Real Estate Markets Thrive Despite Economic Headwinds

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1 Real Estate Markets Thrive Despite Economic Headwinds Global Market Perspective Q [Type text]

2 Global Market Perspective Contents Real Estate Markets Thrive despite Economic Headwinds... 3 Global Economy... 6 Real Estate Capital Markets... 8 Investment Volumes... 8 Capital Values and Yields Corporate Occupiers Global Real Estate Health Monitor Office Markets Office Demand Dynamics Office Supply Trends Office Rental Trends Retail Markets Industrial Warehousing Markets Hotel Markets Residential Markets Key Investment Transactions in Q Illustrative Office Occupational Transactions in Q COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 2

3 Real Estate Markets Thrive despite Economic Headwinds Investment and occupational markets move in tandem Momentum continues to build in the world s major commercial real estate markets and, for the first time in the current cycle, growth in leasing activity has matched that of investment. Significantly, office leasing volumes are at their highest level for more than three years, with healthy uplifts recorded across all three global regions. Meanwhile, investor appetite for real estate shows no signs of abating, with a potential Grexit, China stock market volatility and expectations of rising U.S. interest rates doing little to knock real estate investment off its stride. Investors push yields to new lows Investment activity has continued to expand vigorously. Volumes during the first half of the year, at US$177 billion, were 9% up on H and an impressive 19% higher when denominated in local currencies. Larger single-asset and portfolio deals are now a regular feature of the dominant markets. The weight of money is still pushing yields to new lows, with yields compressing at their fastest pace for five years. Prime Office Yields, % % 6.92% Mean Prime Office Yields* 4.94% bps Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q Yield Compression (bps) *20 Major Office Markets Source: JLL, July 2015 The U.S. has been the standout investment market, with year-to-date volumes increasing 29% on Germany and the UK have also registered a strong first half of the year, while China has bounced back robustly during Q2. Investor demand is high in Australia and Japan, but activity in these markets has been constrained by a lack of product. The Super Cities shine Investor demand for prime assets in the Super Cities has reached new heights, with New York and London having their busiest first half of the year since 2006, accounting for a record 15% of global activity. Their scale, liquidity, transparency and safe haven attributes are attracting significant capital from sovereign wealth funds, global institutions and HNWIs. COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 3

4 Direct Commercial Real Estate Investment, Top 20 Cities, H New York London Tokyo Los Angeles Chicago Washington DC Paris Boston Seattle San Francisco San Jose Honolulu Singapore Seoul Atlanta Miami Phoenix San Diego Sydney Munich Americas EMEA Asia Pacific US$ billions Source: JLL, July Highest leasing volumes for more than three years Office leasing market fundamentals made a significant rebound during Q2, with volumes up 8% year-on-year and at their highest level for more than three years. Asia Pacific has seen leasing activity grow by 41% year-on-year; Europe recorded its strongest Q2 since 2008; and U.S. volumes are at a two-year high. Technology continues to drive demand across the globe from Bangalore to Berlin, Los Angeles to London, and San Francisco to Sydney. Vacancy rates are still falling steadily, yet the current global office vacancy rate, at 12.5%, masks a significant supply squeeze in many CBD markets. Corporate occupiers are focusing on markets that have density, amenity, authenticity and a diverse mix of office inventory. The development pipeline is rising, but it is unlikely to provide substantial relief until well into Rental growth of 4% is projected for the full-year 2015 across major office markets. London is currently recording the fastest rental uplift at close to 12% year-on-year. Hong Kong and Tokyo are forecast to be the star rental performers during Several U.S. markets have the potential to see a sharp increase in rents during the second half of the year. Consumer optimism boosts retail sales Reduced fuel and energy prices, decreasing unemployment and lower interest rates are boosting disposable incomes across the globe. Retail sales are improving in Europe, with Northern European cities in particular showing robust expansion in retail rents. The pace of improvement in the U.S. retail market is much more gradual but it continues to strengthen nonetheless. In Asia Pacific, new-to-market foreign retailers and the growth of inbound tourism (particularly Chinese) are supporting many markets around the region. COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 4

5 Realignment of logistics networks heightens demand Continued innovation in order fulfilment and delivery is driving further adaption of logistics networks and heightening demand in multimodal locations, for automated facilities and for facilities supporting efficient urban logistics. Demand is also being boosted by a strengthening manufacturing sector. In the U.S., absorption is still outpacing new supply and vacancy rates remain low. Likewise, vacancy is very low in Europe, but here speculative development is, as yet, extremely limited. Global hotel investment going from strength to strength Global hotel transaction volumes have gone from strength to strength, reaching a new high of US$42 billion in H1 2015, up 55% from the same period last year. Europe continues to be a magnet for foreign investment in hotel assets. Investors from the Middle East and mainland China have been the major exporters of capital. Robust appetite for institutional-grade residential product Demand for institutional-grade residential product continues apace in many markets across the globe. In the U.S., multifamily investment sales momentum exceeds the 2007 peak; volumes are at record levels in Germany; and there is growing investor appetite for institutional-grade rental product in the fledging UK market. Policy restrictions remain in place in various Asian residential markets, but sales activity is slowly increasing and China has relaxed its downpayment rules for buyers of second homes. Dubai has seen a notable decline in residential sales, but falls in prices have been modest. Australia is also showing signs of capital growth moderation. COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 5

6 Global Economy Global upswing still faces headwinds and Grexit risks remain After a disappointing start to the year, it has been an unsettled quarter for the global economy. While there have been more encouraging signs on economic activity in the advanced economies, most notably in the U.S. and the Eurozone, lingering risks and uncertainties refuse to dissipate and continue to cloud the outlook. While few expect a reversal in the slow revival, forecasts remain cautious for this year and there appears little prospect of an acceleration in global GDP before A last-minute deal for Greece was passed in July that included controversial austerity measures. The schedule for securing funding is tight and, although progress has been made, the Grexit danger has still not disappeared. Creditors will be demanding further market reforms to improve economic performance which will likely be difficult for the Greek administration to accept, particularly as debt relief seems to be off-the-table in the near term. While Greece dominated headlines for much of July, a sharp sell-off in Chinese equities has also reminded investors about the risks to financial stability in the world s second largest economy. The reaction of the Chinese authorities was swift, but also interventionist, raising further concerns about the depth of market reforms in China. These global uncertainties have been reflected in a patchy set of forecast revisions over the last three months. The U.S. and UK have received downgrades, though this largely reflects historic weakness and more recent news has been more upbeat. Similarly, Germany has also suffered from a poorer-than-expected Q1 and a subsequent downgrade to the year s outlook, though this contradicts the improving tone of most other Eurozone data, including figures from France. Of the few of our focus markets to be upgraded, Japan has received the most notable boost. GDP Projections for 2015 in Major Economies Recent Movements Australia China France Germany India Japan UK U.S. April July (Latest) Change (bps) Source: Oxford Economics, July 2015 Bumpy ride for Eurozone bonds, while U.S. tightening moves ever closer After the ECB s QE announcement in Q1, European monetary developments have been dominated by its implementation from March. The initial impact of the liquidity injection in the Eurozone was falling bond rates, but this trend was reversing by the summer as a result of receding deflation fears. Since then there has been considerable volatility, including a slight increase of peripheral Eurozone spreads (Spain, Portugal, Italy and Ireland, relative to Germany) as contagion risk has heightened in the Greek crisis. Markets have calmed post-deal, while bond rates remain at historically low levels with the 10-year bund rate still sub-1%. Providing that the Eurozone situation stabilises, attention will shift back to the U.S. in Q3 with the impending Fed rate hike. The U.S. is still expected to lead the tightening in global rates during 2015, but there continues to be intense speculation about the timing. Events in Greece and China have provided a sobering reminder of global fragility and were noted in recent FOMC notes, but are also set against improving U.S. data during Q2. The consensus remains that U.S. rates will rise during Q3, probably in September. However, policymakers will continue to err on the side of caution if there is any sign of uncertainty, and there is still a significant chance that the decision could be delayed. COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 6

7 Global upturn fails to catch light The post-gfc recovery has been frustratingly protracted. Last year the global economy grew by just over 3%, similar to the previous two years and slower than the historic average. A stronger contribution by the advanced economies has been the main positive of recent figures, albeit offset by a dip in the emerging markets. There are further improvements expected in the developed world, notably the Eurozone, but other factors including a strong U.S. dollar and weak oil prices will weigh on growth elsewhere. Asia Pacific has comfortably maintained its strong lead at the top of the regional growth rankings. Despite the recent market upheaval, the market s view of China has not changed since the last quarter, with it continuing the pattern of gradual slowdown as the economy matures and the authorities engineer a soft landing. By contrast, India should enjoy stronger growth this year. As ever, the key risk will be progress on structural reform in sustaining this performance over the longer term. Japan remains a laggard, but loose policy and improving export demand are stimulating a slow revival that is set to last into The U.S. has experienced another difficult start to the year with weather-related disruptions bringing a contraction in Q1, and forecasts for 2015 have been downgraded. Despite this, with housing and consumer markets reviving, performance through the year is expected to accelerate rapidly enough to justify a Fed tightening before year-end. U.S. growth rates are set to rise further in 2016, albeit that they are still below past historic averages. A steady improvement in underlying activity in the Eurozone has been partly obscured by the recent Greek dramas. The stimulus of a weaker euro, quantitative easing and falling oil prices are expected to sustain the momentum into 2016, providing that current uncertainties are resolved. Germany has received a technical downgrade after a poor Q1, but healthy underlying conditions mean it remains the strongest of the core Eurozone economies, while France s outlook has been upgraded in the light of more encouraging recent data. Outside of the Eurozone, the UK has been most buoyant and, although there was a pre-election dip at the start of the year, growth prospects remain robust over the next two years. This is in spite of the prospect of interest rate hikes in early 2016 and some tough fiscal measures announced in the UK Chancellor s interim Budget. Global Outlook, GDP Change, % pa Global Asia Pacific Australia China India Japan Americas U.S MENA Europe France Germany UK Source: Oxford Economics, July 2015 COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 7

8 Real Estate Capital Markets Investment Volumes Deals are getting bigger and more sophisticated as volumes increase further Transactional volumes in Q were US$177 billion, which is 9% higher than the second quarter of On a yearto-date basis, volumes at US$333 billion are also 9% higher than last year with larger deals and portfolios now a regular feature of the investment market. However, the strength of the U.S. dollar over the first half of the year is masking the true level of transactional activity around the world. This is particularly true for the Eurozone, UK, Japan, Australia and South Korea where the dollar is between 10% and 20% stronger than a year ago. If fixed exchange rates were used, then volumes would be up 19% globally over the first half of 2015 compared to Threat of rising Fed rate yet to knock real estate off its stride The United States continues to be the major driver of activity in the Americas and globally, with growth over 30% up on Q2 last year and 29% higher than 2014 s first six months. This has helped increase regional volumes almost 20%, both on a year-on-year and year-to-date basis, to US$153 billion. Elsewhere in the region, volumes in Canada are 6% down year-to-date against 2014, with falls in Brazil and Mexico even more pronounced; both countries are circa 80% lower than the first six months of Potential Grexit and Brexit does little to disrupt investment in real estate assets European volumes in local currency terms continue to move higher, up 28% on Q and 26% on H Growth over the first half of the year has been spread region-wide with uplifts in the UK and Germany being supported by increases in the Nordics and Southern Europe, despite the Greek turmoil. Even Russia is showing some signs of renewed optimism with stronger levels of activity. In U.S. dollar terms, volumes are slightly higher both year-on-year and over the first six months at US$124 billion, with the difference to local currency activity almost entirely due to foreign exchange factors. New York and London account for 15% of transactions globally New York and London have witnessed one of their busiest first halves of the year, with US$26 billion and US$24 billion transacted respectively. They stand head-and-shoulders above all other cities and, between them, accounted for 15% of global transactions in H Their scale and liquidity continues to attract capital, with global institutions, sovereign wealth funds and HNWIs representing a notable share of buyers. Stable first half with market-setting assets on the horizon to trade Asia Pacific s biggest markets of Japan and Australia are feeling the effects of the stronger U.S. dollar; both country s currencies are 15% weaker than the same period last year and this is also feeding through into weaker transactional volumes for Australia. This has had the effect of depressing regional volumes by 2% compared to Q but half-year volumes are 2% higher than H at US$56 billion. Regionally, the second half of the year looks as if it will be much stronger than the first with a number of large transactions set to close in Singapore, Australia and China. Hong Kong has been one of the bright spots over the first half with volumes up 66% year-on-year. Structural shift in investment habits continues to support real estate investment The second quarter of the year has been dominated by discussions around Greece s role in the Eurozone and the extreme volatility we have seen in equities in China. What has garnered less attention, but is probably more important, is the continuing decline in global interest rates, with Sweden cutting its interest rate to minus 0.35% despite the economy forecast to grow by 3% in 2015, and China also cutting rates for the fourth time since November This decline in global interest rates makes real estate investment more attractive and should support transactional activity for the remainder of The longer-term structural shift of institutional capital allocating more to real estate also COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 8

9 continues, with a recent PwC report estimating that alternative investments, including real estate, could reach US$15 trillion by 2020, up from US$8 trillion today. JLL maintains its full-year 2015 forecast at US$ billion which represents a 5% rise on 2014 transactional activity. Direct Commercial Real Estate Investment Regional Volumes, US$ billions Q1 15 Q2 15 % change Q1 15-Q2 15 Q2 14 % change Q2 14-Q2 15 YTD 2014 YTD 2015 % change YTD YTD 2015 Americas % 67 20% % EMEA % 63 3% % Asia Pacific % 31-2% % TOTAL % 162 9% % Source: JLL, July 2015 Direct Commercial Real Estate Investment Largest Markets, US$ billions Q1 15 Q2 15 % change Q1 15-Q2 15 Q2 14 % change Q2 14-Q2 15 YTD 2014 YTD 2015 % change YTD YTD 2015 U.S % % % UK % % % Germany % % % China % % % Japan % % % Australia % % % Norway % % % Hong Kong % % % Canada % % % France % % % South Korea % % % Sweden % % % Netherlands % % % Spain % 2.0 6% % Singapore % % % Czech Republic % % % Italy % % % Finland % % % Malaysia % % % Source: JLL, July 2015 REGIONS IN FOCUS U.S. momentum builds further The Americas region is well on pace to achieve a new high-water mark in 2015 exceeding the record volumes seen over the period (on an ex-entity deal-level basis) and 20% higher than Growth is being entirely driven by the U.S. market where there is a very active transaction pipeline across sectors and geographies. A combination of attributes is continuing to make the U.S. commercial property market a highly sought-after destination for capital placement for both domestic and global investors, including relative economic outperformance among advanced economies, a broad safe haven appeal, and attractive yield on offer against the backdrop of very low interest rates worldwide. Of particular note is that large portfolio transactions are being increasingly pursued and, by extension, this includes an increase in M&A activity among REITs and other property investment firms (although those transactions are, by and large, not included in volumes cited in this report). COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 9

10 Q107 Q207 Q307 Q407 Q108 Q208 Q308 Q408 Q109 Q209 Q309 Q409 Q110 Q210 Q310 Q410 Q111 Q211 Q311 Q411 Q112 Q212 Q312 Q412 Q113 Q213 Q313 Q413 Q114 Q214 Q314 Q414 Q115 Q215 US$ billions Global Market Perspective, Third Quarter 2015 Weaker investment activity across Latin America Transaction activity remained far weaker in Latin America during the second quarter. Although both Brazil and Mexico are subject to the lumpiness of large individual and portfolio sales in their developing markets, there has nonetheless been a marked slowing in deal velocity thus far in Brazil, in particular, is also being impacted by its recession and property market downturn. Nevertheless, the second half of 2015 is likely to bring improved transaction activity to both markets on a relative basis. Direct Commercial Real Estate Investment Source: JLL, July 2015 Americas EMEA Asia Pacific Rolling Four-Quarter Average Uncertainty drives investors to safe haven asset classes in Europe The euro has come under sustained pressure since the middle of last year due to a combination of expectations of a return to the rate hike cycle in the U.S., an aggressive quantitative easing programme in Europe and, more recently, concerns over the viability of the European project as a result of Greece s debt crisis. Though the impact on the euro is meaningful, if anything, the uncertainty in Europe has driven investors further towards safe haven asset classes such as real estate. UK and Germany outperform as investors focus on core markets The UK, Europe s largest market, continues to perform strongly, rising by 26% year-on-year in local currency terms to 15.9 billion, accounting for 37% of the region s volumes. Activity in Germany has also been strong, with year-on-year volumes more than doubling in euro terms to 13.4 billion. Smaller European markets mixed in both local currency and U.S. dollar terms Southern Europe has remained resilient in the second quarter, despite concerns over the future of Greece, with investment up 16% year-on-year at US$4.5 billion driven by Portugal and Italy. Investment in the Nordics overall was strong, with impressive increases in Finland and Norway, but volumes have fallen in Sweden. Volumes have also been weaker in the Benelux. Activity in the CEE region was up over Q2 (66% year-on-year) to US$2.9 billion. COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 10

11 Market to remain robust in Europe While it is hard to draw conclusions from one quarter of data, investment activity across Europe remains robust. The region does not yet show any signs of slowing down due to concerns about the future of Greece and its possible exclusion from the euro. Indeed, Europe is still benefiting from low borrowing costs in its core markets, plentiful liquidity and a continued move to safe haven assets. JLL s forecast for full-year 2015 is for a 5% increase on 2014 in euro terms, which would signify a 10%-15% fall in U.S. dollar terms (at quarter-end exchange rates). Asia Pacific still on track for record year In general, the Asia Pacific investment market remains active with strong investor appetite demonstrated by a wave of large transactions and the appearance of more trophy assets on the market over the past six months. Furthermore, the region has witnessed an increase in portfolio transactions in H Investment volumes are expected to pick up significantly during the second half of the year; JLL maintains its forecast for transaction volumes of US$140 billion for the full-year 2015, which translates to a year-on-year gain of 5%-10%. Meanwhile, Asian debt markets experienced a period of volatility over the second quarter. New debt issues continue to be present in most Asian markets but moderated in Q as investors focused more on longer-term maturity fixed rate bonds to avoid near-term refinancing risk. Australia s investment volumes constrained by lack of product The limited availability of good-quality stock after several years of robust investment activity is constraining transactions in Australia. Moreover, the sale of the Investa portfolio is diverting attention, with investors and vendors awaiting new pricing from the sale before bringing assets to the market. Overseas investors, especially from Asia, continue to be attracted to Australian assets, in part due to the weak Australian dollar and attractive yields. Liquidity is high in Japan The market in Japan was stable in local currency terms in H There is still ample liquidity as more equity funds were raised in Q2, and foreign investor demand remains at an unprecedented level on the back of a weak currency. Regional leader China s volumes up 54% year-on-year on more stimulus measures China ranked first in investment volumes in the region during Q2 with volumes up 54% year-on-year. Sentiment in core offices is improving in the country s Tier 1 or top-end Tier 2 cities driven by sufficient liquidity from core and core-plus funds looking for assets with strong yields. Lower interest rates and bank reserve requirement ratios are likely to reduce the costs of borrowing going forward and may provide more upside for the real estate investment market. However, the recent volatility seen in China s equity market may potentially slow the investment decision process and lead to more outbound investment. ADIA s hotel portfolio deal boosts Hong Kong volumes In Hong Kong, transaction volumes for Q more than doubled year-on-year largely due to the three-hotel property portfolio platform deal between Abu Dhabi Investment Authority (ADIA) and New World Development for US$2.4 billion. The high-profile acquisitions mark ADIA s largest investment in Asia to date. Investors struggle to access product in India India s transaction volumes in the second quarter were flat year-on-year, with access to stock remaining a barrier to entry. Investors continue to prefer stabilised assets in the retail and logistics sectors and there is still abundance of liquidity as new private equity funds look to take in India s growth story. COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 11

12 Asia Pacific Americas Europe US$ billions Global Market Perspective, Third Quarter 2015 Direct Commercial Real Estate Investment, (F) 5% % %* % Americas EMEA Asia Pacific Global xx% Source: JLL, July 2015 * +5% in Euro Terms Projected Change Prime Office Yield Shift, Brussels Frankfurt London Madrid Moscow Paris Stockholm Boston Chicago Los Angeles New York San Francisco Toronto Washington DC Sao Paulo Mexico City Beijing Hong Kong Mumbai Seoul Shanghai Singapore Sydney Tokyo Source: JLL, July 2015 Q Q Q Q Basis point change COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 12

13 Capital Values and Yields Yield compression defies expectations Though yields in many core markets are perceived to have reached their low point in the cycle, compression of yields for prime office assets (across 20 major markets) continued into Q2; in fact, at its strongest pace for nearly five years. The weight of investor demand pushed yields down by 50 bps in Madrid and by a further 25 bps in London, while a bps compression was seen across the board in North America s gateway cities. In Asia Pacific, yields fell in Sydney (12.5 bps) and Tokyo (10 bps) on the back of robust investor demand. Steady capital value growth of 6%-8% Capital value appreciation on prime office assets stood at an annualised rate of 7.6% in the second quarter. Strongest year-on-year growth was recorded in Madrid, the main U.S. cities (e.g. Boston, San Francisco, New York), London and Tokyo. Capital value appreciation is forecast to remain at around current rates for the rest of the year (i.e. 6%-8% is projected for prime assets across 25 major office markets). Tokyo and Madrid are expected to be the star performers, while at the other end of the spectrum Moscow will struggle with double-digit falls in capital values. Prime Offices Annualised Capital Value Change, % pa % % % 8.8% 7.6% 5 2.8% 0 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Unweighted average of 25 major office markets across the globe Source: JLL, July 2015 COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 13

14 Corporate Occupiers Occupier activity on the rise globally The second quarter of 2015 has seen a surge of occupier activity across global markets. Despite continued volatility in operating and macroeconomic conditions, business sentiment remains robust with corporates increasingly moving into growth mode. According to a recent CEO Survey from PwC, 50% of CEOs questioned reported plans to increase their headcount in An uplift in global leasing volumes of 24% on the quarter and 8% year-on-year provides clear evidence of this growth trajectory. M&A driving portfolio change M&A is particularly high on the corporate agenda and, after 2014 witnessed the strongest increase in M&A since the GFC, 2015 year-to-date M&A volumes remain at multi-year highs. A growing number of companies are absorbing new real estate, consolidating, and reassessing enterprise footprints and resultant real estate portfolios. Divestments are also increasingly common as corporates recast and optimise their businesses, with some rationalisation still apparent in financial services. Notwithstanding these areas of ongoing restructuring, expansionary demand is now on the rise across the majority of major global markets and sectors. In search of authenticity A combination of changing occupier preferences and real estate market conditions are reshaping space requirements in some markets. In the U.S., demand for Class B space is skyrocketing among tenants. Technology, media and creative firms are showing more interest in the character of the space, neighbourhood and the amenities that they can get within their space than an address on Fifth Avenue or the most prestigious trophy building. A search for authenticity appears to be spilling into real estate from other industries. In Asia Pacific, in addition to robust domestic activity and solid demand from MNCs, the continuing strength of smaller occupiers is apparent; especially finance players in the key financial markets of Hong Kong, Shanghai, Singapore and Tokyo. Flexibility is key for these high-growth occupiers who favour two-three year lease patterns, may take 500 square metres, and grow within 18 months to double or triple that space. In Europe, many markets are now facing a declining number of high-quality space options. In some markets, this fall in prime supply has been sharp, driving increasing occupier mobility and forcing occupiers to plan further ahead in their real estate strategies. People, productivity and cost will continue to shape strategy JLL s recently launched global CRE survey points to a range of pressures impacting corporate real estate decisionmaking; however, some themes stand out. People and productivity certainly continue to drive real estate decisions but reducing operating expenses remains a core success factor for CRE teams. In a volatile operating environment, flexibility is increasingly sought by occupiers with many reviewing their traditional portfolio balance of leased and owned space. Finally, the data is clear that the volume of strategic and operational demands being placed on occupiers is driving many towards increasing partnership and outsourcing as a way to deliver greater performance from their real estate. COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 14

15 Global Office Market Conditions Matrix*, Market Market MARKET Market Chicago Brussels Beijing Los Angeles Frankfurt Hong Kong New York London (West End) Mumbai San Francisco Toronto Madrid Moscow Shanghai (Pudong) Singapore Washington DC Paris Sydney Mexico City Stockholm Tokyo Sao Paulo Dubai Tenant Favourable Neutral Market Landlord Favourable * Relates to conditions in the overall office market of a city. Conditions for prime CBD space may differ from the above. Source: JLL, July 2015 COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 15

16 Global Real Estate Health Monitor Economy Real Estate Investment Markets Real Estate Occupier Markets Metro GDP OECD Leading Indicator City Investment Volumes Capital Value Change Prime Yield Yield Gap Rental Change Net Absorption Vacancy Rate Supply Pipeline Dubai 4.8% na -64% 2.3% 7.5% na 2.3% na 21.0% 14.0% Frankfurt 2.0% % 9.6% 4.4% % 1.1% 10.0% 1.5% Hong Kong 2.9% na 69% 2.0% 3.1% % 2.8% 3.5% 4.5% London 3.9% % 19.9% 3.5% % 1.8% 3.9% 5.1% Madrid 3.2% % 31.1% 4.3% % 1.4% 11.1% 0.8% Mexico City 3.7% % -1.2% 7.5% % 10.0% 11.0% 16.2% Moscow -4.6% % -34.5% 10.5% % 4.0% 17.0% 8.0% Mumbai 5.2% % -3.3% 10.0% % 8.0% 19.8% 13.0% New York 2.8% % 21.2% 3.3% % 1.4% 9.7% 0.9% Paris 1.6% % 9.7% 3.5% % -0.7% 7.6% 2.6% Sao Paulo 0.2% % -18.3% 9.8% % 3.4% 23.4% 18.6% Seoul 3.4% % 6.9% 4.7% % -0.2% 11.5% 3.2% Shanghai 6.5% % 5.9% 5.9% % 16.3% 10.7% 37.6% Singapore 3.6% na -25% 0.0% 4.0% % 4.8% 6.0% 12.6% Sydney 2.4% % 9.5% 6.0% % 2.4% 8.8% 5.2% Tokyo 1.4% % 20.6% 3.1% % 3.3% 3.3% 10.5% Toronto 2.4% % 6.8% 4.9% % 1.0% 9.9% 2.2% Real estate data as at end Q Definitions and Sources Metropolitan Region GDP: Change in Real GDP. Projection, Source: Oxford Economics OECD Leading Indicator: Composite Leading Indicator. Change in Index. Latest Month. Source: OECD City Investment Volumes: Direct Commercial Real Estate Volumes. Metro Area Data. Rolling Annual Change. Source: JLL Capital Value Change: Notional Prime Office Capital Values. Year-on-Year Change. Latest Quarter. Source: JLL Prime Yield: Indicative Yield on Prime/Grade-A Offices. Latest Quarter. Source: JLL Yield Gap: Basis Points that Prime Office Yields are above or below 10-year Government Bond Yields. Latest Quarter. Source: JLL, Datastream Rental Change: Prime Office Rents. Year-on-Year Change. Latest Quarter. Source: JLL Net Absorption: Annual Net Absorption as % of Occupied Office Stock. Rolling Annual. Source: JLL Vacancy Rate: Metro Area Office Vacancy Rate. Latest Quarter. Source: JLL Supply Pipeline: Metro Area Office Completions ( ) as % of Existing Stock. Source: JLL COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 16

17 Office Markets Office Demand Dynamics Highest leasing volumes for more than three years After a slow first quarter, office leasing market fundamentals made a significant rebound during the second quarter. Global leasing volumes improved by 24% on Q1 and were up 8% year-on-year. At 10.4 million square metres in Q2, global corporate occupier activity (for the markets tracked by JLL) was at its highest level since Q The strongest gains were recorded in Asia Pacific, up 41% year-on-year, while the U.S. and Europe also registered healthy growth. Modest uplift in volumes for full-year 2015 Despite the recent improvement, JLL still expects gross leasing volumes to be only moderately higher for the full-year 2015 (+0%-5%) compared to 2014 levels. The biggest uplift is forecast for Asia Pacific (+15%-20%), while volumes in the U.S. and Europe are anticipated to remain in line with 2014 levels. The focus will be on CBD space, notably markets that have amenity, density and a diverse mix of office inventory to create dynamic environments, albeit that supply shortages in these locations will constrain leasing activity. A shift towards expansion demand Expansion demand is now firmly on the agenda of many corporate occupiers, with projections of a 15%-20% increase in global net absorption for the full-year Occupancy growth in the U.S. is expected to be sustained at its current robust level, and also has the potential to accelerate in Europe and Asia Pacific. Technology still dominates demand While there is now a much broader diversity of demand in terms of industry sectors, technology continues to have a significant impact on leasing markets across the globe as it expands into new business areas, such as financial, healthcare and personal services. As the sector becomes more ubiquitous within business in general, a greater variety of office markets, beyond the more established global technology hubs, are benefiting from technology s expansion. A more robust U.S. economy boosts office demand Leasing activity during the second quarter in the U.S. reached its highest level in two years, following a disappointing first quarter: Leasing activity was led by Boston, Chicago, Los Angeles and Washington DC, where demand has intensified as scientific and technical industries have expanded out beyond the supply-constrained Northern California (San Francisco, Silicon Valley), Pacific Northwest (Seattle, Portland) and New York. Absorption gains were more evenly spread across markets, with Washington DC and New York making a significant comeback. Dallas topped the U.S. rankings in terms of net absorption, reflecting its rapid ascent as a powerhouse economy. Silicon Valley, Atlanta, Boston and Raleigh-Durham also performed well. Many suburban markets continued to struggle with weak demand as they compete for tenants who are looking for amenity-rich locations and also using such locations as a recruitment and retention tool. Growth slowed substantially in energy-dependent Houston as occupiers consolidate their space requirements. Pre-leasing was strong with companies like Apple, Box, Google and Salesforce leasing full buildings in the San Francisco Bay Area and Austin. COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 17

18 In Canada, positive absorption was registered in Vancouver and Toronto, while Calgary is feeling the negative effects of depressed oil prices. Looking southwards, demand was among the most resilient in Mexico City, where the market is successfully absorbing significant new supply. Europe records strongest Q2 take-up volumes since 2008 European office leasing activity totalled just over 2.9 million square metres in Q2, up 25% quarter-on-quarter and the strongest second quarter since While most markets recorded positive growth, Europe continues to be a multispeed environment with cities also moving in different directions: Corporate occupier activity in London shows no signs of weakening with take-up increasing by 41% year-onyear in Q2, representing the strongest quarter in almost 10 years. In Spain, Barcelona experienced a strong quarter, with leasing volumes up by 87% year-on-year. In Madrid, transaction volumes are being increasingly held back by the lack of good-quality supply in central locations. German offices have gone from strength to strength. The five largest office markets recorded a year-on-year increase in take-up of 12% in the second quarter. Berlin and Hamburg put in particularly robust performances as the willingness of occupiers to expand has increased substantially in recent quarters, as signified by a jump in occupied stock and increases in take-up of 22% and 15% in the respective cities in H versus H Central and Eastern Europe (CEE) also performed strongly in Q2. Prague saw a year-on-year increase in take-up of around 55%, while Budapest and Warsaw recorded their best quarters in over 15 years. By contrast, two of the largest office markets in Europe - Paris and Moscow - underperformed in H compared with their long-term averages. Excluding Paris and Moscow, overall take-up for Europe was up 15% on the Q numbers. Strong improvement in Asia Pacific leasing activity Office leasing activity in Asia Pacific surged in Q2, with gross and net leasing up by 41% and 76% year-on-year respectively. India and Greater China were the outperformers, with India contributing 40% of total regional gross absorption and its volumes nearly double their Q level: The strongest activity was recorded in Delhi and Bangalore on the back of large deals signed by finance, professional services and IT firms. Shanghai saw a rising number of enquiries from domestic financial services companies as well as MNCs. A few large occupiers and Chinese mainland companies drove take-up in Hong Kong. Singapore saw weak activity, with many tenants holding off in expectation of lower rents due to the large volume of impending supply. Tokyo continued to see business consolidation to new high-quality buildings and persisting demand from the IT sector. Leasing activity maintained its recovery in Australia, particularly in Sydney where the CBD recorded its most robust quarter of net absorption since Q JLL is optimistic that office leasing volumes in Asia Pacific will continue to improve in 2015, and has upgraded its forecast of growth of 15%-20% for the full-year Domestic financial firms and technology should remain active demand drivers. COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 18

19 millions sq m Projection millions sq m Global Market Perspective, Third Quarter 2015 Global Office Demand Net Absorption Trends, markets in Europe; 25 markets in Asia Pacific; 44 markets in the U.S. Asia relates to Grade A only. Source: JLL, July 2015 Global Office Completions, U.S. Europe Asia Pacific 15 Average (F) 2016 (F) 2017 (F) 24 markets in Europe; 25 markets in Asia Pacific; 44 markets in the U.S. Asia relates to Grade A only. Source: JLL, July 2015 COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 19

20 Office Supply Trends Office Construction New deliveries nudge above long-term average New office deliveries are expected to be 30% higher globally in 2015 than last year. Nonetheless, at 14.3 million square metres, deliveries are still only marginally above the average of the past 10 years. Construction continues to rise and new deliveries, at 16 million square metres in each of 2016 and 2017, will represent the highest levels since Construction in the U.S. continues to increase The U.S. now has the largest pipeline of new supply in a decade (at 8 million square metres) which will start to test the market from The highest construction levels are in Houston, New York, Dallas and Seattle. Stronger office supply additions in Asia Pacific Stock additions in Asia Pacific in Q2 were more than double the level of Q2 2014, but almost 80% of the total was in China (mainly Shanghai) and India. Many European markets face supply squeeze Relatively low levels of speculative development across Europe are resulting in tightening market conditions. In some cities, such as London, Dublin, Hamburg and Berlin, office markets are now particularly squeezed. Developers are responding in the London-City submarket for example, four new office schemes started construction in Q2, increasing the speculative pipeline by 54%. Development has also been fuelled by improving funding conditions and growing investor appetite, given the intense competition for directly-traded prime office product in many markets. Office Supply Pipeline Major Markets, Shanghai Sao Paulo Mexico City Dubai Mumbai Singapore Beijing Tokyo Moscow Sydney London Hong Kong Seoul Brussels Boston Paris San Francisco Toronto Chicago Frankfurt Stockholm Washington DC New York Madrid Los Angeles Completions as % of existing stock Covers all office sub-markets in each city. Tokyo CBD - 5 kus Source: JLL, July COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 20

21 Office Vacancy Vacancy rates fall steadily The global office vacancy rate (across 98 markets) fell to 12.5% in Q2 and is projected to decline further, driven primarily by a drop in U.S. vacancy rates. A shortage of space in many CBD markets is forcing higher occupier mobility, with some companies now targeting a much wider range of submarkets to satisfy space requirements. U.S. vacancy below 15% by year-end U.S vacancy decreased to 15.3% in Q2, and rates are projected to fall below 15% by year-end. Stronger leasing activity has led to vacancy declines across most U.S. cities. Single-digit direct vacancy is a feature of Salt Lake City, Portland, San Francisco and New York, where low vacancy rates are forcing tenants to explore new markets. Development surge in Canada pushes up vacancy Despite positive absorption in the second quarter, Canada s total office vacancy rate increased 30 bps during the quarter to 10.3%. This was a result of new construction added to the inventory. Large office development pipeline in Latin America Upcoming new supply is still posing challenges for landlords across several office markets in Latin America, but is introducing new space options for tenants at the same time. In Brazil, the market continues to become yet more tenantfavourable. The total vacancy rate in Sao Paulo increased again in the second quarter, to 23.4%, up nearly 300 bps from the level a year ago. Europe s vacancy falls again The overall office vacancy rate in Europe has fallen for the second consecutive quarter (to 9.4% from 9.5% in Q1). In many markets, the strengthening of occupier demand and a lack of speculative completions has resulted in a sharp drop in supply. In Dublin, this effect has been most extreme with the vacancy rate plummeting from 16.6% to 8.6% over the last 12 months. Meanwhile, in London, the vacancy rate has decreased to 3.9%. Strong occupier demand in Germany has pushed vacancy rates to their lowest levels in over five years across the five largest markets. New supply in Dubai Much of the currently vacant office space in Dubai is in secondary-quality buildings, many of which are in strata-title ownership and of little interest to major corporate occupiers. The lack of high-quality space will result in the delivery of a number of new office projects during Asia Pacific regional vacancy rate stable Healthy demand led to lower vacancy in most Asian cities in the second quarter and the regional vacancy rate held steady at 10.8%. However, vacancy rose in Beijing, Tokyo, Jakarta, Manila and Kuala Lumpur on the back of new completions. The vacancy rate in Sydney s CBD continued to fall, tightening to 7.5% from last quarter s 9.9%. COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 21

22 Q Q Q Q Q Q Q Q Q Q Q Q Vacancy Rate (%) San Francisco New York Toronto Mexico City Boston Los Angeles Chicago Washington DC Sao Paulo London Paris Stockholm Brussels Frankfurt Madrid Moscow Tokyo Hong Kong Beijing Singapore Sydney Shanghai Seoul Mumbai Global Market Perspective, Third Quarter 2015 Office Vacancy Rates in Major Markets, Q Global 12.5% % 25 Americas 14.9% Europe 9.4% Asia Pacific 10.8% Quarterly movement Increased Decreased Stable Regional vacancy rates based on 49 markets in the Americas, 24 markets in Europe and 24 markets in Asia Pacific. Covers all office submarkets in each city. All grades except Asia and Latin America (Grade A only). Tokyo relates to CBD 5 kus. Source: JLL, July 2015 Global and Regional Office Vacancy Rates, % % 14.9% Americas % 11.9% 12.5% GLOBAL % 10.8% Asia Pacific 9.4% Europe 8 44 markets in the Americas, 24 markets in Europe, 25 markets in Asia Pacific. Grade A space vacancy only for Asian markets Source: JLL, July 2015 COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 22

23 Office Rental Trends Rental growth moves at a steady pace Tightening fundamentals are fuelling landlord confidence. Rental growth continues to move at a steady pace, with the annual rate of growth on prime office assets across 24 markets standing at circa 3%. 1 Nonetheless, momentum is building in several markets. Landlord confidence builds in the U.S. In the U.S., asking rents have increased by 2.5% since the start of the year, with rental growth strengthening in the vast majority of markets. San Francisco (+10.3% year-on-year) and Boston (+8.4%) continue to lead, but landlords in Los Angeles (+5.9%) and Chicago (+4.1%) are also benefiting from expanded demand. As supply-demand becomes more unbalanced in favour of landlords, we should see further rental uplifts in U.S. markets over the next 12 months. However, rental growth should decelerate by the end of 2016 as supply comes on tap. Increased optimism selectively boosts rents across Asia Pacific Net effective rents have increased in about three-quarters of Asia Pacific markets. Hong Kong recorded the most robust growth (+7.9% year-on-year) in Q2, the best result in four years, supported by improved occupancy levels at the mid-range of the market. Solid annual growth was also seen in Tokyo (+6.8%) and Shanghai (+5.3%). Of the major Asia Pacific markets, the biggest quarterly fall was in Singapore (-5.2%), where landlords have started to drop rents as tenants delay decisions due to large upcoming supply in Sydney s rental levels have moved higher over the year (+2.4%). Single-digit rental growth across the region is generally expected for the full-year 2015, although Singapore and a few Australian cities are projected to see further declines. Rental growth has picked up in Hong Kong and Tokyo which, among the major markets, are likely to be the top global performers in Positive momentum across Europe The European Office Index increased by 0.5% quarter-on-quarter, indicating positive momentum across most of Europe. London was the top performer (+11.9% year-on-year) where prime rents have moved ahead of the previous peak. The robust recovery in Spain translated into further prime rental growth in Q2, with Barcelona (+8.6%) and Madrid (+6.1%) outperforming most of the rest of Europe. In Germany, the rise in office-related employment continued to feed rental growth, with Berlin (+4.5%) recording the strongest uplift. In Paris, prime CBD rents have dropped by 4.1% over the past year. While there is a risk of further minor corrections in the short term, prime rents in Paris have recently fluctuated between quarters without a strong uptrend. The most significant correction in prime rents was recorded in Warsaw (-2.1% year-on-year). In general, the outlook for European offices is upbeat and H should see positive rental growth in most European office markets. The intensifying supply squeeze in markets such as London, Dublin, Berlin, Hamburg and Munich will add to this momentum. Many Southern European office markets offer further potential for growth as prime rents are still well below their previous peaks, including Madrid (-38%), Barcelona (-30%) and Milan (-18%). At the other end of the spectrum, oversupplied markets such as Warsaw and The Hague might experience some further downward corrections. 1 Excludes Moscow which, due to sharp falls in rents, is distorting the average COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 23

24 Rental change (y-o-y %) Global Market Perspective, Third Quarter 2015 Prime Offices Rental Change, Q Q London San Francisco Boston Hong Kong Tokyo Madrid Los Angeles Shanghai Chicago Beijing Toronto New York Sydney Dubai Mexico City Washington DC Frankfurt Singapore Stockholm Seoul Brussels Paris Mumbai Sao Paulo Moscow Based on rents for Grade A space in CBD or equivalent. In local currency. Source: JLL, July 2015 Prime Offices Rental Change, % 8.9% % 4%* % 1.2% Prime office rental growth: unweighted average of 25 major markets. * 2015 forecast excludes Moscow Source: JLL, July 2015 COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 24