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STATE OF U.S. OFFICE MARKET

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Andrea Cross, CBRE Head of Office Research, Americas
ANNUAL MARKET UPDATE: SHIFTING RISKS AND OPPORTUNITIES IN CRE

Most would agree that 2017 shaped up better than many of us expected it to. The year left us with still-strong property fundamentals, continued moderation in the growth of commercial property transactions and concerns that this long-running bull market has run its course. This mid-year look at commercial real estate deal-making will highlight the market’s metro hot spots, the asset classes driving the strongest opportunities and a long-term look at the greatest risks facing the market.

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STATE OF U.S. OFFICE MARKET

  1. 1. STATE OF U.S. OFFICE MARKET ANDREA CROSS AMERICAS HEAD OF OFFICE RESEARCH MAY 2018
  2. 2. Dare we say it… …This time is different?
  3. 3. 2001 2008
  4. 4. 4 CBRE | STATE OF U.S. OFFICE MARKETCBRE U.S. OFFICE-USING EMPLOYMENT INDEXED TO PRE-RECESSION PEAK LEVEL Note: 100 = pre-recession peak office-using employment level; indices based on seasonally adjusted data Source: Federal Reserve Bank of St. Louis, Bureau of Labor Statistics, April 2018. PROFESSIONAL AND BUSINESS SERVICES EMPLOYMENT 15% ABOVE PRE-RECESSION PEAK… 2001 2007 2010 2016 Apr- 2018 120 90 100 110 TOTAL EMPLOYMENT FINANCIAL ACTIVITIES PROFESSIONAL & BUSINESS SERVICES INDEX = 100 2004 2013 CHANGE FROM TROUGH PROF. & BUS. SVCS.: 27.3% TOTAL EMPLOYMENT: 14.4% FINANCIAL ACTIVITIES: 11.4%
  5. 5. 5 CBRE | STATE OF U.S. OFFICE MARKETCBRE 12.4% 6.3% -15% -10% -5% 0% 5% 10% 15% 0 2 4 6 8 10 12 14 16 18 % Note: Latest data as of Q1 2018. Source: CBRE Econometric Advisors, Q1 2018. …BUT LONGER, SLOWER OFFICE MARKET EXPANSION THIS CYCLE 2007 2010 2013 2017 VACANCY RATE VS. RENT GROWTH VACANCY RATE (L) GROSS ASKING ANNUAL RENT GROWTH (R) 2009 2014 201620122008 2011 2015 MORE EFFICIENT USE OF SPACE HAS LED TO A LONGER, MORE MUTED AND LIKELY MORE SUSTAINABLE EXPANSION 2018
  6. 6. 6 CBRE | STATE OF U.S. OFFICE MARKETCBRE LESS NEW SUPPLY… AND HIGHLY CONCENTRATED IN LEADING MARKETS U.S. CONSTRUCTION COMPLETIONS – MIL SQ. FT. CYCLICAL PEAKS Source: CBRE Econometric Advisors, Q1 2018. Manhattan San Francisco Washington, D.C. Seattle Dallas/Ft. Worth San Jose Austin Boston Denver Phoenix Other U.S. Markets Source: CBRE Research, Q1 2018. 123 1989 110 2001 77 2008 47 2017 35 SHARE OF U.S. OFFICE SQ. FT. UNDER CONSTRUCTION – Q1 2018
  7. 7. 7 CBRE | STATE OF U.S. OFFICE MARKETCBRE Then… …Now
  8. 8. THE OFFICE AS A DESTINATION
  9. 9. AMENITIES MATTER
  10. 10. CULTURE MATTERS ZAPPOS HQ, LAS VEGAS, NV
  11. 11. 11 CBRE | STATE OF U.S. OFFICE MARKETCBRE THINK STEM TECH, HEALTHCARE, LIFE SCIENCES DRIVING LEASING ACTIVITY Note: STEM includes high-tech and healthcare/life sciences leasing activity; data includes the 25 largest transactions by sq. ft. each quarter for the 54 markets tracked by CBRE Research. Source: CBRE Research, Q1 2018. SHARE OF OFFICE LEASING BY INDUSTRY ENERGY INSURANCELEGAL GOVERNMENT CREATIVE INDUSTRIES BUSINESS SERVICES FINANCIAL SERVICES STEM 0% 15% 25% 35% 5% 10% 20% 30% 2014 2015 2016 2017 STEM INDUSTRIES REMAIN THE GREATEST DRIVER OF MAJOR LEASING ACTIVITY Q1 2018
  12. 12. 12 CBRE | STATE OF U.S. OFFICE MARKETCBRE Source: CBRE Research 2017 Scoring Tech Talent. FOLLOW THE TECH TALENT
  13. 13. BABY YOU CAN SHARE MY CAR…
  14. 14. …TO ROBOT YOU CAN DRIVE MY CAR
  15. 15. 15 CBRE | STATE OF U.S. OFFICE MARKETCBRE Source: CBRE Research, Q1 2018. Boston Chicago Dallas/Ft. Worth Denver Indianapolis Manhattan New Jersey Philadelphia Pittsburgh Portland Salt Lake City San Francisco San Jose Atlanta Detroit Orange County Phoenix San Diego Washington, D.C. Minneapolis/St. Paul Nashville Raleigh-Durham St. Louis Austin Charlotte Los Angeles Oakland Seattle STABILIZATION Rents still declining or stable, vacancy increasing, or decreasing slowly and limited or new supply additions EXPANSION Rents rising at faster pace, vacancy declining, and new supply additions underway or on the horizon MATURATION Rents increasing at slower pace, vacancy stable, and increased new supply additions CONTRACTION Rents declining, vacancy increasing, and excess new supply additions Baltimore OFFICE MARKET CYCLE MARKET POSITION AS OF Q1 2018 Houston
  16. 16. 16 CBRE | STATE OF U.S. OFFICE MARKETCBRE SO WHAT’S NEXT FOR OFFICE?
  17. 17. 17 CBRE | STATE OF U.S. OFFICE MARKETCBRE JOB OPENINGS SURPASSED HIRES IN 2015 FOR THE FIRST TIME ON RECORD Note: Data are seasonally adjusted. Job openings and hires data as of March 2018. Unemployment data as of April 2018. Source: Federal Reserve Bank of St. Louis, Bureau of Labor Statistics, March and April 2018. WAR FOR TALENT HEATING UP 2007 2009 2013 2016 2017 JOB OPENINGS (L) HIRES (L) 2008 20142011 20152010 2012 2018 0 1 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5 6 7 UNEMPLOYMENT AT 18-YEAR LOW UNEMPLOYMENT RATE (R) MILLIONS %
  18. 18. 18 CBRE | STATE OF U.S. OFFICE MARKETCBRE -7% -6% -5% -4% -3% -2% -1% 0% 1% 2% 3% 4% -1,000 -800 -600 -400 -200 0 200 400 600 800 Thou. ANNUAL OFFICE-USING EMPLOYMENT CHANGE Source: CBRE Econometric Advisors, Q1 2018. OFFICE-USING JOB GROWTH EXPECTED TO SLOW 2007 2009 2013 2017 2018f OFFICE-USING JOBS ADDED (L) CHANGE (R) 2008 20142011 20162010 2012 2015 OFFICE-USING JOB GROWTH TO SLOW DUE TO LABOR MARKET CONSTRAINTS 2019f
  19. 19. 19 CBRE | STATE OF U.S. OFFICE MARKETCBRE SUN BELT MARKETS EXPECTED TO ADD JOBS AT FASTEST PACE Top 20 Markets for Forecasted Office- Using Employment, Average Annual Growth (%) – Q1 2020 vs. Q1 2018 Note: Ranking includes markets with at least 200,000 office-using jobs as of Q1 2018. Source: CBRE Econometric Advisors, Q1 2018. AUSTIN 2.75 HOUSON 2.72 ORLANDO 2.65 TAMPA 2.33 PORTLAND 2.04 PHOENIX 1.79 SAN ANTONIO 2.13 DALLAS/FT. WORTH 2.35 RALEIGH 1.71 SEATTLE 1.63 MIAMI 1.57 SALT LAKE CITY 1.39 CLEVELAND 1.26 MINNEAPOLIS 1.23 CHARLOTTE 1.32 NASHVILLE 1.47 COLUMBUS 1.18 DENVER 1.05 ORANGE COUNTY 1.04 ATLANTA 1.02
  20. 20. 20 CBRE | STATE OF U.S. OFFICE MARKETCBRE LARGEST MARKETS TO ADD THE MOST JOBS Top 20 Markets for Forecasted Office-Using Employment, Average Annual Change (Thou.) – Q1 2020 vs. Q1 2018 Note: Ranking includes markets with at least 200,000 office-using jobs as of Q1 2018. Source: CBRE Econometric Advisors, Q1 2018. DALLAS/FT. WORTH 20.8 HOUSTON 16.2 CHICAGO 11.2 PHOENIX 9.0 SEATTLE 7.8 WASHINGTON, D.C. 7.6 TAMPA 8.0 NEW YORK 10.7 ATLANTA 7.2 AUSTIN 7.0 ORLANDO 6.9 LOS ANGELES 6.3 PORTLAND 5.2 SAN ANTONIO 4.7 MINNEAPOLIS 6.1 BOSTON 6.8 DENVER 4.6 ORANGE COUNTY 4.2 DETROIT 3.9 CHARLOTTE 3.8
  21. 21. 21 CBRE | STATE OF U.S. OFFICE MARKETCBRE 77 63 0 2 4 6 8 10 12 14 16 18 -60 -40 -20 0 20 40 60 80 100 %Mil. Sq. Ft. CONSTRUCTION COMPLETIONS VS. NET ABSORPTION Source: CBRE Econometric Advisors, Q1 2018. NEW SUPPLY EXPECTED TO DRIVE UP-TICK IN VACANCY RATE COMPLETIONS TO PEAK IN 2018 NET ABSORPTION (L) CONSTRUCTION COMPLETION (L) VACANCY RATE (R) 2007 2010 2014 2017 2018f2009 20152012 20162011 20132008 2019f
  22. 22. 22 CBRE | STATE OF U.S. OFFICE MARKETCBRE MATURING MILLENNIALS LARGEST GROUP OF MILLENNIALS TURNED 25 IN 2016 3.4 3.6 3.8 4.0 4.2 4.4 4.6 4.8 1995 1999 2003 2007 2011 2015 2019 2023 2027 2031 2035 Mil. Population Turning 25 by Year 96.1 mil. Note: Purple bars represent Millennials, defined as those born between 1982 and 2003. Source: Census 2015 population estimates, CBRE Research, Q1 2017.
  23. 23. 23 CBRE | STATE OF U.S. OFFICE MARKETCBRE 0 100 200 300 400 500 600 0 2 4 6 8 10 12 14 16 18 20 Basis Points U.S. DOWNTOWN VS. SUBURBAN VACANCY RATES Source: CBRE Econometric Advisors, CBRE Research, Q1 2018. SUBURBAN OFFICE CLOSING THE GAP DOWNTOWN VACANCY RATE (L) SUBURBAN VACANCY RATE (L) SPREAD 2007 2010 2014 2017 2018f2009 20152012 20162011 20132008 GAP BETWEEN DOWNTOWN AND SUBURBAN VACANCY RATES HAS BEEN SHRINKING 2019f
  24. 24. LIVE/WORK/PLAY MATTERS TEMPE, AZ
  25. 25. 25 CBRE | STATE OF U.S. OFFICE MARKETCBRE U.S. OFFICE MARKET 2018 OUTLOOK LONG-TERM TRENDS TO WATCH • Positive but slower job growth due to tight labor market • Strongest job growth expected in low-cost, fastest-growing Sun Belt cities • Tech industry main demand driver; financial services and energy recovering • Decelerating rent growth, especially in leading Downtown markets • Slight vacancy up-tick due to slower net absorption • High completions expected relative to other years of this cycle, but not compared with previous cycles • Older product in markets with lots of new supply could struggle • Occupier and developer discipline bodes well for sustainability of cycle • Suburbs not dead: – Maturing millennials to boost demand – “Urban-suburban” submarkets to outperform • Continued tenant push towards space agility/flexibility • Increasing preference for modern, adaptable, technology-enabled buildings • Importance of building/location amenities and offering employees multiple workspace options • Renovations of older buildings to meet the needs of today’s workforce • Futureproofing buildings for emerging technologies, e.g. autonomous vehicles
  26. 26. THANK YOU ANDREA CROSS 415.772.0337 andrea.cross@cbre.com @andreabcross

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