Themes that shape the U.S. Skyline
Infographics from the U.S. Skyline Review | Spring 2014
Collision of the workforce and workplace
“If you build it, they will come” can be thrown out...In the 80s
and 90s, supply ...
Reinvented frontiers
A significant shift in demographics and urban in-migration
have fueled Skyline population growth to n...
Flight to the middle
In recent quarters, high-end and value conscious tenant
demand have left few space options at the ext...
Rightsizing overload
Corporates across industries are reevaluating workplace
strategies and implementing new solutions to ...
Cards stacked against tenants
Demand levels are increasing, space options are decreasing
and rents are going up. However, ...
The United Nations of Skyline
Canada, China, Chile, Korea, Qatar and Norway are just a few
of the countries where capital ...
Supply
Space crunch is prevalent in luxury and value
While construction activity across the Skyline has
picked up in recen...
Supply
Space crunch is prevalent in luxury and value

Secondary Skylines
accounting for some
of the sharpest drops
in vaca...
Supply
Space crunch is prevalent in luxury and value
Only

4 Skylines still post direct vacancy rates above 20.0%
Cincinna...
Supply
Space crunch is prevalent in luxury and value

50.0%

of office construction
nationally is taking
place in Skylines...
Supply
Space crunch is prevalent in luxury and value
Skylines with the highest rate of construction to existing inventory ...
Demand
Activity and growth levels continue to expand and diversify
The Skyline once again led demand and
occupancy gains v...
Demand
Activity and growth levels continue to expand and diversify

Activity and growth levels continue to expand and dive...
Demand
Activity and growth levels continue to expand and diversify
Energy, tech, media and healthcare dominate tenant grow...
Demand
Activity and growth levels continue to expand and diversify
Rightsizing what?

In 2013, the number of
transactions ...
Demand
Activity and growth levels continue to expand and diversify

More Skylines experiencing net new growth as opposed
t...
Rents
Growth to spread across geographies and pricing segments
While the Skyline segment of the market remains
somewhat bi...
Rents
Growth to spread across geographies and pricing segments

Rents for Skyline properties reach $40.73 p.s.f., the firs...
Rents
Growth to spread across geographies and pricing segments

Increased demand and shrinking
space options mean leverage...
Rents
Growth to spread across geographies and pricing segments

Industry-driven Skylines are posting fastest rental growth...
Investment
Foreign capital shifts domestics along the risk curve
2013 saw a resurgence of investment sale activity
with pr...
Investment
Foreign capital shifts domestics along the risk curve
Foreign investment
activity continues to
fly into the Sky...
Investment
Foreign capital shifts domestics along the risk curve
Investment activity across the Skyline
to highest levels ...
Investment
Foreign capital shifts domestics along the risk curve
Cap rates continue to
for core assets:
San Francisco:

co...
Interested?
Intrigued?
Dive deeper into current
commercial real estate
trends and statistics
with our complete
2014 U.S. S...
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United States Skyline Review 2014: Preview

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See the latest commercial real estate trends in U.S. Trophy and Class A office space. Our annual U.S. Skyline Review contains a building-by-building and floor-by-floor assessment of 43 office market centers across the country—the market-makers of the U.S. office sector. Click through here for a sneak peek.

More information at http://www.us.jll.com/united-states/en-us/united-states-skyline-review

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United States Skyline Review 2014: Preview

  1. 1. Themes that shape the U.S. Skyline Infographics from the U.S. Skyline Review | Spring 2014
  2. 2. Collision of the workforce and workplace “If you build it, they will come” can be thrown out...In the 80s and 90s, supply and demand eventually met and thus filled up office buildings in core and even challenged locations. The millennial generation’s shift into the driver seat of the workforce over the next five years will position buildings and micromarkets with unique offerings, a sense of place and a heartbeat to dominate demand patterns. Ironically, this does not mean Main and Main buildings will be the winner, but in many cases, could be the loser, as owners who bet on location only and not experience are left behind until they can recreate an ideal setting for tomorrow’s tenant.
  3. 3. Reinvented frontiers A significant shift in demographics and urban in-migration have fueled Skyline population growth to nearly triple the rate of growth of overall cities. Consequently, once derelict or largely ignored urban microsegments will see a renaissance over the next three to five years. Parking lots will be transformed into Trophy office towers; warehouses into multifamily units, rail depots into retail experiences and dim streets into lively blocks. Look for areas like Downtown Atlanta, South Park Los Angeles, Midtown Village in Philadelphia, Middle Market San Francisco, the Arts District in Dallas, Mount Vernon Triangle in Washington, DC and the West Side in New York to lead growth in the years ahead with a more vibrant offering than traditional office corridors.
  4. 4. Flight to the middle In recent quarters, high-end and value conscious tenant demand have left few space options at the extremes of the Skyline, positioning mid-tier buildings for tightening ahead. This scarcity, particularly in the form of large blocks of space, will position the mighty middle to capture future tenant activity. However, in order for owners of those second- and thirdgenerational buildings to be successful, repositioning and investment will be needed to maximize window line, minimize column spacing and offer more side core opportunities, among other attributes.
  5. 5. Rightsizing overload Corporates across industries are reevaluating workplace strategies and implementing new solutions to attract and retain talent, improve the workplace culture and wring out cost savings. Law firms are seeing their per attorney space shrink from 900 square feet per attorney to as efficient as 550 square feet per attorney, consulting firms are seeing optimization levels increase by nearly 50.0 percent and 75.0 percent of corporates are proactively solving for future space optimization. However, in recent months, we have seen a plateauing in the frequency of rightsizing and even a overcorrection from some larger companies and firms. Cost savings remain important, but culture and retention are trumping that in an improved economic environment.
  6. 6. Cards stacked against tenants Demand levels are increasing, space options are decreasing and rents are going up. However, that is just the cover story; the underlying message shows a Skyline with intense capital demand, which will translate into rent growth ahead coming more from investment demand than leasing demand due to aggressive competition and underwriting ultimately yielding even higher rents and lower concessions. Further, on the back-end of those sales, tenants can expect to see the tax component of operating expenses jump significantly due to record sales prices recorded.
  7. 7. The United Nations of Skyline Canada, China, Chile, Korea, Qatar and Norway are just a few of the countries where capital placement in the Skyline has been prominent in recent years. Demand currently sitting on the sidelines is even higher than the levels we have seen invested into the Skyline over the past 24 months. As a result of this globalization, domestic institutions and REITs will be increasingly left to reevaluate investment strategies, consider joint ventures, move farther along the risk curve (and thus out of the Skyline) and expand their geographic focus from a handful of gateway cities to core product in the top 30 to 40 Skylines, shifting activity to many secondary Skylines ahead.
  8. 8. Supply Space crunch is prevalent in luxury and value While construction activity across the Skyline has picked up in recent quarters (reaching 17 million square feet), the overwhelming amount of construction activity is concentrated in three markets: New York, Houston and San Francisco. The additional 40 Skylines JLL tracks have an average of just 198,550 square feet of space under construction. In fact, 10 Skylines have vacancy levels below 10.0 percent with seven of those Skylines showing no current development and two of those Skylines seeing just one crane in the air. This dynamic has caused a space crunch in SuperTrophy or AA buildings across most Skylines. In New York, of the most sought-after Trophy buildings, half had vacancies of less than 5.0 percent. In Chicago, only three buildings priced above $40.00 per square foot have occupancy levels below 90.0 percent. Trophy assets in Uptown Dallas all have occupancies above 85 percent and CBD’s Trophies are far outperforming the broader market with respect to occupancy and rents. A similar tightening exists in Skyline value options. In Washington, DC, buildings priced ($45.00 NNN $+/-$70.00 FS) or below posted occupancy levels 16.0 percent higher than the overall Trophy market. In Miami, properties priced $40.00 per square foot or below demonstrated vacancy levels that were 29.1 percent lower than the overall Skyline.
  9. 9. Supply Space crunch is prevalent in luxury and value Secondary Skylines accounting for some of the sharpest drops in vacancy: 11.9% 13.4% U.S. Skyline historical equilibrium direct vacancy U.S. Skyline direct vacancy as of YE 2013 Orange County (-460bp) Detroit and Fort Lauderdale (-420bp) Washington, DC (-340bp) Orlando (-330bp) Baltimore (-320bp)
  10. 10. Supply Space crunch is prevalent in luxury and value Only 4 Skylines still post direct vacancy rates above 20.0% Cincinnati Cleveland Dallas Phoenix 11 Skylines now have single-digit direct vacancy rates Bellevue Charlotte Houston Philadelphia Pittsburgh Portland Raleigh Richmond San Francisco St. Louis Washington, DC
  11. 11. Supply Space crunch is prevalent in luxury and value 50.0% of office construction nationally is taking place in Skylines... percent of Skylines are seeing construction... 66.0% despite representing just for a total of 17 million square feet 14.8% of office inventory nationwide
  12. 12. Supply Space crunch is prevalent in luxury and value Skylines with the highest rate of construction to existing inventory is a mix of primary and secondary geographies: Newark (12.7%) Houston (9.8%) Richmond Austin (8.4%) (8.3%) Washington, DC Orange County (7.3%) (7.2%)
  13. 13. Demand Activity and growth levels continue to expand and diversify The Skyline once again led demand and occupancy gains versus the broader U.S. office market, besting countrywide levels by 45.0 percent and doubling the gains of the overall CBD. Overall, the Skyline registered just shy of 10 million square feet of occupancy gains in 2013, following nearly 22.4 million square feet of net absorption in the three years prior. However, the main difference between then and now is market participation with 70.0 percent of Skylines demonstrating consistent net absorption over the past two years. of the frequency of that trend. Approximately 15.5 percent of Skyline transactions involved rightsizing in 2013 with the vast majority stemming from law firms and banks and financial institutions. However, even within these sectors (and the accounting / consulting sector), evidence of an overcorrection by certain tenants has arisen. Further, looking at the growth industries across the Skyline (energy, tech, health care and media), few of those uses can operate in a remote environment like some of the traditional office sectors can. Ahead, both opportunities and challenges await landlords. Rightsizing has dominated the office sector over the past three years, yet recently, we have noticed a slowdown and potential plateauing Yet, one of the key challenges for landlords ahead is the lack of near-term large-block tenant demand with 2017 and 2018 tenants touring the market becoming the norm, not the extreme.
  14. 14. Demand Activity and growth levels continue to expand and diversify Activity and growth levels continue to expand and diversify Net absorption as percent of inventory (and percent of markets seeing occupancy growth) 1.0% 1.3% 1.5% 1.6% 61.9% 71.4% 2010 2011 2012 2013
  15. 15. Demand Activity and growth levels continue to expand and diversify Energy, tech, media and healthcare dominate tenant growth Accounting / consulting: Architecture, construction engineering: 21% Growing 59% Stable 20% Shrinking 25% Growing 70% Stable 5% Shrinking Law: Healthcare: 32% Growing 68% Stable 0% Shrinking Banking / finance: 22% Growing 64% Stable 14% Shrinking Media: 22% Growing 51% Stable 27% Shrinking Energy: 74% Growing 26% Stable 0% Shrinking Technology: 41% Growing 53% Stable 6% Shrinking 63% Growing 32% Stable 5% Shrinking
  16. 16. Demand Activity and growth levels continue to expand and diversify Rightsizing what? In 2013, the number of transactions where tenants grew doubled the amount where tenants gave back space Rightsizing has been dominated by 2 industries, which accounted for of all rightsizing. 83.3% 2013 Skyline transactions that exhibited 2013 Skyline transactions that exhibited growth: 30.2% rightsizing: 15.5% To shrink or to grow? Banking / Finance Law Banks and law firms 11 20,000 s.f. saw their real estate footprint grow Banks and law firms 20,000 s.f. 5 saw their real estate footprint shrink
  17. 17. Demand Activity and growth levels continue to expand and diversify More Skylines experiencing net new growth as opposed to net new contraction: Skylines that saw highest concentration of expansions: Atlanta Austin Bellevue Boston Chicago Columbus Detroit Houston San Diego Tampa Skylines that saw highest level of rightsizing: Charlotte Cleveland Sacramento Washington, DC
  18. 18. Rents Growth to spread across geographies and pricing segments While the Skyline segment of the market remains somewhat bifurcated from a rental standpoint, rents are beginning to grow across markets from industry-heavy primary Skylines to now even diversified secondary Skylines. Nearly two-thirds of Skylines are reporting consistent rental increases at a rate 1.4 times faster than the U.S. office market as a whole, referencing the tight fundamentals in core product. Despite the rent increases, stubbornly high tenant improvement allowances and only a slight reduction in rental abatement are indicative of a more challenging landscape for landlords and a welcome leftover of the lingering downturn to tenants across most cities. From a geographical perspective, rental growth remains highest in tech- and energy-dominant Skylines; however, these markets, which have seen large upticks in new construction, may be the first geographies that switch from landlordfavorable positions to neutral positions in 2016 due to the new supply. Conversely, markets without significant speculative development (all markets besides Houston, San Francisco and New York) will see leverage for landlords extended over the next 24 to 30 months with a trickle down in tightening from the top-down and the bottom-up of the Skyline.
  19. 19. Rents Growth to spread across geographies and pricing segments Rents for Skyline properties reach $40.73 p.s.f., the first time they have broken $40.00 p.s.f. on record; with rental growth of 3.4 percent in 2013 $36.69 $29.16 2 0 05 $37.86 2007 2008 $30.81 2 0 06 $34.58 $34.51 $36.25 2009 2010 2011 $39.39 $40.73 20 1 2 2 0 13
  20. 20. Rents Growth to spread across geographies and pricing segments Increased demand and shrinking space options mean leverage in the Skyline is shifting away from tenants to landlords 2016: Tenant-favorable Skylines 2.3% 2015: 11.6% 2014: 18.6%
  21. 21. Rents Growth to spread across geographies and pricing segments Industry-driven Skylines are posting fastest rental growth over time: Largest rent growth past 12 months : Largest rent growth past 36 months : 9.6% Bellevue: 9.2% Fort Worth: 7.9% Portland: 6.3% Austin, Denver: 5.1% 80.7% Bellevue: 18.2% Houston: 17.7% New York: 16.9% Orange County: 16.4% San Francisco: San Francisco: Largest rent growth since 2005 : 69.8% San Francisco: 69.1% Austin: 53.9% Denver: 52.4% Salt Lake City: 49.7% Houston:
  22. 22. Investment Foreign capital shifts domestics along the risk curve 2013 saw a resurgence of investment sale activity with primary and secondary Skylines seeing yearover-year growth of 43.4 and 20.0 percent, respectively, on a square footage basis. While the broadening of transaction activity across secondary markets spurred a modest softening of cap rates, primary markets saw average cap rates compress below pre-recession levels, now pegged at 4.8 percent. A resurgence of activity in New York, exhibited by nearly 5.1 million square feet of transactions and pricing exceeding $1,000 per square foot in three transactions, was a key primary market growth factor. However, Los Angeles surpassed New York sales volumes due to Brookfield Office Properties’ 4.9 million-square-foot acquisition of the MPG Office Trust portfolio - the largest trade of 2013 nationally. Foreign capital demonstrated significant growth with investments in New York, Washington, DC and Boston, accounting for 50.2 percent of buyers in primary Skyline transactions in 2013. Foreign investment is notably flowing from China and Norway, both of which saw U.S. investments surpass $1.0 billion. While primary markets showed notable growth this year, secondary market pricing gains per square foot exceeded primary markets—a trend evidenced in Raleigh, Miami and Philadelphia. Transaction activity in these markets continues to be driven by REITs and domestic institutional buyers, spurring growth across 14 secondary markets and expanding bidder profiles to institutional investors.
  23. 23. Investment Foreign capital shifts domestics along the risk curve Foreign investment activity continues to fly into the Skyline from all parts of the globe: $1.9b (2012) versus $5.2b (2013), accounting for 50.2% of buying activity in 2013 in primary markets $2.1b 2013 $0.8b 2013 $0.7b 2013 New York Washington, DC Boston ($0.0b 2012) ($0.3b 2012) ($0.0b 2012) $0.5b 2013 $0.4b 2013 $0.0b 2013 Chicago Seattle San Francisco ($0.0b 2012) ($0.0b 2012) ($1.6b 2012) Origins of large foreign investors in Skyline assets: China: Norway: Australia: South Korea: Canada: $1.4b $1.2b $0.8b $0.5b $0.4b
  24. 24. Investment Foreign capital shifts domestics along the risk curve Investment activity across the Skyline to highest levels since 2007 Square feet transacted in the Skyline in 2013: 63.9 m.s.f. jumps Percent of Skyline markets that have seen sales volumes (s.f. basis) grow since 2011: 68.3% Percent increase in Skyline sales volume (s.f. basis) from 2012 to 2013: 30.8% Liquidity growing in secondary markets with institutions edging out REITs as primary buyers Percent of 2013 sales transactions acquired by REITs in secondary markets: 38.6% Percent of 2013 sales transactions acquired by institutional buyers in secondary markets: 39.4%
  25. 25. Investment Foreign capital shifts domestics along the risk curve Cap rates continue to for core assets: San Francisco: compress to record lows 3.2% (average low 4s) Boston: 3.7% (average high 4s) New York: 3.8% (average low 4s) Minneapolis: 4.0% (average low 6s) Seattle: 4.2% (average high 4s) Washington, DC: 4.2% (average low 5s) Atlanta: 4.2% (average low 6s) Austin: 5.2% (average low 6s) Houston: 5.3% (average high 5s) Denver: 5.5% (average low 6s) Appetite for risk varies greatly across buyer types Over the past 24 months, occupancy of Skyline properties acquired by… (and percent of those assets classified as Trophy) Foreign: 88.9% (64.7%) REITs: 87.2% (50.0%) Domestic institution / advisor: 86.7% (50.9 %) Developer / property company: 79.6% (20.0%) Equity fund: 68.2% (16.7%)
  26. 26. Interested? Intrigued? Dive deeper into current commercial real estate trends and statistics with our complete 2014 U.S. Skyline Review. This comprehensive report is a beautiful printed document—part reference guide and part coffee-table book for the real estate aficionado. It includes detailed breakdowns of vacancy rates, absorption, average rents and more at Trophy and Class A buildings in the top 43 office market centers.

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