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U.S. office market statistics (Q4 2014) and 2015 outlook

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Now at its strongest point in the recovery, the economy grew by nearly 3.0 million jobs in 2014, pushing unemployment to its lowest level since the third quarter of 2008. As a result, markets across the country recorded expansionary activity as corporate confidence grew along with demand for office space. Annual net absorption totaled 54.7 million square feet driving vacancy to 15.6 percent—its lowest point since 2008—a trend expected to continue over the next 24 months.

While challenges exist ahead, including historically low labor force participation and the recent fall in oil prices, forecasts for 2015 and 2016 across the U.S. project the highest growth in more than a decade.

Learn more and see market-by-market data at http://bit.ly/1yy1zss

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U.S. office market statistics (Q4 2014) and 2015 outlook

  1. 1. Expansionary leasing activity driving growth across markets United States Office Review Q4 2014
  2. 2. The increase in corporate profitability and economic growth will continue to result in headcount increases and expansionary leasing activity across markets. As a result, the rate of absorption will likely reach 2.0 percent of total inventory in 2015, a 25 percent increase from 2014 levels.
  3. 3. Fundamentals are tightening across markets, particularly absorption, fueling new development 2 Source: JLL Research Leasing activity • Leasing activity declined by 10.2 percent overall in the fourth quarter as a result of quarterly declines in 50.0 percent of markets that JLL tracks. Leasing activity, yet, was up in the large-block segment (20K and >) and is expected to pick up again in 2015 as employment gains continue to surpass pre-recession employment totals and rightsizing is showing signs of plateauing. Absorption • Net absorption in the fourth quarter was the highest on record since the recession at 16.8 million square feet and 54.7 million square feet in 2014. This is nearly four times the amount recorded at year-end 2010 and 37 percent higher than 2013. At year-end, New York, Houston and Chicago alone contributed to more than 30 percent of total net absorption for 2014. Vacancy • With absorption at a post-recession high, vacancy is at its lowest point in the cycle at 15.6 percent with New York, San Francisco, Portland and Salt Lake City all at 10.0 percent vacancy or less. As tenants plan for further expansion in 2015, vacancy is expected to decline further, especially in Class A segments and CBDs. Rents • Rent growth was relatively flat across markets in the fourth quarter, but saw more significant growth in the Class A and B segments of suburban markets, largely a result of greater expansionary activity as vacancy rates in CBDs tighten. Construction • Construction activity increased by 12.2 percent from the third to fourth quarter with nearly 80 million square feet under construction at year-end, 77.8 percent of which is speculative. Only 10 markets tracked by JLL are without construction activity while markets like Houston, Silicon Valley, Austin and San Francisco (energy and tech) continue to top lead in terms of construction as a percent of total inventory.
  4. 4. Leasing activity
  5. 5. Following several quarters of strong leasing activity, Q4 posted lower results 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. Slowdowns in New York, San Francisco, Chicago and Boston pushed year-end totals 5.2 percent below 2013 activity 5 258,547,529 246,521,385 228,764,145 275,274,581 282,356,988 234,094,033 249,187,644 236,140,690 0 50,000,000 100,000,000 150,000,000 200,000,000 250,000,000 300,000,000 2007 2008 2009 2010 2011 2012 2013 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 NewYork Washington,DC Boston Dallas LosAngeles Chicago NewJersey Denver OrangeCounty SanFrancisco SiliconValley Atlanta Philadelphia Seattle SanDiego Houston Oakland-EastBay Austin Phoenix Minneapolis Detroit Portland Baltimore Pittsburgh Charlotte St.Louis FairfieldCounty Indianapolis Milwaukee Cincinnati Cleveland WestPalmBeach Tampa Sacramento Miami Columbus FortLauderdale Orlando SanFranciscoPeninsula Raleigh-Durham SaltLakeCity WestchesterCounty LongIsland HamptonRoads SanAntonio Jacksonville Richmond Leasingactivity(s.f.) Source: JLL Research 41.8% 20.4% 37.8%
  8. 8. 7 29.3 MSF total square feet leased in Q4 in transactions 20,000 s.f. or larger 101 average term in months 48% / 11% / 37% of tenants are growing / shrinking / stable (respectively) 52% / 48% urban / suburban breakdown of Q4 volume Large-block leasing activity increased by 3.5 percent compared to Q3 Source: JLL Research
  9. 9. 8 54% of total leasing activity over 20,000 s.f. 46% of tenants are growing 16% of tenants are shrinking 23 companies were ‘new to market’ Banking, finance, and insurance generated the most activity at 3.3MSF leased Technology followed, leasing 2.8MSF 46% of total leasing activity over 20,000 s.f. 51% of tenants are growing 6% of tenants are shrinking 14 companies were ‘new to market’ Technology generated the most activity at 3.6MSF leased Banking, finance, and insurance followed, leasing 1.8MSF Companies that ignored the debate all together in Q4? WeWork and Regus Traditional industries, such as finance, continue to dominate core leasing activity; tech’s campus preference make it lead suburbs Source: JLL Research
  10. 10. 9 Urban Suburban Total metro 397,525 412,940 447,220 584,063 717,839 754,502 939,491 1,147,817 2,016,105 3,952,458 0 5,000,000 Minneapolis Atlanta Houston Boston San Francisco Seattle-Bellevue Chicago New Jersey Washington, DC New York 450,791 454,524 465,752 498,688 519,785 636,858 809,550 894,578 1,096,835 2,546,429 - 5,000,000 Charlotte Northern Virginia San Francisco Peninsula Atlanta Dallas Oakland-East Bay Philadelphia Los Angeles Orange County Silicon Valley 878,203 911,628 1,023,561 1,096,835 1,161,837 1,288,716 1,558,642 2,016,105 2,566,775 3,952,458 - 5,000,000 Boston Atlanta Los Angeles Orange County Philadelphia Chicago New Jersey Washington, DC Silicon Valley New York New York and Silicon Valley lead large-block leasing volume across markets Source: JLL Research
  11. 11. 10 However, large leasing is taking place throughout the United States, with a focus on gateway markets Seattle CBD Zillow: 155,000 s.f. Pleasanton North (East Bay) Workday: 151,000 s.f. Sunnyvale (Silicon Valley) Google: 946,000 s.f. North County (Orange County) St. Joseph Heritage Medical Group: 192,000 s.f. Dallas CBD Crosstex Energy: 158,000 s.f. Minneapolis CBD Seed Partners: 280,000 s.f. West Loop (Chicago) Hyatt: 229,000 s.f. Hudson Waterfront (NJ) ISO Insurance: 392,000 s.f. Penn Plaza/Garment (NYC) Amazon: 470,000 s.f. Southwest (DC) U.S. Dep’t of Education: 314,000 s.f. Source: JLL Research
  12. 12. Month 00, 2014 11 Unknown Creative Consumer-oriented Non-profit Professional and business services Finance Scientific & technical - 5,000,000 10,000,000 15,000,000 Unknown Manufacturing & distribution Retail & hospitality Marketing, advertising,… Media & entertainment Association, non-profit, union Education Government Accounting, consulting, research,… Other professional and business… Law firm Real estate Banking, finance, insurance Aerospace, defense, transportation Energy & utilities Architecture, engineering,… Life sciences Telecom/Mobile Healthcare Technology - 2,000,000 4,000,000 6,000,000 Leasing activity within the scientific and technical industry cluster… …dominated by technology companies, led activity in the fourth quarter Tech and finance drove fourth-quarter leasing activity, with law, health and life sciences also boosting volumes Source: JLL Research
  13. 13. Month 00, 2014 12 199 83 50 83 39 44 17 0 50 100 150 200 250 - 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 7,000,000 Numberoftransactions(s.f.) Leasingactivity(s.f.) s.f. leased number of transactions Leasing continues to be divided between large (100,000+) and small (< 30,000) transactions, seeing new growth in middle Source: JLL Research
  14. 14. 13 485,234 6,597,165 18,216,762 4,038,366 - 10,000,000 20,000,000 C B A Trophy 41% of tenants signed leases that represented growth in Trophy buildings in Q4 Life sciences Architecture, engineering,… Real estate Manufacturing & distribution Government Telecom/Mobile Healthcare Law firm Banking, finance, insurance Technology - 2,000,000 4,000,000 6,000,000 Tenants continue to seek high quality space, even as rents rise in top metros across the country Within the Trophy segment, technology tenants leased the largest share of space in Q4 Tenants continue to take up space in Class A buildings, although dwindling space options are picking up Class B’s share Source: JLL Research
  15. 15. 14 48% of companies grew in Q4 11% of companies shrunk in Q4 37% of companies were stable in Q4 Technology • 17.8% of companies Banking, finance, insurance • 7.1% of companies Healthcare • 3.6% of companies Banking, finance, insurance • 7.0% of companies Technology • 3.4% of companies Government • 3.3% of companies Law firm • 3.8% of companies Banking, finance, insurance • 1.9% of companies Manufacturing & distribution • 0.9% of companies Nearly half of all companies grew during the quarter, while law and finance remain flat Source: JLL Research
  16. 16. Absorption
  17. 17. After a recovery high in Q3, Q4 demonstrated even more gains in occupancy, with 16.8 million square feet of net absorption 16 -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
  18. 18. As a percent of total inventory, YTD net absorption posts highest level since 2007 17 -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
  19. 19. Absorption in CBD and Suburban Class A continued to mount in 2014, but Suburban markets maintain the lead 18 -10,000,000 -5,000,000 0 5,000,000 10,000,000 15,000,000 20,000,000 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
  20. 20. Quarterly Class B absorption over the past four quarters is taking place 4x faster than from 2010 to Q3 2013… 19 Source: JLL Research 14,049,878 15,493,469 0 2,000,000 4,000,000 6,000,000 8,000,000 10,000,000 12,000,000 14,000,000 16,000,000 18,000,000 2010-Q3 2013 Past four quarters ClassBnetabsorption(s.f.) 936,658 s.f. per quarter 3,873,367 s.f. per quarter
  21. 21. With demand for creative office space strengthening Class B in many submarkets across the United States 20 9.6% 7.8% 5.9% 4.6% 3.7% 3.3% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% Boston (East Cambridge) San Francisco (SOMA) Philadelphia (The Navy Yard) Chicago (River West) Portland (Lloyd District) New York (Penn Plaza/Garment) YTDCBDClassBnetabsorption(%ofinventory) Source: JLL Research U.S. average
  22. 22. Only four markets experienced a net loss of occupancy in 2014, all of which were greater than -100,000 square feet 21 -2,000,000 0 2,000,000 4,000,000 6,000,000 8,000,000 10,000,000 NewYork Houston Chicago Boston Atlanta Phoenix SiliconValley Dallas LosAngeles Seattle SanFrancisco OrangeCounty Denver Philadelphia Raleigh/Durham Charlotte SanDiego Baltimore Minneapolis Portland Detroit Miami SaltLakeCity SanFranciscoPeninsula Austin WestPalmBeach TampaBay Cincinnati FortLauderdale KansasCity St.Louis Columbus Sacramento Milwaukee Oakland-EastBay FairfieldCounty Indianapolis Richmond Jacksonville Cleveland SanAntonio Pittsburgh Orlando HamptonRoads NewJersey WestchesterCounty LongIsland Washington,DC YTDnetabsorption(s.f.) Source: JLL Research YTD net occupancy losses amount to 1.0 million square feet in Washington, DC
  23. 23. Diversification of absorption prominent heading into 2015: New York, Florida, Atlanta and Philadelphia boost East Coast in Q4 22 -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
  24. 24. More than one-fifth of absorption took place outside a specialized industry or geographic segment in 2014 as recovery broadens 23 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 0.0% 37.5% 26.0% 29.1% 7.4% 2012 11.1% 21.6% 22.3% 18.6% 26.4% 2013 13.7% 23.1% 15.3% 20.1% 27.8% 2014
  25. 25. Tech and Sunbelt markets all posting above-average absorption; energy markets expected to slow in 2015 24 1.4% 1.6% 2.6% 1.5% 2.5% 2.4% 2.5% 3.6% 1.9% 2.4% 3.0% 2.8% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% YTDnetabsorption(s.f.) Source: JLL Research Energy Tech Sunbelt U.S. average
  26. 26. Atlanta and South Florida maintain absorption levels as New York, Boston, Philly and Carolinas boost East Coast gains 25 Source: JLL Research -10,000,000 -5,000,000 0 5,000,000 10,000,000 15,000,000 20,000,000 25,000,000 2010 2011 2012 2013 2014 Netabsorption(s.f.) Atlanta South Florida Rest of the East Coast
  27. 27. 4.6x as much Trophy and Class A space has been absorbed than Class B and C during the same time period from 2010-2014 26 Source: JLL Research Trophy and Class A net absorption 140.2 m.s.f.2010-2014 Class B and C net absorption 30.5 m.s.f.2011-2014
  28. 28. -4,000,000 -3,000,000 -2,000,000 -1,000,000 0 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 2010 2011 2012 2013 2014 Netabsorption(s.f.) Atlanta Chicago Los Angeles Miami Philadelphia Phoenix Diversified markets hit another recovery high with 3.8 million square feet of occupancy gains this quarter, led by Chicago 27 Source: JLL Research Atlanta and Phoenix have absorbed a combined 14.7 million square feet since 2010, or 54.5 percent of cumulative total.
  29. 29. Lack of available Class A space keeping absorption volume steady quarter-over-quarter 28 133.5% 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% 66.9% 69.8% 0.0% 50.0% 100.0% 150.0% 200.0% 250.0% 300.0% 350.0% 2011 2012 2013 2014 ClassAshareofquarterlyabsorption Source: JLL Research
  30. 30. CBD absorption remains somewhat volatile; declining by 49.0 percent since Q3 29 166.2% 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% 66.4% 32.6% 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
  31. 31. Absorption in Class A space maintains largest share, with CBDs and suburbs nearly evenly split 30 116.9% 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% 67.4% 66.8% 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
  32. 32. But demand for creative office space is strengthening Class B in many submarkets across the United States 31 7.3% 5.9% 5.6% 4.7% 3.3% 2.6% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% 8.0% San Francisco (SOMA) Philadelphia (The Navy Yard) Boston (East Cambridge) Chicago (River West) Portland (Lloyd District) New York (Penn Plaza/Garment) YTDCBDClassBnetabsorption(%ofinventory) Source: JLL Research U.S. average
  33. 33. Still, Class A continues to trump Class B according to most indicators 32 Source: JLL Research of absorbed space in 2014 has been Class A per square foot difference between Class A and B space… premium charged for Class A space versus Class B difference between Class A and Class B total vacancy
  34. 34. Vacancy
  35. 35. The steep decline in vacancy this year, currently at 15.6 percent, is the result of nearly 55 million square feet of absorption 34 12.0% 13.0% 14.0% 15.0% 16.0% 17.0% 18.0% 19.0% 20.0% 2009 2010 2011 2012 2013 2014 Totalvacancy(%) Source: JLL Research
  36. 36. Vacancy now at lowest level since 2008 and expected to decline even more until new space comes to the market 35 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
  37. 37. Total vacancy declining overall, but Class B in CBDs posting sharpest decline amidst falling Class A vacancy 36 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
  38. 38. As office-using employment increased by 877,000 net new jobs in 2014, vacancy declines to 15.6 percent 37 14.0% 14.5% 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 30,500 2011 2012 2013 2014 Totalvacancy(%) Office-usingemployment(thousands) Office-using employment (thousands) Total vacancy (%) Source: JLL Research
  39. 39. CBD vacancy just 70 basis points from historic low, but Suburban vacancy still relatively high 38 5.0% 7.0% 9.0% 11.0% 13.0% 15.0% 17.0% 19.0% 21.0% 23.0% Totalvacancy(%) Source: JLL Research
  40. 40. Sublease vacancy inched upward in Q4 as a result of Covington moving into new development in DC, leaving old space behind for a few years 39 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
  41. 41. Rents
  42. 42. Q4 2014 U.S. overall office clock Peaking phase Falling phase Rising phase Bottoming phase Houston, San Francisco, Silicon Valley Boston, Denver, Los Angeles, Miami, Tampa, United States Cincinnati, Detroit, Hampton Roads, Long Island, San Antonio, St. Louis, Westchester County Phoenix, Salt Lake City Atlanta, Fort Lauderdale, Indianapolis, Kansas City, Orange County, Orlando, Richmond Sacramento, West Palm Beach Baltimore, Columbus, Washington, DC Dallas Austin, Pittsburgh, Portland San Francisco Peninsula Jacksonville New Jersey Chicago, Cleveland, Fairfield County, Oakland-East Bay, Raleigh-Durham, San Diego New York Charlotte, Milwaukee, Philadelphia Seattle-Bellevue Minneapolis Source: JLL Research
  43. 43. Q4 2014 U.S. CBD office clock Peaking phase Falling phase Rising phase Bottoming phase Austin, Houston, Portland, San Jose CBD Miami, Seattle CBD Dallas, Indianapolis, Salt Lake City, Stamford CBD Atlanta, Fort Lauderdale, Greenwich CBD, Los Angeles, Midtown (New York), Orlando, United States Cincinnati, Washington, DC, West Palm Beach Boston, Denver, Pittsburgh, Tampa Richmond, San Antonio, San Diego Baltimore, Columbus, Kansas City, White Plains CBD Jacksonville, Oakland CBD Midtown South (New York), San Francisco Chicago, Downtown (New York), Philadelphia Charlotte, Cleveland, Detroit, Raleigh-Durham St. Louis Milwaukee, Phoenix Sacramento Minneapolis Source: JLL Research
  44. 44. Peaking phase Falling phase Rising phase Bottoming phase Q4 2014 U.S. suburban office clock Atlanta, Baltimore, Cleveland, East Bay Suburbs, Hampton Roads (Peninsula), Miami, Milwaukee, Raleigh-Durham, San Diego, Westchester County Boston, Long Island (Nassau), Portland, Salt Lake City Long Island (Suffolk) Charlotte, Fort Lauderdale, Oakland Suburbs, Orlando, Philadelphia Columbus, Lehigh Valley, Northern Delaware, West Palm Beach Central New Jersey, Northern New Jersey, Northern Virginia, Suburban Maryland Dallas Denver, Indianapolis, Jacksonville, St. Louis, Tampa Chicago, Cincinnati, Fairfield County, Hampton Roads (Southside), Sacramento, San Antonio Bellevue CBD, Richmond Austin, Kansas City, Minneapolis, Phoenix Cambridge, Houston, San Francisco (non-CBD) San Francisco Peninsula Silicon Valley Southern New Jersey Los Angeles, Pittsburgh Seattle-Bellevue, United States DetroitSource: JLL Research
  45. 45. Rent growth remains subdued, but is expected to jump as lack of availability, combined with higher growth, is forecasted for 2015 44 -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
  46. 46. CBD segments posting negative or nearly flat results, while suburban segments record 2.0 percent or more, year-over-year 45 $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
  47. 47. But quarterly rent growth was slightly higher in CBDs than suburbs, though still below historic norms 46 -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%
  48. 48. The rent gap is growing between CBD and Suburbs, increasing by $0.07 in Q4 47 $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 $15.05
  49. 49. However, the rent gap between Class A and overall rents inching downward as demand for all other classes increases 48 $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 $4.90 $4.81 $3.00 $3.50 $4.00 $4.50 $5.00 $5.50 2010 2011 2012 2013 2014 ClassApremium($p.s.f.) Source: JLL Research
  50. 50. TI allowances are beginning to elevate due to new construction providing higher concessions 49 3.5 4.1 5.1 6.1 6.2 5.7 5.1 5.3 5.8 $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
  51. 51. Construction
  52. 52. Completions are at their highest rate since 2009, but still far below pre-recession peaks 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 Annualcompletions(s.f.) 51 Source: JLL Research -60.5%
  53. 53. Geographic diversity of construction starts in Q4 helped to push volumes to roughly 80.0 million square feet 52 Source: JLL Research – numbers represent Q4 starts in square feet 2,496,472 Seattle 221,827 Portland 1,233,071 Bay Area 252,164 San Diego 499,200 Phoenix 416,531 Denver 590,000 Houston 314,964 Dallas 1,036,769 DC 3,029,952 New York 934,850 Charlotte 753,000 Chicago
  54. 54. With starts 76.3 percent higher than 2013 levels 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 Annualstarts(s.f.) 53 Source: JLL Research
  55. 55. Starts of major developments continue to rise: seven of more than 500,000 s.f. broke ground in Q4 totaling more than 6.8 m.s.f. 54 Source: JLL Research 3 World Trade Center (New York) 2,861,402 s.f. Silverstein 18.0% pre-leased (Group M) Central Place (Northern Virginia) 552,781 s.f. JBG 64.6% pre-leased (CEB) Zurich North America HQ (Chicago) 753,000 s.f. Stonemont 100.0% pre-leased (Zurich) 400 Bellevue Square (Bellevue) 724,693 s.f. Kemper 0.0% pre-leased Partners Healthcare (Boston) 700,000 s.f. Federal Realty 100.0% pre-leased (Partners Healthcare) 300 South Tryon Street (Charlotte) 630,000 s.f. Spectrum/Mass Mutual 31.7% pre-leased (Babson Capital) Moffett Gateway (Silicon Valley) 600,864 s.f. Jay Paul 0.0% pre-leased 6,822,740 s.f. 3,882,576 s.f. available 2,568,295 s.f. pre-leased 37.6% pre-leased
  56. 56. Over the course of 2014, tightening fundamentals have led to a surge of UC totals, up 68.9 percent year-on-year 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 2010 2011 2012 2013 2014 Underconstruction(s.f.) 55 Source: JLL Research
  57. 57. Market Under construction (s.f.) Share Houston 16,225,602 20.3% Bay Area 8,246,777 10.3% Dallas 5,245,160 6.6% New York 5,203,624 6.5% Seattle-Bellevue 5,144,406 6.4% Washington, DC 4,779,129 6.0% Silicon Valley 4,284,425 5.4% Boston 4,017,760 5.0% Chicago 3,692,067 4.6% San Francisco 3,618,785 4.5% Philadelphia 3,585,450 4.5% Austin 3,444,990 4.3% Phoenix 2,345,759 2.9% Los Angeles 2,099,739 2.6% Denver 1,813,315 2.3% Raleigh-Durham 1,694,995 2.1% Cincinnati 1,679,533 2.1% All other markets 10,951,731 13.7% United States 79,826,470 100.0% As the recovery broadens, construction is moving away from just tech and energy and into a variety of markets Houston Dallas New York Seattle Washington, DC Silicon Valley Boston Chicago San Francisco Philadelphia Austin Phoenix Los Angeles Denver Raleigh-Durham Cincinnati All other markets 56 Source: JLL Research
  58. 58. Typical floor plate Share of s.f. < 20,000 s.f. 8.2% 20,000-29,999 s.f. 27.9% 30,000-39,999 s.f. 18.9% 40,000-49,999 s.f. 10.1% 50,000+ s.f. 34.9% < 50,000 s.f. 50,000-99,999 s.f. 100,000-249,999 s.f. 250,000-499,999 s.f. 500,000+ s.f. Building size Share of s.f. < 50,000 s.f. 1.6% 50,000-99,999 s.f. 4.6% 100,000-249,999 s.f. 25.3% 250,000-499,999 s.f. 35.4% 500,000+ s.f. 33.2% The average development is now 250,070 s.f., with a typical floor plate of 33,657 s.f. 57 < 20,000 s.f. 20,000-29,999 s.f. 30,000-39,999 s.f. 40,000-49,999 s.f. 50,000+ s.f. Source: JLL Research
  59. 59. Urban Suburban Most construction is taking place in Suburban and non-CBD locations, largely due to booms in energy and tech markets 58 CBD Non-CBD Source: JLL Research
  60. 60. Market Under construction (s.f.) Share Hines 4,126,714 5.9% Trammell Crow 3,083,604 4.4% Silverstein 2,861,402 4.1% Boston Properties 2,568,963 3.7% KDC 2,421,167 3.5% Jay Paul 1,962,886 2.8% Related 1,700,000 2.4% Liberty 1,570,077 2.2% O'Donnell 1,200,000 1.7% Skanska 1,142,045 1.6% Tishman Speyer 1,131,840 1.6% Kilroy 1,045,895 1.5% All others 45,011,877 64.5% United States 79,826,470 100.0% Hines, Trammell Crow, Silverstein, Boston Properties and KDC are all developing more than 2.0 million square feet Hines Trammell Crow Silverstein Boston Properties KDC Jay Paul Related Liberty O'Donnell Skanska Tishman Speyer Kilroy All other developers 59 Source: JLL Research
  61. 61. Most construction underway will be completed in late 2015 and throughout 2016, when the national office market will peak 0 5,000,000 10,000,000 15,000,000 20,000,000 25,000,000 2015 2016 2017 2018 Projectedcompletions(s.f.) Spec BTS 60 Source: JLL Research
  62. 62. A similar pattern emerges when only looking at available space; the vast majority will come online in 2015 and 2016 0 2,000,000 4,000,000 6,000,000 8,000,000 10,000,000 12,000,000 2015 2016 2017 2018 Projectedcompletions(s.f.) Spec BTS 61 Source: JLL Research
  63. 63. Investment sales
  64. 64. Office investment sales up 21.3 percent year-over-year, seeing its highest volume since 2007 63 $0.00 $50.00 $100.00 $150.00 $200.00 $250.00 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Officeinvestmentsalevolumes(billionsof$US) Q1 Q2 Q3 Q4 Source: JLL Research
  65. 65. Market Sales volume ($) Share New York $2,426,600,000 13.7% Boston $2,065,599,379 11.6% Washington, DC $1,623,250,000 9.1% Chicago $1,152,925,000 6.5% Northern Virginia $973,304,190 5.5% San Francisco Peninsula $925,233,131 5.2% Los Angeles $863,145,000 4.9% Houston $724,800,000 4.1% Seattle-Bellevue $566,070,260 3.2% Minneapolis $484,504,900 2.7% Denver $469,779,843 2.6% Atlanta $393,431,088 2.2% Portland $362,150,000 2.0% Oakland-East Bay $361,510,000 2.0% Phoenix $354,078,825 2.0% All other markets $4,021,912,058 22.6% United States $17,768,293,674 100.0% Primary markets driving quarterly volumes, followed by select secondary markets New York Boston Washington, DC Chicago Northern Virginia San Francisco Peninsula Los Angeles Houston Seattle-Bellevue Minneapolis Denver Atlanta Portland Oakland-East Bay Phoenix All other markets 64 Source: JLL Research
  66. 66. A trend consistent across CBD, Suburban markets Primary markets continued to see highest velocity of CBD and Non-CBD transaction activity this quarter by dollar volume 65 $2,427 $1,571 $1,248 $773 $622 $925 $899 $817 $481 $380 $- $500 $1,000 $1,500 $2,000 $2,500 $3,000 New York Washington, DC Boston Chicago Houston San Francisco Peninsula Northern Virginia Boston Minneapolis Chicago Q4officeinvestmentsalevolume(millionsof$US) Most active CBD markets Most active Non-CBD markets Of CBD volumes in Primary markets Of Non-CBD volumes in Primary markets Source: JLL Research
  67. 67. 6.9% 64.5% 28.7% Trophy Class A Class B Trophy and Class B segments similarly saw transaction volumes rise in 2014… 66 8.1% 58.2% 33.7% Trophy Class A Class B Source: JLL Research
  68. 68. 56.7% 43.3% Primary markets Secondary markets …but secondary market activity rising on a square footage basis, accounting for 52.9 percent of 2014 activity 67 47.1% 52.9% Primary markets Secondary markets Source: JLL Research
  69. 69. Secondary CBD investment rising with noteworthy activity in Tampa, Atlanta and Philadelphia this quarter 68 54% 55% 62% 79% 51% 71% 49% 45% 46% 45% 38% 21% 49% 29% 51% 55% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2 2014 Q3 2014 Q4 CBDtransactionvolumesas%oftotal Primary Secondary Most active secondary CBDs: Tampa, Atlanta, Philadelphia Source: JLL Research
  70. 70. Florida, Texas and California seeing noteworthy turnover in annual investment sale volumes, surpassing the U.S. average 69 32% 21% 20% 20% 19% 17% 16% 15% 14% 13% 13% 13% 13% 12% 11% 11% 0% 5% 10% 15% 20% 25% 30% 35% CBDassetturnoverratio,2014(%) United States: 11.0% Source: JLL Research
  71. 71. While majority of markets have seen suburban investment overtake CBDs, 67.0 percent of sales volume took place in urban markets 70 2% 16% 19% 19% 27% 28% 30% 52% 53% 55% 56% 59% 59% 60% 72% 73% 74% 75% 81% 92% 95% 97% 100% 100% 100% 100% 98% 84% 81% 81% 73% 72% 70% 48% 47% 45% 44% 41% 41% 40% 28% 27% 26% 25% 19% 8% 5% 3% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0% Suburban Urban Source: JLL Research
  72. 72. With leading suburban submarkets driving 52.5 percent of U.S. suburban transaction activity in H2 2014 71 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% Submarkettransactionvolumes (asa%ofsuburbanmarket,H22014) Source: JLL Research
  73. 73. ... And secondary suburban markets accounting for 63.0 percent of Q4 activity 72 53% 49% 51% 44% 48% 49% 30% 37% 47% 51% 49% 56% 52% 51% 70% 63% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2 2014 Q3 2014 Q4 Suburbantransactionvolumesas%oftotal Primary Secondary Most active secondary suburbs: Denver, Minneapolis, St. Louis, Portland, Dallas Source: JLL Research
  74. 74. Outlook
  75. 75. 74 Source: JLL Research 2015 outlook strongest in nearly a decade U.S. GDP and consumer spending levels are forecasted to grow by 3.2 and 2.5 percent, respectively in 2015, which will lead to further corporate expansion and real estate demand. The increase in corporate profitability and economic growth will continue to result in headcount increases and expansionary leasing activity across markets. As a result, the rate of absorption will likely reach 2.0 percent of total inventory in 2015, a 25 percent increase from 2014 levels. Vacancy rates in many CBDs and select non-CBD markets on the edge of CBDs will see vacancy rates decline to single-digits, but fundamentals will also become increasingly tighter in suburban markets as lack of vacancy, coupled with increasing rents, pushes tenants outside of the core CBD. JLL forecasts over the next 27 months call for rent increases nationally of 13.0 to 14.0 percent, driven largely by a new wave of developments delivering, priced at 20.0 to 25.0 percent premiums, which will trickle down to reset market pricing. Exactly half of all markets are now posting under construction levels equating to 1.0 percent of inventory levels. With many developers increasingly thinking about commencing construction on proposed sites, the market over the next 36 months will likely shift from an under-supplied market to an over-supplied one by late 2016. Geographies with substantial amount of construction underway already (Texas, Bay Area), could see momentum turn a year earlier for tenants. 1. 2. 3. 4. 5.
  76. 76. The slowdown in the energy industry, as a result of the decline in oil prices in recent weeks, will yield a slower demand environment in energy hotbeds such as Houston over the short to mid-term. Likewise, absorption in high-priced tech markets like San Francisco and Silicon Valley could also slow as rental rates reach peak levels amidst declining vacancy.
  77. 77. COPYRIGHT © JONES LANG LASALLE IP, INC. 2015 John Sikaitis Managing Director – Office and Local Markets Research +1 202 719 5839 John.Sikaitis@am.jll.com Julia Georgules Associate Director – Office Research +1 415 354 6908 Julia.Georgules@am.jll.com Sean Coghlan Manager – Capital Markets Research +1 215 988 5556 Sean.Coghlan@am.jll.com Phil Ryan Research Analyst – Office and Economy Research +1 202 719 6295 Phil.Ryan@am.jll.com >> Click to learn more, and see market-by-market data

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