Office Outlook. 2012: the year of uncertainty; 2013: the year of transition. United States. Q1 2013

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1 Office United States. Q : the year of uncertainty; 2013: the year of transition The U.S. office market is beginning to muscle its way through the challenges of heightened uncertainty, wavering demand and an evolving tenant that paralyzed most aspects of the office sector in the second half of 2011 and all of We believe 2013 will be characterized by a transitioning economy, market and demand paradigm that will not only lead to a stronger and more diversified recovery in the years ahead, but also fundamentally alter how we view and use office space. The economy will transition from one defined by below-average economic and employment growth driven by a few geographies and sectors (in 2012) to one where growth across most markets and industries leads to economic and employment growth that beat consensus estimates (in 2014). The office market will transition from an overall tenant s market (in 2012) to one favoring the landlord (in 2014) due to diversifying demand and limited new supply. And the overall office market paradigm will transition from one driven by random buildings and spaces to real estate s most fundamental principle: location due to the ever-increasing influences of demographics and technology.

2 2013 started off on a positive note with more than 40.0 percent of markets JLL tracks reporting increased touring activity and more than 98.0 percent of markets reporting either increased or stable touring levels from fourth quarter estimates. In addition to heightened touring, we saw more leasing activity that closed than experienced over the prior four quarters. Leasing activity levels increased 15.9 percent from the fourth quarter of 2012 and were up 9.6 percent from the first quarter of 2012.

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4 4 Jones Lang LaSalle United States Office Q Table of contents Table of contents 4 In this report 5 United States office market 6 United States overall office clock 9 United States CBD office clock 10 United States suburban office clock 10 United States economy 11 United States capital markets 14 United States local office markets 16 Atlanta 16 Austin 16 Baltimore 17 Boston 17 Charlotte 18 Chicago 18 Cincinnati 19 Cleveland 19 Columbus 20 Dallas 20 Denver 21 Detroit 21 Fairfield County 22 Fort Lauderdale 22 Hampton Roads 23 Houston 23 Indianapolis 24 Jacksonville 24 Los Angeles 25 Miami 25 Milwaukee 26 Minneapolis 26 New Jersey 27 New York 27 Oakland - East Bay 28 Orange County 28 Orlando 29 Philadelphia 29 Phoenix 30 Pittsburgh 30 Portland 31 Raleigh / Durham 31 Richmond 32 Sacramento 32 San Antonio 33 San Diego 33 San Francisco 34 San Francisco Peninsula 34 Seattle 35 Silicon Valley 35 St. Louis 36 Tampa 36 Washington, DC 37 Westchester County 37 West Palm Beach 38 Appendix 39 United States employment statistics 40 United States office statistics 41 United States office rankings 42 United States office rankings 43 United States office rankings 44

5 5 Jones Lang LaSalle United States Office Q In this report This report provides an overview of supply and demand conditions as well as detailed statistics, rankings and brief analyses of major office markets in the United States. Our research department is dedicated to producing information and insights that help our clients understand dynamic real estate market trends and guide critical decision making for investors and occupiers. Seattle Portland Minneapolis Sacramento Oakland - East Bay San Francisco Silicon Valley Denver Milwaukee Detroit Chicago Boston Cleveland Westchester County Fairfield County Pittsburgh New York City Columbus New Jersey Philadelphia Indianapolis Cincinnati Baltimore St. Louis Washington, D.C. Richmond Hampton Roads Los Angeles Orange County San Diego B Phoenix Dallas/Fort Worth Atlanta Raleigh / Durham Charlotte Austin Houston Jacksonville San Antonio Tampa Orlando Palm Beach Fort Lauderdale Miami

6 6 Jones Lang LaSalle United States Office Q United States office market The office sector kicked off 2013 in a much different way than it started The anemic performance of the first quarter 12 months ago provided a preview of how 2012 ended up: tenant indecision, depressed leasing volumes, growth concentrated in just a few markets and, largely, in quality space and an overall performance that took several steps back from However, the first quarter performance of 2013 provided a view of a transitioning market that appears to be on far-sturdier ground than we saw 12 months ago. Tenants came back into the market in a meaningful way with respect to touring spaces and completing deals, sublease space declined dramatically in the first quarter, occupancy growth outnumbered gains from 12 months ago by more than five-fold and we saw growth in geographies and product types that have been dormant for several years. Additionally, rents, which were declining in close to 40.0 percent of markets at this point last year, are increasing slowly, but consistently, across more than 80.0 percent of markets JLL tracks, while concessions are firmly headed in the downward direction. Even construction, while focused in a handful of markets on the East and West coasts, is jumping up from near-historical lows. All of these factors provide concrete evidence that the market is transitioning from a more neutral position in recent quarters to what will likely be a landlord-favorable environment across most submarkets and product types at this time next year. Touring up; leasing activity up One of the most optimistic signs we have seen in recent months has stemmed from touring activity. Last year, we saw touring activity decline quarter in and quarter out; this year, 43.8 percent of markets JLL tracks reported seeing touring activity levels higher than last quarter and many reported significantly higher levels than recent quarters. In addition, another 54.2 percent of markets reported that touring velocity was either slightly up or stable with just one market (Orange County due to no real large tenant activity being completed) reporting slower touring in the first quarter than we saw at year-end. From Boston to Stamford down to Miami and across to Chicago, Dallas and Seattle, future tenant requirements increased in the marketplace, signaling tenant s posturing on future economic conditions shifting from a neutral or pessimistic view to one that is more optimistic. That enhanced touring volume nationally led to leasing volumes that nearly matched the average-trailing 25-quarter total. In the first quarter of 2013, we saw more than 60 million square feet of leasing across the country during the quarter. The 60 million-square-foot-mark is the dividing level between flat and expanding marketplaces. All throughout 2008, 2009 and 2012, we, for the most part, saw leasing levels come in below that level, while in 2010 and 2011, when the market was in turning point or stronger recovery mode, we saw quarterly leasing volumes eclipse 60 million square feet almost every quarter. Overall, leasing volumes expanded by 15.9 percent in the first quarter from year-end 2012, with levels growing or stabilizing in nearly 70.0 percent of markets JLL tracks. At the same time, leasing volume was up 9.6 percent from the first quarter of Leasing activity was up almost equally across the CBD and Suburbs with each market segment seeing approximately four million square feet more of activity this quarter compared to the fourth quarter of Sublease down, meaning tenants growing into their own spaces In addition to increased leasing activity, we have begun to see sublease levels decline at meaningful levels. The last time we saw that trend take place was during the beginning of the recovery in late 2008 and early Over the past several years, we have seen sublease consistently fall, but at slow levels. Not in the first quarter of This trend bodes well for future demand, future leasing volume and future expansion. Sublease levels, which declined by more than 4.5 million square feet during the first quarter, are indicative of tenant strength and weakness in the market. That large decrease in a single quarter reflects that many tenants took their space off of the market to grow their own footprint into that once-excess space. If growth for companies continues, those same tenants will need to come back into the marketplace for even more space. One quarter does not make a trend, but combined with diversification of demand, which we discuss below, increased greenshoots in the economy and several other factors, we believe this is a very positive sign for the overall office market ahead. Expansion activity diversifying across markets Although the recovery has moved in fits and starts over the past three-plus years, overall occupancy levels have now increased consistently over that timeframe, with the first quarter of 2013 marking the 12th consecutive quarter of positive net absorption posted across the United States. All in, the market absorbed 7.5 million square feet in the first quarter of 2013, ironically just a few hundred feet shy of the fourth quarter total, but more than five times greater than the first quarter 2012 tally. While tech and energy markets still comprised the vast majority of occupancy growth, the diversity of the recovery begun to change ever-so-slightly with most markets now participating in growth. Consequently, in the first quarter of

7 7 Jones Lang LaSalle United States Office Q , 70.0 percent of markets posted occupancy growth. The diversity of the recovery is most evident from the transaction side. In the first quarter, we saw numerous industries that had been on the sidelines show some signs of life. In the retail sector, entities from Office Depot in Austin to Panera Bread in St. Louis to J.Crew in Manhattan took additional office space to accommodate growing headcounts and business. On the finance and insurance side we witnessed entities like F-Squared growing in Boston, Wyndam Capital Mortgage adding space in Charlotte, Sedgwick Claims Service expanding in Cincinnati, American Westbrook Insurance Services taking more space in Chicago, Russell Financial Services adding space in Milwaukee, Greenlight Financial growing in Orange County and Liberty Mutual doing the same in Manhattan. There was even evidence of growing consulting and law firms, two industries which have been routinely rightsizing of late. Houston, Philadelphia and Miami saw new law firms enter their market to expand their geographic footprint and consulting outfits such as Huron Consulting and Accenture grew in Chicago and Sacramento, respectively. After accounting for less than 3.0 percent of growth in 2012, markets outside the energy, tech, sunbelt hubs and NYC and DC, accounted for 25.0 percent of growth in the first quarter of Yet, tech and energy still comprising large share of expansion Despite the diversity we have recently witnessed in tour activity, leasing volume and expansion, tech and energy continue to dominate the story of growth. In the first quarter of 2013, Seattle handily led absorption gains with 1.6 million square feet of absorption driven by firms like Google, Intel, Cisco and Visa, among others. Meanwhile, Northern California, the epicenter of tech, saw net absorption of more than 1.5 million square feet. In that region, we even saw diversity. Two of the sleepier Northern California market in recent years, the East Bay and Sacramento, came to life with headquarters relocations and healthcare expansions driving growth in those market segments. San Francisco followed with nearly 300,000 square feet of net absorption, driven partly by move-ins by tech companies Yammer and Square Trade, among others. On the energy side, Houston continued to be king, driving significant economic, employment and thus office occupancy gains. In Houston, the region has created 118,200 new jobs, a 4.5 percent annual increase, in the 12 months ending January 2013, a rate that is nearly triple that of the rest of the country. That job growth drove additional office occupancy levels farther up once again. Houston absorbed more than 1.2 million square feet of additional space in the first quarter. From Energy XXI to Cameron to TransCanada, gas and oil companies continued their significant expansion. Even while drilling has slowed and some energy subsector employment growth levels have declined, many companies continue their onward growth strategy due to the long-term potential of the energy sector here in the U.S. and the growing likelihood that Washington passes energy legislation this year and next that provides the industry with additional momentum, exploration and investment opportunities. Within the quarter, traditional energy companies in the gas and oil fields also grew in places like Pittsburgh and Denver as well. While the recovery has broadened geographically, we have also seen it broaden to the Class B market While demand has been concentrated mostly in the CBD and across high-end Trophy and Class A product in recent years, we have started to see evidence that activity is growing beyond these segments of the market. Demand within Class A urban cores is not declining, nor do we envision it declining over the near or mid-term due to the ever-changing demographics driving tenants shifts. However, due to an overall lack of quality space options remaining in many urban cores, Class B space is seeing momentum. Class A Absorption as percent of total quarterly absorption Q1 2012: 295.2% Q2 2012: 98.5% Q3 2012: 82.0% Q4 2012: 78.3% Q1 2013: 45.0% With respect to Class A demand, levels have not actually gone down dramatically, but the composition of overall gains has shifted as Class B product gains momentum due to lack of quality, but also B product gaining momentum in tech-rich markets due to creative and loft-style space. Looking ahead We believe 2013 will be characterized by a stronger and faster economic engine, a diversifying recovery across the office sector that will lead to a landlord-favorable environment across most submarkets and product types at this time next year and a tenant paradigm shift that will fundamentally alter how we view and use office space.

8 8 Jones Lang LaSalle United States Office Q Leasing levels up 15.9 percent from Q at 60.8 million square feet Absorption levels continue with 12th consecutive quarter of occupancy growth 90,000,000 80,000,000 70,000, quarter trailing average Net absorption as a percent of inventory 1.5% 1.0% 15-year trailing quarterly average Total U.S. leasing activity (s.f.) 60,000,000 50,000,000 40,000,000 30,000,000 20,000, % 0.0% -0.5% 10,000, % Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Tech and energy still king, but the recovery continues to diversify with more markets demonstrating growth Despite growth in office-using employment, vacancy still at elevated levels (17.0 percent) Net absorption as a percent of inventory 29,000 Office-using employment Total vacancy 19.0% Tech markets Energy markets NYC/DC Sunbelt Rest of U.S. 28,800 28, % 33% 15% 8% 30% 14% 34% 0% 3% % 37% 6% 0% 25% 24% % Office-using employees (thousands) 28,400 28,200 28,000 27,800 27,600 27,400 27, % 17.5% 17.0% 16.5% Total vacancy 27,000 26,800 Q Q Q Q Q Q Q Q Q % As a result of many traditional office users reevaluating how they use office space Demand centering around quality product Industry Employment base Most affected office markets to date State Government Contracting California, Illinois, New Jersey Federal Government Contracting Washington, DC Media-print Contracting LA, NYC Finance / banking Contracting (Rightsizing) NYC, Charlotte, Chicago, Palm Beach, Pittsburgh Law firms Contracting (Rightsizing) Washington, DC, NYC, SF, Atlanta, LA Consulting Contracting (Rightsizing) NYC, Chicago, Washington, DC Accounting Contracting (Rightsizing) Chicago, NYC, LA Telecom Stable NJ, Dallas, Atlanta Retail / consumer goods Stable NYC, Atlanta, Los Angeles Green energy / clean technology Stable Pittsburgh, Silicon Valley, Denver Education Growing Everywhere Media digital and TV Growing Atlanta, NYC, LA, Philadelphia, Washington, DC Real estate (Residential) Growing Southern CA, Nevada, AZ, FL, GA, Carolinas Technology Growing Silicon Valley, San Francisco, Austin, Seattle, Portland, Midtown South NYC, Cambridge, MA Natural Gas / Oil Energy Growing Denver, Houston, Dallas, Pittsburgh Biotech / pharmaceutical Growing San Francisco, San Diego, NJ/Phil, Boston, RDU Trophy & Class A net absorption 58.6 MSF Class B & C net absorption 10.2 MSF And thus the rent gap between Class A and overall rents has sharply increased Lack of quality even driving new construction especially in the tightest of markets $5.00 3,500,000 $4.80 3,000,000 2,876,224 Difference between Class A and overall rents $4.60 $4.40 $4.20 $4.00 $3.80 $3.60 $3.40 Construction starts (s.f.) 2,500,000 2,000,000 1,500,000 1,000, ,000 1,210, , , , , , , , ,000 $ , , ,000 90,967 49,964 27,000 $3.00 Q Q Q Q Q Q Q Q Q Q Q Q Q Source: Jones Lang LaSalle

9 9 Jones Lang LaSalle United States Office Q United States overall office clock Houston, San Francisco, Seattle Peaking phase Falling phase Silicon Valley Austin, San Francisco Peninsula Dallas Rising phase Bottoming phase Orlando Boston, Denver, Pittsburgh Indianapolis, New York, Richmond Miami Atlanta, Los Angeles, Minneapolis, Orange County, Philadelphia, Portland, United States Oakland-East Bay, San Antonio West Palm Beach Fort Lauderdale Washington, DC Baltimore, Detroit, Milwaukee, New Jersey, Phoenix, St. Louis Jacksonville, Tampa, Westchester County Charlotte, Chicago, Cincinnati, Cleveland, Columbus, Fairfield County, Hampton Roads, Raleigh-Durham, Sacramento, San Diego Reading the clock The Jones Lang LaSalle office clock demonstrates where each market sits within its real estate cycle. Markets generally move clockwise around the clock. Geographies on the left side of the clock are generally landlord-favorable, while markets on the right side of the clock are typically tenant-favorable. For the first time in more than five-plus years, nearly 70.0 percent of office markets Jones Lang LaSalle tracks are located at or beyond the 6:00 position, signaling landlords slow, but increased confidence in overall market fundamentals. In fact, landlords increased rents for the ninth consecutive quarter, lifting rents 0.8 percent in the first quarter of As landlords shifted rents up, they also pushed concession levels down, but at slower rates than prior quarters, demonstrating owners desire to gradually shift from concession compression to rent growth coupled with gradual concession compression. Overall, rents have grown nearly 4.0 percent over the past 12 months and 7.4 percent since hitting bottom in early 2010, recovering about half of the rent declines experienced during the downtown. Additionally, over the past 12 months free rent has dipped 9.5 percent, while tenant improvement allowances were clawed back by 4.4 percent with concessions falling approximately 12.5 percent from cyclical highs in 2009 and There definitely remains a tale of two markets with the technology and energy hubs of San Francisco, Seattle, San Francisco Peninsula, Austin, Houston, Dallas and Denver leading rent growth with many of those markets seeing rents moving beyond prior-market peak rents. Markets with those demand drivers located near the top of the clock, particularly San Francisco, Houston and Silicon Valley, will test the market from a supply side over the next 12 to 18 months and could see rent growth slow due to the new space additions. Whereas markets at the opposite side of the clock, particularly in the Midwest and Southeast / Southwest, are moving closer toward bottom, but not yet at that point to date. Of those markets, expect the Southeast and Southwest to pull ahead due to stronger economies and demand patterns and the Midwest to lag. Overall, through the course of 2013, we expect almost all geographies to transition to a landlord s market by early 2014.

10 10 Jones Lang LaSalle United States Office Q United States CBD office clock San Francisco, Seattle Peaking phase Falling phase Austin Houston Rising phase Bottoming phase Denver, Miami Boston Midtown South (NYC), Pittsburgh Greenwich CBD, Indianapolis, Philadelphia, Portland, San Jose Atlanta, Midtown (NYC) Stamford CBD, United States Minneapolis, Richmond Charlotte, Detroit, Jacksonville, Oakland CBD, Raleigh-Durham, Tampa United States suburban office clock West Palm Beach Baltimore, Fort Lauderdale, Orlando Phoenix, St. Louis Downtown (NYC), Milwaukee, Washington, DC Raleigh-Durham, Sacramento, San Diego Chicago, Cincinnati, Cleveland, Columbus, Dallas, Los Angeles, San Antonio, White Plains CBD Houston, San Francisco, Seattle Silicon Valley Peaking phase Falling phase Cambridge Dallas San Francisco Peninsula Austin Pittsburgh Richmond Denver, Indianapolis Baltimore, Portland (Westside) Boston, East Bay Suburbs, Los Angeles, Orange County Oakland Suburbs, San Antonio, United States Rising phase Bottoming phase Orlando Jacksonville, Northern Virginia, Southern New Jersey, Suburban MD Fort Lauderdale, West Palm Beach Detroit, Miami, New Jersey, Phoenix Fairfield County, Hampton Roads (Peninsula), Milwaukee, Northern Delaware, Raleigh-Durham, Sacramento, St. Louis, Tampa, Westchester County Atlanta, Charlotte, Chicago, Cincinnati, Cleveland, Columbus, Lehigh Valley, Hampton Roads (Southside), Philadelphia, Portland (Eastside, Vancouver), San Diego

11 11 Jones Lang LaSalle United States Office Q United States economy Following the November election, we have begun to see momentum domestically in both employment markets and the overall economy that point to an economy in transition from one mired in slower growth to one we believed is positioned for more robust and diversified expansion as we head into the second half of 2013 and through At the same time, globally we are seeing a clearer horizon and prospects for growth improving across most parts of the world. The big question mark remains in the Eurozone where debt levels across numerous countries have eliminated economic growth and pushed unemployment levels to record highs in many countries (especially for the younger demographic), combining to yield limited prospects for optimism for the majority of While Europe is contributing to slower global growth, renewed activity and optimism across most parts of Latin America and many emerging Asian markets will likely push overall GDP estimates globally up for 2013 from more anemic 2012 levels. Employment growth starting to pick up At the end of 2012, U.S. total nonfarm employment stood at almost million jobs, up 1.7 percent from the end of 2011, having registered average monthly growth of 182,800 jobs. So far in 2013, the national economy has posted payroll increases of 177,500 jobs per month, slightly below the 2012 average. Despite the lower number, across just two months of the 2013 calendar year, monthly employment gains have surpassed the 200,000-mark three out of the past four months, a trend not seen since the beginning of While employment gains continue to be realized, the overall unemployment level remains stubbornly high compared to historical norms. The overall unemployment rate, which has yet to drop below 7.7 percent after wobbling within 10 basis points of 7.8 percent over the past six months, has been contained from higher levels due to consistent decreases in the labor force participation. In February, we saw the indicator fall to a new low of only 63.5 percent. However, unlike Europe, the college graduate unemployment remains low at only 3.8 percent, which could pose problems for employers to recruit new talent, particularly in the STEM (science, technology, engineering, mathematics) fields. Growth still stemming from energy, tech and healthcare The components of national, as well as metro area, employment have not fluctuated widely: tech, certain segments of professional and business services (PBS), healthcare and leisure and hospitality are the main drivers of new job growth across the country, all at least twice as fast as total nonfarm growth. Further, these subsectors have regained all jobs lost during the recession and are now above pre-recession peaks. Nearly all of these high-growth sectors from healthcare to technology to energy have legislation in Washington pending that could catapult these sectors to the next phase of growth. From the Health Care Reform Act adding numerous layers of bureaucracy and jobs and office space to the public and private sector to immigration reform helping tech companies keep foreign STEM nationals here in the United States to add to their workforce to energy initiatives like the Keystone pipeline providing a potential boom we have not seen in decades, we are optimistic that Washington will start to compromise on key growth initiatives that help transition the economy and job market from steady to robust over the next 24 months. Typical office-using performance varies widely across subsectors Important to the office market is PBS, which eclipsed its pre-recession peak employment in October 2012 and is now growing at an average of 3.1 percent per month. Temporary employment continues to contribute a significant portion of PBS jobs: 15.6 percent as of February 2013, its share having grown by 370 basis points over the course of the recovery. As a result of the stellar performance of the overall PBS sector, white-collar unemployment levels are a fraction of what overall unemployment is, closing February at a rate of 3.8 percent. Not all office-using sectors are performing at high levels. Traditional officeusing subsectors such as legal services and financial activities are still struggling to recover the jobs lost during the recession. Additionally, financial activities has only regained 170,000 (23.6 percent) of the 720,000 jobs lost during the recession, while legal services is even lower at 21.3 percent. This stands in sharp contrast to management consulting, for example, which now employs 15.2 percent more workers than at its peak in mid Greenshoots ahead In addition to bright spots ahead for the employment markets, we also remain optimistic about the other elements of the domestic economy. The private sector of the U.S. economy is one of the bright spots globally in the continued recovery as it has continually de-leveraged and amassed record amounts of corporate profits, leading to the highest cash reserves in modern history. Eventually, these profits will lead to future investment in technology, equipment, R&D and even human capital.

12 12 Jones Lang LaSalle United States Office Q Further, after six years of pushing down the economy, the U.S. housing market is helping propel the overall economy. New construction in the residential sector totaled 815,500 units in 2012 (up 30.7 percent from 2011), leading to construction employment increasing 2.4 percent yearon-year, 190 basis points more than total nonfarm during the same time period. Further, national housing prices posted their 13th consecutive month of increases as of December, growing by 8.7 percent since bottoming in November The housing market recovery is still in its infancy with authorized units well below the 10-year average of 1.3 million new units per year and housing prices 28.5 percent lower than peak prices. Despite this, we are optimistic that this part of the economy will lead to some of the strongest near-term and mid-term growth across numerous geographies over the next 36 months. In fact, even the Sunbelt, the worst-affected area of the country by the housing bubble, is seeing values jump up from bottom and talk of construction starts to resurface across numerous geographies. Challenges on the public side Unsustainable government debts at the federal, state and local levels continue to impact the recovery; however, the private sector has started to move forward without clarity on many public issues. On the employment side, government payrolls are contracting as large deficits and soaring long-term debts are demanding budget cuts at all government levels, which has resulted in the loss of 330,000 public sector jobs over the past two years. The federal government, which accounts for 12.8 percent of the 21.8 million government jobs in the United States, has cut jobs recently, but at rates slower than the overall government sector. On the positive side, Dodd-Frank, healthcare and intelligence focused on cyber security will add new public sector jobs. However, the effects of sequestration, which will take place over the upcoming year or so, will vary significantly across agencies and locations and impact not just the feds, but even more so, private sector contractors. While many contractors have already been in consolidation and rightsizing mode for the past 24 to 36 months, the near-term outlook for this industry, as well as the federal government, remains somewhat in limbo. Employment to reach prior peak levels over the next 15 months with economic growth escalating Looking through the rest of 2013 and the next few years, the greatest growth in hiring and office usage will be tech, energy, new media / communications, healthcare and other highly skilled professional services. The national recovery has resulted in over two-thirds of jobs regained and the rate of increase is almost certain to grow, reaching prior peak levels over the next 15 months. The effects of financial regulation, healthcare and energy policy will all begin to clarify in 2013, while housing market gains and continued corporate profits will fuel a rise in consumer and business confidence, helping transition the economy into a faster-moving engine over the 36 months ahead.

13 13 Jones Lang LaSalle United States Office Q Job growth beginning to average higher monthly gains 65.5 percent of jobs have been recovered from the recession with return to prior peak levels in mid , , , , , ,000 50,000 0 Total non-farm monthly employment change Oct ,000 Nov ,000 Dec ,000 Jan ,000 Feb ,000 Mar ,000 Apr ,000 May-11 54,000 Jun-11 84,000 Jul-11 96,000 Aug-11 85,000 Sep ,000 Oct ,000 Nov ,000 Dec ,000 Jan-12 Feb ,000 Mar ,000 Apr ,000 May ,000 Jun-12 87,000 Jul ,000 Aug ,000 Sep ,000 Oct ,000 Nov ,000 Dec ,000 Jan ,000 Feb , ,000 Jobs lost during recession Jobs gained during recovery After a slowdown in 2012, tech remains the industry to beat with newfound growth in 2013 PBS 3.1-percent monthly gains driving office-using job growth Year over Year % change month net change Information Professional and Business Services Financial Services -9.0 High-tech Energy, Mining, and Utilities Office-using industries Total non-farm And thus, the unemployment rate for those with a bachelor s degree is now only 3.8 percent Corporate profits break $2.0 trillion, demonstrating the health of the domestic private sector 6 5 Bachelor's degree and higher $ billions SAAR $2,500 $2,000 Corporate profits* Percent change from preceding period % Change 30% 20% Unemployment rate (%) $1,500 $1,000 10% 0% -10% 1 $500-20% $0-30% Q Q Q Q Q Q Q Q Q Q Q Q Housing market on the rise: fourth consecutive year of more authorized units and YTD 2013 ahead of YTD 2012 While Q GDP grew by only 0.4 percent due to government expenditures dropping, forecasts for 2013 are in the 2.5 percent to 3.0 percent range 2, Gross domestic product Government consumption expenditures and gross investment 8.0 2, Authorized units (thousands) 1,500 1, Quarterly % change (SAAR) YTD 2012 YTD Source: Jones Lang LaSalle, Bureau of Labor Statistics, economy.com. Note: Corporate profits with inventory valuation and capital consumption adjustments, data only available through Q / BEA data only available through Q / Due to data lags, high-tech employment only available through January 2012

14 14 Jones Lang LaSalle United States Office Q United States capital markets No let-up in 2013 investment sales with transitioning markets supporting growth As we entered 2013, we were faced with lingering debt ceiling issues and other budgetary policy measures that were unresolved. However, economic matters turned out better than expected for the first quarter, and the anticipated pull-back in investment sales volume, expected by some, was unrealized across many core markets. With strength driven by employment growth sectors of technology, energy and healthcare; attractive financing options; and tradable product that met investor appetite for risk, the office market pulled off its best first quarter performance since prior to the 2008 financial crisis. Based on preliminary totals, estimated sales volume for office transactions nationally came in close to $18 billion during the first quarter, representing a 17.0 percent increase over the same period in For the full year 2013, we continue to estimate growth in office investment sales volume to be in the percent range, driven by the strength previously cited. We are not completely out of the woods yet, as the estimated pace of growth is slightly down from the 23.0 percent annual level for Still low Treasuries bode well for debt markets and other capital providers A positive transition that continues to play out is the still low interest rates and government yields that exist since the financial crisis, which supports an attractive lending environment to fuel the funding of office investment activity. The recent affirmation by the Fed to maintain its $85 billion monthly asset purchase program (split between $40 billion of mortgage-backed and $45 billion of Treasury securities) until the economic recovery is more sustainable, continues to bode well for the CMBS and overall CRE markets, and currently keeps the cost of available capital provided by major lenders low. Other capital providers such as life insurance companies and U.S. banks currently remain active in primary markets, and CMBS activity already on a surge for 2013 helps fill the funding gap particularly in secondary and tertiary markets. actually outpaced that in primary markets (45.0 percent) for the office sector. Large deal activity in Seattle, Houston and Dallas rounded out the top three nontraditional (but increasingly traditional) markets that contributed to this occurrence. However, what we believe to be less of a phenomenon and more of a transitional paradigm shift is further growth in secondary market activity in 2013 and into We expect this growth to be influenced greatly by the impact of technology and energy growth and the resurgence in housing markets on these markets as property values here gain further ground, and investors increase their willingness to move farther along the risk curve in their search for yield. Stability in highly occupied product still favored As the number of top-quality deals remains limited, we will continue to see office trades of Class A property in secondary markets, as well as Class B trades in primary markets. Whether the investor chooses to transact in a primary or secondary market, safety and stability remains favored in highly occupied properties. This is evidenced by the rising average 93.0 percent occupancy rate for better-quality office assets that transacted during the first quarter, which came in significantly above that for the overall national office market. In addition, property yields remain favorable for quality product, and overall spreads averaged in the basis-point range for all transacted office property during the quarter. Promising outlook, but look for deviating signals Although some clarity has formed, transition is underway that supports steady growth in office investment sales activity. The key for the investor is to stay ahead of shifts, and be aware of any economic or fiscal signals that may point to a change in course. Transition into secondary markets also grows steady Most primary markets set a solid pace in office transaction volumes in 2012, and continue to do so in Be that as it may, 2012 marked the first year post-crisis that secondary market activity (49.0 percent)

15 15 Jones Lang LaSalle United States Office Q U.S. office transaction volumes up 17 percent annually in first quarter 2013, after 23 percent increase for 2012 Benchmark treasury and LIBOR yields remain relatively low and have risen just modestly close to year-ago levels $210 $180 $150 $120 $90 $60 $30 $0 6% 5% 4% 3% 2% 1% 0% Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 Total transaction volume ($ billions) Estimated Q Increase: 17% Projected 2013 Full-Year Increase: 15%-20% 2013* Yield (%) As of 3/8/13, the 5 year, 7 year, and 10 year treasury hit levels of 0.89, 1.41 and 2.04, - respectively, - close - to that seen in March 2012 before falling again on more European concerns. Q1 Q2 Q3 Q4 Q2-Q Projection Five yr treasury Seven yr treasury T en yr treasury One mo libor Highly rated CMBS spreads still at post-crisis lows and have tightened modestly by just 6 bps since start of 2013 New post-recession high of $48 billion in new issuance for 2012; up over 48.0 percent annually; more viable financing option and already on a surge for ,400 $50 $48 1,200 $40 Spread over swap rates (basis points) 1, US $ billions $30 $20 $10 $12 $3 $12 $33 $21 0 $0 Jan-08 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar Q1 2013* Most primary markets set solid pace through Q relative to prior years, while Austin and Seattle forge ahead most aggressively While competition has increased in preferred primary office markets, share has picked up in secondary and tertiary markets in 2012 and remains strong for 2013 Transaction volume ($ in millions) $18,000 $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0 Manhattan Los Angeles DC Total office market transaction volume Seattle Chicago Houston Dallas San Francisco Boston San Jose Atlanta Q1 2013* Phoenix Denver San Diego Austin Percent of all office building transactions by dollar volume 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 7% 6% 3% 6% 6% 11% 38% 38% 43% 45% 49% 44% 56% 59% 48% 51% 45% 45% Q1 2013* Primary Secondary T ertiary Investor flight to safer properties most prominent in Q throughout market recover Q office-high quality cap rates of 5.8% remain below 6.6% for overall office Average office occupancy rate 92% 90% 88% 86% 84% 82% 80% 78% Q Occupancy - all office properties Q Q Q Q Occupancy-traded office properties Q Q Q Q Q Q Q Q Transacted office assets continue to have significantly greater average occupancy than overall office market; with Q highest level shown Q Q % Q Q Q1 2013* Spread of office over 10 year treasury yield (basis pts) Q Q Q Q Q Q Q Q Q Q Office Q Office-high quality Q Q Q Q Q Q Q Q Q Q1 2013* Source: Jones Lang LaSalle, Bloomberg, Real Capital Analytics, Moody s Analytics, Federal Reserve, Commercial Mortgage Alert

16 16 Jones Lang LaSalle United States Office Q United States local office markets Atlanta Telltales that measure Atlanta s economic health are beginning to show positive signs. Within the residential sector, home sales have been on the rise and, consequently, those values are likewise up. Apartment rental rates have also continued to increase, even as new multifamily developments and deliveries proliferate. The metro added back 34,000 jobs since November 2011 according to finalized November 2012 data from the Bureau of Labor Statistics. Atlanta has also recorded year-over-year employment gains every month for almost two and a half years. Another reason for optimism is that the strongest nonfarm growth has been seen in high-paying sectors such as trade, transportation and utilities and professional and business services. Education and health services and manufacturing industries saw improvements as well. Still, at 8.3 percent, Atlanta s preliminary February unemployment was elevated well above that of the U.S. rate, which clocked in at 7.7 percent. While economic indicators are showing signs of life, the metro still has a lot of ground to cover for it to achieve recuperated status. Job growth has led to eight consecutive quarters of positive demand for Atlanta, with 4.5 million square feet of office space absorbed across the metro in the last two years. Not unexpectedly, the net new requirements have stemmed from a variety of industry sectors given the diversity that is typical of Atlanta s tenant base. However, demand has diverged geographically. With the recovery once concentrated almost solely in Buckhead, positive growth has now spread to the neighboring submarkets of Midtown and Central Perimeter. There has been an unprecedented trend of tenant relocation from distant Suburban climes to occupy luxury tower space that is closer to the in-town amenities. With hiring on the mend, existing tenants in the more active submarkets have also been hiring again and expanding their space accordingly. Demand in the remaining submarkets has been comparatively quiet. North Fulton, a usually bright node for high-tech, back office and call center activity, did not have an especially strong 2012 when it came to leasing, but secured a huge win with a recent investment in the submarket by GM. The car manufacturer made national headlines when it paid $18.5 million for an old UPS site where it will open a new technology center, eventually bringing on 1,000 new workers. Thus far, 2013 has proven to be more positive than was originally anticipated as 2012 drew to a close. There seems to be more good news than bad news announced here as of late, perhaps the most notable of which is State Farm s game changing commitment to 1.0 million square feet in Central Perimeter. There could be additional such wins in the pipeline as the Metro Atlanta Chamber of Commerce recently reported that there are myriad other large scale requirements currently shopping Atlanta on their top five list of potential markets under consideration. Landlord representatives have also cited an uptick in tour activity and by tenants with bigger footprints. This could be the year that Atlanta throttles ahead in its recovery versus the painfully slow climb out witnessed in the last several years. - Sarah Dasher Research Manager, Atlanta Austin The Austin-Round Rock-San Marcus MSA is the fastest growing large metropolitan area in the United States, with 3.0 percent population growth last year, compared to 1.7 percent growth in Texas and 0.6 percent growth in the country. Net domestic migration is the leading factor in the city s staggering growth, with people flooding into the city to take advantage of the relatively low cost of living and enticing job market. Job growth over the past 12 months was 3.9 percent. Unemployment this quarter was 5.8 percent, rising slightly from last quarter, but still below the state and national rates of 6.3 and 7.7 percent, respectively. Optimism abounds for landlords, as office market conditions continue to tighten. Downtown rents are reaching record heights and vacancies are diminishing to unprecedented lows. Availability in the South/Southwest submarkets remains scarce and we are beginning to see significant rental rate inflation and reduced concessions as a result. The Northwest submarket lags the South/Southwest markets, but is showing tightening fundamentals as well. Vacancy in the overall Austin office market is now 13.5 percent, representing a 5.3 percent decrease from the end of 2012 and a 28.3 percent decrease year-over-year. Rates in the total office market have increased 2.5 percent since the last quarter, with quoted rents in the CBD alone rising nearly 10.0 percent in just three months. Confirming the idea that absorption is typically low in the first quarter, absorption this quarter was only 144,190 square feet. Similarly, year-over-year leasing activity fell 15.1 percent. As tenants are increasingly aware of rising rental rates and diminishing vacancies, early renewals and over-leasing of space will be go-to strategies for those looking to lock in current rental rates and safeguard for future expansion premises. The trend of over-leasing space may increase available sublease space this year, now representing just 0.6 percent of the vacant space in the city. Though no new office developments have broken ground as of this quarter, several are continuing to move closer to fruition, with Endeavor finalizing plans at The Domain for two buildings and considering commencing construction at their proposed Champion Office Center project. Koontz McCombs has completed plans for its Encino Trace project in the Southwest submarket. Downtown, Cousin s proposed 3rd & Colorado building and IBC Bank Plaza continue to have substantive discussions with prelease tenants. - Meredith Sheeder Research Analyst, Austin

17 17 Jones Lang LaSalle United States Office Q Baltimore The Baltimore economy continued to post significant job growth at the beginning of 2013, led again by the professional and business services (PBS) sector. Nonfarm payrolls overall grew by 2.0 percent compared to last year as a healthy private sector offset losses in government employment. Specifically, the federal government saw payrolls shrink by 1.8 percent, while state and local government remained neutral. Leasing activity across the city and suburbs dropped compared to 2012, resulting in a slow start to Aside from a significant renewal from a financial institution, the Baltimore City office market experienced a quiet quarter. Several longstanding vacant blocks, however, fell out of the inventory as functionally obsolete office buildings traded to developers for residential conversion. In Baltimore Southeast at the Harbor Point development, Exelon s new 380,000-square-foot headquarters has yet to break ground, while the developer continues to pursue the city for additional tax breaks for the site. In the suburban markets, federal government contractors returned to the market with Ventura Solutions lease of two floors at 410 National Business Parkway. Move-ins at the end of 2012 brought vacancy in the BWI/Anne Arundel submarket surrounding Fort Meade to below 10.0 percent as the cyber security industry emerges as major driver of office occupancy. COPT has one speculative building under construction in National Business Park and has plans to break ground at Arundel Preserve after fully leasing 7740 Milestone Parkway to KEYW Corporation last year. In a trend to be watched, availability for single-story office space in the Columbia market shot up to 30.0 percent as tenants, especially those with federal government clients, delayed leasing decisions. While tenant activity was limited, the northern suburban submarkets attracted attention from investors with Greenfield Partners and BECO Management closing on major transactions. In Sparks, Greenfield Partners purchased a well leased two-building portfolio totaling 162,646 square feet for $146 per square foot. BECO Management picked up a pair of office buildings totaling 330,736 square feet in Owings Mills from GGP at Mill Run Circle for $44 per square foot. across the Baltimore area should gradually tighten through 2013 with the cyber security industry serving as the primary driver of growth. Recovery in Baltimore City and especially the CBD will likely continue to lag the suburbs as the financial sector continues to shed jobs. Limited blocks of Class A available space larger than 20,000 square feet in Howard and Anne Arundel County, combined with several large tenant requirements in the market, will likely lead to new construction breaking ground in the area surrounding Fort Meade. Boston Boston is officially in growth mode and has fully recovered from recession losses, making its pace of recovery one of the best in the nation. Following the loss of 103,000 jobs, Boston returned to pre-recession peak employment levels in September Annual employment revisions now show Boston eclipsing the peak with a total of 134,000 new jobs as of January Overall, high-tech (computer systems design) and life sciences (scientific research and development) continue to be bright spots. While their pace of growth has slowed as well, they continue to be significant drivers in the region s recovery, growing at 9.8 percent and 5.9 percent year-over-year, respectively. The year started with strong leasing activity coming from a variety of sectors from financial to life science, technology, biomedical and engineering firms. The vacancy rate in Greater Boston remains below 15.0 percent for the second quarter in a row, but jumped 27 basis points because of a number of spaces that were known to be coming to the market finally becoming vacant. (Monitor s 196,000 square feet at 2 Canal Park in Cambridge and IBM s 90,000 building at 5 Technology Park in Westford are two examples.) Downtown, the vacancy rate reached 9.6 percent, down 10 basis points from year end. The positive direct absorption in the quarter was driven primarily by activity in the Financial District again. Total direct absorption in the Financial District alone was 430,000 square feet. This is in large part due to Brown Brother Harriman s lease signed at 50 Post Office Square although a number of smaller leases were signed as well like Deloitte moving to 200 Berkeley and Dechert going to International Place. Rents are up in Downtown Boston 0.4 percent in the first quarter and 2.0 percent year-over-year. The Financial District and South Station recorded rent growth of 0.4 percent and 1.6 percent, respectively. The outlook is bright for Boston, but the effects of sequestration remain to be seen in this market that relies heavily on NIH funding and federal spending in defense. Consumers appear to be weathering the impacts of a rise in taxes well and firms continue to thoughtfully consider strategic real estate decisions that marry growth with space-saving strategies. - Patrick Latimer Senior Research Analyst, Baltimore - Lori Mabardi Research Manager, Boston