6% Total vacancy in core tech markets, compared to 16.3 percent nation-wide 2.2% Growth in core tech market rents in 2014 • Benching is standard • Less personal space, more shared and amenity space • “Open hangar” design preferred • Migration to Class B+ with character • Space viewed as core to culture • Remote work is waning
  33. 33. Banks are shifting 32 Source: JLL Research 10.1% Give-back by average bank across the U.S. when renewing (flat headcount) 86.0% Percent of banking transactions that no longer need a teller 66.0% Percent of surveyed banks planning to reduce CRE footprint • Regulation and cost pressures forcing portfolio consolidation • Offices shrinking • Business units competing • Branch reductions common • Increasing importance of back office (second- and third-tier markets) • Remote working increasing
  34. 34. Even the federal government is shifting 33 Source: JLL Research 170 s.f. Target utilization rate per employee for federally leased space $1.7 billion Amount spent annually by the GSA for properties deemed underutilized 15.9% Average give-back by GSA across Metro DC in FY 2013 • Telecommuting • Benching • Co-locations • Minimal funds to implement • Consolidations in low cost buildings/submarkets • Migration to off-center locations • Disposition of underutilized assets.
  35. 35. As office-using employment increases by 199,000 net new jobs, vacancy declines to 16.3 percent 34 15.0% 15.5% 16.0% 16.5% 17.0% 17.5% 18.0% 18.5% 19.0% 26,000 26,500 27,000 27,500 28,000 28,500 29,000 29,500 30,000 2011 2012 2013 2014 Totalvacancy(%) Office-usingemployment(thousands) Office-using employment (thousands) Total vacancy (%) Source: JLL Research
  36. 36. CBD and suburban vacancy both inch downward, this quarter to 13.7 percent and 18.0 percent, respectively 35 5.0% 7.0% 9.0% 11.0% 13.0% 15.0% 17.0% 19.0% 21.0% 23.0% Totalvacancy(%) Source: JLL Research
  37. 37. Following declines in total and direct vacancy, sublease space falls to 53.7 million square feet, or 1.3 percent quarter-on-quarter 36 30,000,000 40,000,000 50,000,000 60,000,000 70,000,000 80,000,000 90,000,000 100,000,000 2009 2010 2011 2012 2013 2014 Subleasespace(s.f.) Source: JLL Research
  38. 38. After 13 consecutive quarters of growth, rents decline slightly due to Class A space removals and drops in Washington, DC and Downtown Manhattan 37 -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 2008 2009 2010 2011 2012 2013 2014 Quarterlyrentgrowth(%) Source: JLL Research
  39. 39. Year-on-year, rents are still rising faster than before, up 2.7 and 1.7 percent for Class A and B space, respectively 38 $15.00 $20.00 $25.00 $30.00 $35.00 $40.00 $45.00 $50.00 2010 2011 2012 2013 2014 Averageaskingrents($p.s.f.) Class A (CBD) Class A (suburban) Class B (CBD) Class B (suburban) Class C (CBD) Class C (suburban) Source: JLL Research
  40. 40. U.S. office market continues to move along the clock as fewer available options exist for tenants, spurring development Peaking phase Falling phase Rising phase Bottoming phase Atlanta, Indianapolis, Jacksonville Los Angeles, Salt Lake City, Tampa, United States Miami, Milwaukee, Oakland-East Bay, Philadelphia, Raleigh-Durham, Richmond, San Diego Columbus, Long Island, Orlando, Washington, DC Dallas, San Francisco Peninsula Charlotte, Chicago, Cincinnati, Fairfield County, Fort Lauderdale, San Antonio, St. Louis, Westchester County Houston, San Francisco, Silicon Valley West Palm Beach Cleveland, Minneapolis, Orange County, Phoenix New Jersey Baltimore, Detroit, Hampton Roads, Kansas City, Sacramento New York, Portland Austin, Pittsburgh, Seattle-Bellevue Boston, Denver Source: JLL Research
  41. 41. Peaking phase Falling phase Rising phase Bottoming phase CBDs remain in the lead, with falling vacancy pushing rents in cores of San Francisco, Houston and Portland up 4.0 percent Atlanta, Jacksonville, Philadelphia Boston, New York (Midtown), Tampa, United States Seattle, Miami Charlotte, Dallas, Fort Lauderdale, Los Angeles, Milwaukee, Orlando, Westchester County Austin, Houston Baltimore, Sacramento, West Palm Beach Kansas City, New York (Downtown), Phoenix, Richmond, San Antonio Fairfield County, Indianapolis, Minneapolis Columbus, San Diego, Washington, DC Pittsburgh, Portland, San Jose CBD Chicago, Cleveland, Oakland CBD, Raleigh-Durham New York (Midtown South), San Francisco Denver Cincinnati, Detroit Salt Lake City St. Louis Source: JLL Research
  42. 42. Peaking phase Falling phase Rising phase Bottoming phase The suburbs are also on the rise, having witnessed quarterly rent growth of 3.6 percent year-on-year Cleveland, Jacksonville, Long Island (Nassau), Milwaukee, Orange County, Portland, St. Louis, United States Denver, Indianapolis, Tampa Chicago, Detroit, Miami, Northern Delaware Long Island (Suffolk) Dallas, Silicon Valley Atlanta, Baltimore, Bellevue (non-CBD), Boston, East Bay, Lehigh Valley, Philadelphia, San Diego, Seattle Houston, San Francisco (non-CBD) Northern and Central New Jersey, Northern Virginia, Orlando, Suburban Maryland, West Palm BeachCincinnati, Fairfield County, Hampton Roads (South), Minneapolis, Oakland Suburbs, Sacramento, San Antonio, Westchester County Cambridge, San Francisco Peninsula Charlotte, Fort Lauderdale, Hampton Roads (Peninsula), Kansas City, Raleigh-Durham Phoenix, Richmond, Salt Lake City Austin, Los Angeles Pittsburgh Bellevue CBD Southern New Jersey Source: JLL Research
  43. 43. After spiking, CBD rents fall due to removals of quality space; suburban rents on the up quarterly and are more stable 42 -4.0% -3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 2011 2012 2013 2014 Quarterlyrentgrowth(%) CBD rent growth Suburban rent growth Source: JLL Research CBD average: 0.9% Suburban average: 0.2%
  44. 44. As a result of drops in CBDs due to removals and steady improvement in the suburbs, the gap has narrowed by $0.27 per square foot 43 $20.00 $25.00 $30.00 $35.00 $40.00 $45.00 2010 2011 2012 2013 2014 Averageaskingrent($p.s.f) CBD Suburbs Source: JLL Research $11.36 $15.59
  45. 45. A similar trend has emerged regarding the Class A premium vs. overall rents, which is down $0.05 per square foot to $4.97 per square foot compared to Q1 44 $3.40 $3.49 $3.49 $3.53 $3.68 $3.81 $3.97 $3.99 $4.21 $4.26 $4.37 $4.38 $4.86 $4.71 $4.82 $4.76 $4.97 $4.92 $3.00 $3.50 $4.00 $4.50 $5.00 $5.50 2010 2011 2012 2013 2014 ClassApremium($p.s.f.) Source: JLL Research
  46. 46. After jumping up earlier in the year, concessions have flatlined of late 45 3.5 4.1 5.1 6.1 6.2 5.7 5.5 5.3 5.3 $23.00 $24.00 $25.00 $26.00 $27.00 $28.00 $29.00 $30.00 $31.00 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 2006 2007 2008 2009 2010 2011 2012 2013 2014 TIallowance($p.s.f.) Freemonthsofrent Free months of rent TI allowance ($ p.s.f.) Source: JLL Research
  47. 47. New supply coming to market is slowly increasing, but still well below historic norms 46 0 20,000,000 40,000,000 60,000,000 80,000,000 100,000,000 120,000,000 140,000,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Completions(s.f.) Source: JLL Research Average annual completions
  48. 48. The vast majority of new completions are Class A, the majority of which is arriving in suburban markets rather than CBDs 47 0 5,000,000 10,000,000 15,000,000 20,000,000 25,000,000 2010 2011 2012 2013 YTD 2014 YTDcompletions(s.f.) Class A (CBD) Class A (suburban) Class B (CBD) Class B (suburban) Class C (CBD) Class C (suburban) Source: JLL Research
  49. 49. Construction volumes jumped 38.4 percent compared to YE 2013, led by Houston 48 0 20,000,000 40,000,000 60,000,000 80,000,000 100,000,000 120,000,000 140,000,000 160,000,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Underconstruction(s.f.) Source: JLL Research
  50. 50. The majority of new construction is now in suburbs rather than CBDs and the share continues to grow thanks to Silicon Valley, Dallas, Austin and Houston, in particular 49 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2010 2011 2012 2013 2014 Shareofconstruction CBD Suburbs Source: JLL Research
  51. 51. 35.3 percent of markets reported an increase in construction starts over the quarter… 50 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2011 2012 2013 2014 Up Neutral Down Source: JLL Research
  52. 52. …resulting in almost 21.0 million square feet of starts during the first half of the year, nearly equivalent to all of 2013’s starts 51 11,843,789 18,490,244 17,558,896 22,251,850 20,986,559 0 5,000,000 10,000,000 15,000,000 20,000,000 25,000,000 2010 2011 2012 2013 YTD 2014 Constructionstarts(s.f.) Source: JLL Research
  53. 53. Houston once again leads construction starts, with Silicon Valley and Washington, DC close behind 52 2,545,988 1,982,305 1,579,746 743,205 648,170 358,000 321,000 247,836 242,969 188,968 118,000 100,000 60,000 32,000 0 500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 Constructionstarts(s.f.) Source: JLL Research
  54. 54. Strong preleasing activity is helping new developments go ahead, but is also reducing the ability to ease supply constraints 53 Source: JLL Research San Francisco: 65.0% Washington, DC: 44.0% New York: 54.6% Chicago: 41.8% Atlanta: 55.0% Houston: 55.5% Seattle: 65.0%
  55. 55. Most landlords and investors of U.S. office product are optimistic about the recovery across most markets, but more pessimistic in terms of placing all of their capital allocations ahead. Already challenges have developed for capital allocation in many coastal gateways and we are seeing the same yield compression and broader buyer pool develop in more adjusted risk-adjustment segments too recently.
  56. 56. COPYRIGHT © JONES LANG LASALLE IP, INC. 2014 John Sikaitis Managing Director – Office and Local Markets Research +1 202 719 5839 John.Sikaitis@am.jll.com Phil Ryan Research Analyst, Office and Economy Research +1 202 719 6295 Phil.Ryan@am.jll.com >> Click to access our complete report on the current state of the U.S. office market
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