I created this PowerPoint presentation . My goal was to update senior management of the Real Estate Investment Group on national trends in supply and demand, rent growth, and transaction volume. I highlighted some research that CBD office properties have recovered in value faster than suburban office properties. Since Real Estate is a derived demand, I then recommended that Allstate explore investment opportunities in three markets (Denver, Charlotte, and Nashville) that are experiencing large job creation.

1. OFFICE REAL ESTATE
MARKET UPDATE AND
OUTLOOK
Daniel Mandel

2. Outline
• Big Picture
• Update on Demand
• Update on Supply
• Rent Growth
• Office Transaction Volume Statistics
• Suburban Office Opportunities
• Addendum: Closer Look at some MSAs
• Denver, CO
• Charlotte, NC
• Nashville, TN

3. Stronger Market
13Q1 14Q1
• Net Absorption 61 MSF • Net Absorption 74 MSF
• Vacancy Rate 12.4% • Vacancy Rate 11.9%
• Rents Increased 1.5% • Rents Increased 3.7%
• Deliveries of 7 MSF • Deliveries of 13 MSF
• Under Construction RBA of 74
MSF
• Under Construction RBA of 85
MSF
• Office Sales of $92 Billion • Office Sales of $112 Billion

4. Drivers of Rent and Value Gains
• 53 of the top 54 US markets had positive net absorption
for the past year
• Vacancy has fallen below 10% in 15 markets
• 50 of 54 markets now have positive rent growth
• Concession packages are also shrinking with free rent
now averaging under 2 months’ duration in most markets,
which means that effective rent growth is even greater
than the 3.7% increase

5. Outline
• Big Picture
• Update on Supply
• Update on Demand
• Rental Growth
• Office Transaction Volume Statistics
• Suburban Office Opportunities
• Addendum: Closer Look at some MSAs
• Denver, CO
• Charlotte, NC
• Nashville, TN

6. Office Starts Almost Back to Historical
Average

7. Major MSAs experiencing fairly strong
2013 Office Starts

8. Price per SF for 2-4 story office building: $230-$132

9. Engineering News-Record’s Cost Indexes
Source: ENR.com

10. Outline
• Big Picture
• Update on Supply
• Update on Demand
• Rent Growth
• Office Transaction Volume Statistics
• Update on Suburban Office
• Update on CBD Office
• Closer Look at some MSAs

11. Most Major MSAs experiencing positive
Occupancy Trends (Y/Y)

12. Overall Leasing Totals above 10-
Year Average for CBD and
Suburban

13. Overall Positive Net Absorption
in CBD and Suburban

14. 25 of 27 major MSAs Projected
Declining Vacancies

15. Top 5 Industries in the Market for
Office Space
As a % of total office space demanded

16. Office Demand Growth Trends
• Desire for high-quality work environments:
• Green buildings
• Since 2009, 40% of all SF built has been LEED certified
• Transit Proximity
• Cultural and retail amenities
• Educated labor pool

17. Concerns for Office Demand
• Demographic
• The retirement of the baby boomers will limit future office demand
growth
• The increase in the working age population is expected to slow
from the 1% range in 2010 to less than 0.4% in 2022.
• Consolidation
• Company efficiency
• Working from home
• Companies reluctant to hire permanently so opting for contractors,
temporary, and part-time employees
• More collaborative work environments utilizing common areas
• IT departments becoming smaller

18. Densification of office work space
• According to WSJ: 20 years ago, 4 workers for every
1,000 SF
• Now, 5 workers for every 1,000 SF
• A new office building under construction in Boston is
being designed for 9 people per 1,000 SF
• According to the WSJ, the 6 largest American banks have
cut occupancy costs by 13.4% since 2009
• Closing branches
• Reducing office space
• Relocating employees to less expensive office space
• Over the past 10 years, financial services job growth has declined
by 1.7% while total office jobs grew by 7.8%.

19. Supply and Demand: Positive Projections for
most MSAs (see below the 45ᴼ line)

20. PPR Projects Vacancy to slowly decline then
inch back
• PPR is projecting that in 2016 the office vacancy rate will
drop to 11% and then slowly inch back up
• In 2017, PPR is projecting the end of a 6+ year string of
falling office vacancy rates.
2010 2011 2012 2013 2014 2015 2016 2017 2018
Vacancy
Rate
13.2% 12.8% 12.4% 11.9% 11.6% 11.2% 11.0% 11.1% 11.4%

21. Outline
• Big Picture
• Update on Supply
• Update on Demand
• Rent Growth
• Office Transaction Volume Statistics
• Suburban Office Opportunities
• Addendum: Closer Look at some MSAs
• Denver, CO
• Charlotte, NC
• Nashville, TN

22. Stronger Y/Y Rent Growth in most major
MSAs

23. Rising national downtown average
asking rent, up 5% Y/Y

24. Projected decrease in Office Rent Growth
& Fairly Constant Vacancy Rate

25. Outline
• Big Picture
• Update on Supply
• Update on Demand
• Rent Growth
• Office Transaction Volume Statistics
• Suburban Office Opportunities
• Addendum: Closer Look at some MSAs
• Denver, CO
• Charlotte, NC
• Nashville, TN

26. Increase in Y/Y Change in Office
Transaction Volume in most major MSAs

27. National Office Sales Volume Continues
Upward Trend

28. 10 years of average cap rates by sector

29. Outline
• Big Picture
• Update on Supply
• Update on Demand
• Rental Growth
• Suburban Office Opportunities
• Addendum: Closer Look at some MSAs
• Denver, CO
• Charlotte, NC
• Nashville, TN

30. Strong Suburban Absorption
• According to PPR: More than 91% of net absorption came
from suburban markets during 2013 (compared to 88% in
2004), much more than suburban markets’ 73% share of
total inventory
• Large number of jobs added from traditionally suburban-based job
sectors over the last 10 years
• The share of all office-using jobs in sectors have
increased by more than 1.5% since 2003.

31. Demand outpacing inventory for premier
suburban, lagging for CBD

32. Wider spread between CBD and
Premier Suburban pricing

33. Outline
• Big Picture
• Update on Supply
• Update on Demand
• Rent Growth
• Suburban Office Opportunities
• Addendum: Closer Look at some MSAs
• Denver, CO
• Charlotte, NC
• Nashville, TN

34. Denver Snapshot

35. Denver’s New Supply and Absorption

36. Denver- Demand Drivers
• Solid demographic drivers: smart, high-income, high
growth population
• Denver is adding jobs at well above the national pace
thanks to technology, health services, energy, and finance
related employment
• Recovered nearly 140% of lost jobs since 2010
• Country’s best public transit systems according to US
News & World Reports

37. Outlook
• Expected NOI growth due to falling vacancies and rent
growth
• In addition to strong expected price growth, driving one of
the best total returns forecasts in the nation
• The pipeline remains relatively light, with less than 2 MSF
expected to deliver in 2014 and as a result building
owners are raising rents

38. Charlotte Snapshot

39. Charlotte’s New Net Supply, Net
Absorption, and total vacancy

40. Strong Employment
• Highly skilled workforce
• 2012-13: CNN Money ranked Charlotte the 8th fastest
growing city in US
• Largest Y/Y drop in unemployment (-2.6%) of any MSA
• Corporate relocations and expansions
• Business friendly government enticing business
• MetLife is creating 1,400 new jobs here
• Expanding light rail system: estimated to add 7,600 new
jobs and $253M in earnings for new workers
• According to PPR, average annual job growth will
outperform most US markets and exceed the national
average by a significant margin

41. Strengths Drawbacks
• A relatively young
population that over
the past 10 years has
expanded at a pace 3x
higher than the PPR54
average growth rate
• Low business and
living costs
• Diverse economy
• High exposure to
banking industry,
which has been
experiencing recent
consolidation
• Concentration of total
metro employment in
financial sector here is
45% higher than at the
national level

42. Nashville Snapshot
1,014,471 SF
10.1%
514,402 SF
4%
$23.50 psf
$19 psf

43. Nashville is hot but no longer flying under
the radar
• Time Magazine
dubbed Nashville as
“the South’s Red-Hot
Town” and wrote
“Nashville and its
economy are on fire,
sparked by a booming
cultural scene, world-
class health care,
rising universities”
• http://time.com/13819/the-souths-red-hot-town/
• Bloomberg wrote,
“commercial real
estate investors are
also saying yes to
Nashville, drawn by
rising rents.”
• http://www.bloomberg.com/news/2014-02-
18/nashville-leading-as-office-deals-beat-u-s-
average-real-estate.html

44. Strong Growth Potential
• Nashville’s unemployment rate 5.1% compared to 6.3%
for nation
• Strong Leasing activity: Existing companies continue to
expand, and global companies are relocating here.
• Strong educated labor pool and government incentives
• Business costs are 20% lower than the national average attracting
healthcare, logistics, manufacturing, and corporate operations
• According to a recent study by KPMG, among MSAs with 1-2MM
residents, Nashville is the second most cost attractive city for
business relocations

45. Job Growth
• One of the 1st markets in the country to fully recover all of
the jobs lost during the downturn
• Nashville has 16% more office workers now than at the height of
the last cycle
• Per the Nashville Chamber of Commerce from July 2011-
June 2012: 154 relocations and expansions
• 14,185 new jobs
• $2.2B in capital investment
• 7M SF of commercial real estate absorption

46. Growing Tourism
• In 2013 the 1.3MM SF Nashville Music City Center
opened as one of the largest convention facilities in the
South East
• Leisure and hospitality became one of the metro’s most
rapidly expanding sectors and will continue to grow
• One of the largest near-term hotel pipelines in the nation
• Taxi fleet has already expanded by 17% this year
• In 2013 convention delegates increased by 18% and total hotel
room nights increased 7%

47. Strong Occupancy
• A 9.7% vacancy rate prompting construction in Nashville
to be the highest it has been in five years.
• A total of 995,500 sq. ft. of new product is under construction and
203,000 sq. ft. has delivered.
• By year-end there could easily be more than 2MM SF underway,
pushing construction as a percent of inventory to 2.5%, one of the
highest rates in the country.
• Speculative office development in short supply

48. Nashville Construction Activity