Office Outlook. United States Q No sign of a slowdown for U.S. office market

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1 Office Outlook United States Q4 215 No sign of a slowdown for U.S. office market

2 WHAT S INSIDE: The bar was set high for market momentum and growth going into 215 and year-end results proved that economic expansion has reached a tipping point in many markets; constricting supply and pushing rental rates to prerecession levels. While expansion activity persists in innovation markets in the West and Northeast, it is also spreading significantly into Sun Belt markets on the heels of demographic, financial and professional business services growth. 2

3 TABLE OF CONTENTS 5 office market trends 4 United States office market 5 United States office clock 8 United States economy 1 United States investment sales 13 Local U.S. office markets Atlanta 16 Austin 17 Baltimore 18 Boston 19 Charlotte 2 Chicago (CBD) 21 Chicago (Suburban) 22 Cincinnati 23 Cleveland 24 Columbus 25 Dallas 26 Denver 27 Detroit 28 East Bay 29 Fairfield County 3 Fort Lauderdale 31 Hampton Roads 32 Greater Hartford 33 Houston 34 Indianapolis 35 Jacksonville 36 Long Island 37 Los Angeles 38 Miami 39 Milwaukee 4 Minneapolis 41 Nashville 42 New Jersey 43 New York 44 Northern Virginia 45 Oakland 46 Orange County 47 Orlando 48 Philadelphia (CBD) 49 Philadelphia (Suburban) 5 Phoenix 51 Pittsburgh 52 Portland 53 Raleigh-Durham 54 Richmond 55 Sacramento 56 Salt Lake City 57 San Antonio 58 San Diego 59 San Francisco (CBD) 6 San Francisco (Mid-Peninsula) 61 Seattle-Bellevue 62 Silicon Valley 63 St. Louis 64 Suburban Maryland 65 Tampa 66 Washington, DC 67 West Palm Beach 68 Westchester County 69 Appendix 71 Contacts 8 3

4 5 OFFICE MARKET TRENDS and what they mean for LOWEST VACANCY IN 8 YEARS 48.9 M.S.F. 4

5 UNITED STATES OFFICE MARKET Activity diversifies across the United States, but remains driven by only a handful of industries Secondary and tertiary markets are gaining speed as economic expansion diversifies across the country. Aside from Washington, DC, which recorded leasing activity at a rate of 2.5 percent of its total inventory (compared to a national average of 1.5 percent), the highest leasing levels made their way outside of typical tech, finance and government heavy markets and into Austin (2.7 percent of inventory), Jacksonville (2.6 percent), Tampa (2.5 percent) Fairfield County (2.3 percent), and Indianapolis (2.1 percent). However, both CBDs and suburbs maintained the same rate of activity at 1.5 percent of total inventory, a reflection of the growing balance between the two markets. Technology and banking and financial services companies are responsible for a combined total of 26.8 percent of leasing activity in the fourth quarter While companies are expanding within their home market, many are also looking to new markets across the country as more than 1.7 million square feet of new-to-market leases were signed during the fourth quarter, bringing total 215 volume to 7.5 million square feet. Buxalta will be opening a new 26,84-square-foot location in the suburban Chicago submarket North while Nationwide plans to open a 246,442-square-foot location in Columbus Grandview/Upper Arlington and SuveryMonkey plans to open a 21,-square-foot location in San Francisco Peninsula s San Mateo submarket. For Buxalta, this is one of two new leases in the Chicago metro area, the second being signed in the CBD s West Loop. Other multi-market expansions during 215 included Brown & Toland s two leases in New Jersey and Oakland, Industrious s leases in Columbus, Minneapolis and Raleigh-Durham and co-working giant WeWork s leases in Portland, Denver, and two in Chicago. More than 1.7 million square feet of new-to-market leases were signed during the fourth quarter While a more diverse group of markets are finally seeing some momentum locally, activity at the industry level remained firmly unchanged with technology and banking and financial services companies responsible for a combined total of 26.8 percent of leasing activity in the fourth quarter and 3.5 percent for 215 distantly followed by healthcare s 6.8 percent annual volume. Individually, these industries are expanding with 7.1 percent of technology and 46.5 percent of banking and financial services leasing activity representing growth. The majority of leasing activity overall has also represented company expansion consistently over the past six quarters, while the rate of occupancy contraction has averaged less than 1. percent during that same time. Tech and finance companies have consistently pushed occupancy growth across markets over the past two years Technology Banking and financial services Government Healthcare Other Law firm Other professional and business services Life sciences Energy and utilities Aerospace and defense Telecom Accounting consulting research strategy Education 8.9% 7.3% 6.4% 6.3% 4.7% 3.6% 3.5% 3.3% 2.8% 2.7% 2.3% 16.8% 15.9% % 5% 1% 15% 2% Share of leasing activity (%) only for leases larger than 2, square feet and industries with more than 2. percent share of activity West Coast markets are ahead in occupancy growth, yet new markets try to take the lead Recording more than 18.7 million square feet of positive net absorption, occupancy gains during the fourth quarter of 215 were the highest on record during this cycle, and 16.5 percent higher than the previous high water mark in the fourth quarter of 214 at 16. million square feet. For the first time in more than two years, occupancy growth was overwhelmingly led by West Coast markets, which contributed to 45.6 percent of net absorption as Los Angeles and Phoenix posted 1.6 and 1.1 million square feet of net absorption, respectively five and three times higher than their five-year average. In Los Angeles, this was the result of expansion by The Honest Company, Facebook and Yahoo; while in Phoenix, State Farm and Isagenix moved into their newly delivered headquarters. Only two West Coast markets, Orange County and San Diego, posted occupancy losses totaling, 188,619 square feet. Occupancy growth was overwhelmingly led by West Coast markets 5

6 Share of quarterly net absorption (%) Meanwhile, on the East Coast, which contributed to 4.9 million square feet of net absorption, Boston and Philadelphia led the pack, each contributing approximately 1.1 million square feet in occupancy growth. On the other hand, Hampton Roads, Jacksonville, Long Island, New Jersey, New York and Westchester County saw occupancy decline by a total of 1.5 million square feet. For the second time this year, New York recorded occupancy losses in the first quarter occupancy declined by 1.6 million square feet and in the fourth quarter fell by 9,5 square feet. Although mid-year activity amounted to 2.3 million square feet of occupancy growth in New York, it wasn t enough to end the year on the positive side, with total year-end absorption coming in at -217,76 square feet. NYC For the second time this year, New York recorded occupancy losses Despite smaller markets that generally record significantly lower occupancy gains, Central U.S. markets contributed to 25.6 percent of total net absorption, with Chicago, Denver and Dallas the latter two being two of the country s hottest secondary markets posting the largest gains at 1.1 million, 839, and 854, square feet, respectively. Some of these gains were seen as a result of Google and Quintessite s expansions in Chicago, Raytheon s move into its newly delivered build-to-suit in Dallas and CoBank s expansion into its new headquarters in Denver. Only three markets (Houston, Indianapolis and Pittsburgh) recorded losses during the quarter for a total of negative 253,7 square feet, with Houston tenants yet to vacate any of the approximately 8. million square feet of sublease space currently on the market. More than 1. million square feet of absorption in Los Angeles, the SF Peninsula and Silicon Valley boosted West Coast in Q4 1% 8% 6% 4% 2% % -2% -4% -6% -8% -1% East Coast Central West Coast Vacancy mostly on the decline, but laggards remain where market drivers are lacking Vacant supply in CBDs remained constricted at 12.1 percent Inching nearer the prerecession low of 13.8 percent, vacancy declined to 14.7 percent by year-end, narrowly missing last year s projection of a 1 basis point decline by just 1 basis points, but affirming the velocity at which markets are moving. Vacant supply in CBDs remained constricted at 12.1 percent as compared to the suburbs 16.3 percent vacancy rate. Within the Class A segment of the market (which captures the most demand) it s even lower, with 12. and 15.3 percent vacancy rates in CBDs and suburbs, respectively, and the suburbs providing approximately 9 million square feet more supply than CBDs. However, with average Class A rental rates in CBDs 59.1 percent higher than those in suburbs, suburban markets are awaiting sharper vacancy reductions as pricing encourages tenants to explore suburban opportunities over the next 12 to 24 months. Suburban markets are awaiting sharper vacancy reductions as pricing encourages tenants to explore suburban opportunities The 18.7 m.s.f. of absorption in Q4 pushed vacancy down sharply by 4bp to 14.7%; first time it has fallen below 15.% this cycle 2.% 18.% 16.% 14.% 12.% 1.% 8.% 6.% 4.% 2.%.% 2.% 18.% 16.% 14.% Within CBDs, urban locales remain the most popular with vacancy rates in Midtown South, Portland Central City, Oakland, San Francisco and Philadelphia CBDs ranging from 6.3 percent to 8.5 percent. In the suburbs, hot markets on the outskirts of CBDs also maintained low vacancy, with Salt Lake City suburbs, Boston-Cambridge, San Francisco Non-CBD, Portland Eastside suburbs and Seattle-Bellevue s Eastside posting vacancy rates ranging from 5.1 percent to 1.2 percent. 6

7 Under construction (s.f.) There remain pockets of stagnancy in local markets lacking industry drivers While vacancy in general is on the decline, there remain pockets of stagnancy in local markets lacking industry drivers as a result of diminishing appeal from the growing millennial workforce. In Central markets, Cleveland, Indianapolis and Houston each saw vacancy increase by 34, 19 and 18 basis points year-over-year, respectively. Plagued with company downsizing, relocations outside of market and a sharply declining oil industry, these markets must also compete with nearby and booming Chicago, Dallas and Austin. Additionally, on the East Coast vacancy in Fairfield and Westchester Counties has continued to mount with year-over-year increases of 26 and 2 basis points, respectively. Meanwhile, in Northern Virginia vacancy has increased by 51 basis points since 21, compared to a national decrease in vacancy of 38 basis points during that same time. Lacking in walkable districts, competing against nearby New York City and Washington, DC for talent and victim of corporate contraction in both the public and private sector, it will be some time before these markets see a real turn around in activity. New supply creating new options, but not impacting vacancy as demand remains strong Fundamentals in supply constrained secondary and tertiary markets continue to constrict and instill confidence in developers to move forward with proposed projects Development volumes declined quarter-over-quarter at the end of the year from 92.8 million square feet in the third quarter (a cycle high) to 88.3 million square feet at year-end. Despite this, more than 7.3 million square feet of new construction starts were recorded during the fourth quarter, a trend that is expected to persist and even grow as fundamentals in supply constrained secondary and tertiary markets continue to constrict and instill confidence in developers to move forward with proposed projects. As leasing demand has largely focused on primary markets and CBDs, 6. percent of the total development pipeline currently resides in just 1 out of 5 U.S. office markets. With the exception of New York and Houston, both of which have recently recorded occupancy losses, the other ten markets had annual occupancy gains that were 1.8 times higher than new deliveries, on average. Chicago s occupancy growth to new supply was the highest at 6.6 times, followed by Philadelphia at 2.3 and Boston at 1.5 times, respectively. A number of large deliveries and groundbreakings in Q1 216 pushed quarterly activity down in Q ,, 9,, 8,, 7,, 6,, 5,, 4,, 3,, 2,, 1,, Meanwhile, eight markets have no construction at all. However, some of these markets include Jacksonville, Oakland/East Bay, Sacramento and West Palm Beach, which are starting to see renewed interest and activity, resulting in above average rent increases within their hottest submarkets. 6. percent of the total development pipeline currently resides in just 1 out of 5 U.S. office markets Looking ahead, 216 will receive an additional 48.9 million square feet of new supply, preleased at a rate of 47.6 percent, with anticipated deliveries including: 1 Hudson Yards in New York s Penn Plaza/Garment District, Phillips 66 headquarters in Houston s Westchase and Moffett Gateway in Silicon Valley s Sunnyvale. For speculative projects only, which total 35.2 million square feet, the prelease rate declines to 32.1 percent, providing tenants with plenty of large-block opportunities for expansion. 216 will receive an additional 48.9 million square feet of new supply 7

8 UNITED STATES OFFICE CLOCK The JLL office clock demonstrates where each market sits within its real estate cycle The JLL 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. As of the fourth quarter, the vast majority of markets are firmly positioned on the left side of the clock. Posting the largest quarterly gain of the cycle, rental rates during the fourth quarter increased 2.2 percent to reach $31.26 per square foot. While this rate surpasses 28 s peak rent of $3.42 per square foot, when adjusted for inflation rents are still 1.2 percent lower. However, this is expected to change over the next two years as markets prepare to welcome some of the most expensive developments ever delivered and landlords of existing buildings push rents to keep pace with an increasing market. Across the more than 48.9 million square feet of new developments that are expected to deliver in 216, rents average $4.78 per square foot a 3.5 percent premium over the current rate. Further into the development cycle, those rents are even higher with rental rates for 217 and 218 deliveries currently averaging $51. per square foot and $58.67 per square foot 63.2 and 87.7 percent premiums, respectively. Even when compared to average Class A rents only, premiums for 216, 217 and 218 deliveries are 11.7, 39.7 and 6.6 percent respectively. In addition to high-priced developments, strong tenant demand is also encouraging landlords to raise rents where supply and demand have begun to veer apart. Following Uber s building acquisition, and coupled with a 7.5 percent vacancy rate (and no new supply on the horizon), Oakland s CBD posted a 14.1 percent quarterly rent increase during the fourth quarter. Boston s Cambridge market, also in high demand by the metro s innovative and technological tenants, recorded a 6.9 percent increase quarter-over-quarter. With a 6.6 percent vacancy rate, and the addition of a mere 57, square feet of new supply, rents averaged $58.22 per square foot higher than Washington, DC and New York s Downtown market. Other notable increases include Jacksonville suburbs seeing rents jump by 8.4 percent and Tampa Bay suburb growing by 6.5 percent the former a result of increasing demand paired with virtually no new supply and the latter a result of new, high-priced construction as well as growing demand. Overall, Class A rents across the country maintained a significant premium over the market at 16.8 percent, but that premium is even higher when compared to just Class B office, which was 43.3 percent lower than Class A rents at yearend. In urban markets where architecturally unique Class B office is being renovated to meet growing creative space demand, the delta between Class A and B is very narrow, with demand for creative Class B surpassing Class A demand in some cases. In Portland s Central City, Class B rents are 6.8 percent lower than Class A. In San Francisco, the delta is only 12.3 percent, with some Class B buildings in SOMA asking for more rent than Class A buildings in the Financial District. However, in markets with languishing demand, the opposite is true. In Fairfield County s Stamford CBD/Railroad market, where overall demand has long been on the decline (and rents are reflective of that), tenants only want high-quality space. As a result, the difference between Class A and Class B rent is 75.6 percent. The same is also true for the Greenwich CBD/Railroad and White Plains CBDs, which must compete with New York for both companies and talent. Class B rents in these markets are 68.4 and 55.3 percent lower, respectively, than Class A. Looking ahead, sustained tenant demand and tightening fundamentals will continue to place pressure on local markets; giving landlords leverage to raise rents further and creating a competitive negotiating environment for tenants. With the exception of Houston, which will continue to see softening amidst high sublease vacancy and halted demand, U.S. markets in general will remain on the upswing over the next 24 months. San Francisco Peninsula Silicon Valley Dallas, San Francisco Austin Nashville Denver, Minneapolis, Seattle-Bellevue Los Angeles, San Diego New York, Pittsburgh, Portland, Tampa Boston Atlanta, Jacksonville, Miami, Orange County, Richmond, United States Chicago, Phoenix Charlotte, Fort Lauderdale, Kansas City, Oakland-East Bay, Orlando, Salt Lake City Cleveland, Indianapolis, Raleigh-Durham, St. Louis Cincinnati, Fairfield County, Hampton Roads, Milwaukee Long Island, Philadelphia Baltimore, Detroit, Hartford, San Antonio, West Palm Beach, Westchester County Peaking phase Rising phase Falling phase Bottoming phase Houston New Jersey, Washington, DC Columbus, Sacramento 8

9 UNITED STATES CBD OFFICE CLOCK Houston San Francisco Austin, Nashville, New York (Midtown South), Silicon Valley Minneapolis, Tampa Denver, Seattle Dallas, Fort Lauderdale, Los Angeles, Portland Boston, New York (Downtown), Pittsburgh Atlanta Chicago, Miami, San Diego, United States Jacksonville, Oakland, Orlando Charlotte, New York (Midtown), Philadelphia, Raleigh-Durham Salt Lake City Cleveland, Indianapolis Fairfield County Cincinnati, Milwaukee, Phoenix, West Palm Beach Detroit, Hartford, Washington, DC Sacramento, White Plains Columbus, Richmond, San Antonio, St. Louis Peaking phase Rising phase Falling phase Bottoming phase Baltimore, Kansas City UNITED STATES SUBURBAN OFFICE CLOCK Silicon Valley Dallas San Francisco Peninsula Houston San Francisco (non-cbd) Cambridge Austin, Bellevue, Richmond Peaking phase Falling phase Denver Los Angeles, Nashville, San Diego Kansas City Jacksonville, Pittsburgh, Portland, St. Louis Nassau County, Orange County, Tampa Boston, Minneapolis, Phoenix, Seattle, Salt Lake City Atlanta, Baltimore, United States Charlotte, Chicago, Cleveland, East Bay, Indianapolis, Westchester County Cincinnati, Fairfield County, Hampton Roads, Oakland Fort Lauderdale, Orlando, Miami, Milwaukee, Raleigh-Durham Philadelphia Columbus, San Antonio Central NJ, Detroit, Hartford, West Palm Beach Rising phase Bottoming phase Southern NJ Suffolk County Washington, DC Lehigh Valley, Northern DE, Northern NJ, Sacramento 9

10 Year-over-year growth (%) 1-month net change (thousands) Federal funds rate (%) UNITED STATES ECONOMY After more than a year of caution, the Federal Reserve confirmed its more optimistic outlook on the U.S. economy during the fourth quarter by enacting a.25 percent interest-rate hike, the first step in a larger program of tightening. Buoyed by a combination of sustained job growth, declines in unemployment and improvements in personal expenditures and domestic investment, the Federal Open Market Committee sees the risks to the outlook for both economic activity and the labor market as balanced ; despite inflation remaining below the 2. percent threshold due to suppressed oil prices and net exports lagging expectations. The decision comes after an unprecedented streak of near-zero interest rates since 29 and sets the stage for cautious action by the Federal Reserve in future quarters. $ The Federal Reserve confirmed its more optimistic outlook on the U.S. economy during the fourth quarter by enacting a.25 percent interest-rate hike Real GDP is up 2.1 percent year-over-year, higher than nearly all other major developed economies Other economic metrics also demonstrate stability in the U.S. economy, even as the global picture remains patchy. In line with employment growth of more than 2.3 million jobs through November 215, real GDP is up 2.1 percent year-over-year, higher than nearly all other major developed economies, and standing at a nominal total of $18.1 trillion. Even the housing market, which has lagged the overall economy, is seeing a resurgence with year-to-date starts of nearly 1.1 million units, exceeding year-to-date 214 totals by 11.6 percent. Not only has such performance translated to higher consumer confidence, but the office market has responded with 55.5 million square feet of occupancy growth, the highest annual total during the current cycle. The office market has responded with 55.5 million square feet of occupancy growth, the highest annual total during the current cycle Interest rate hike coming after unprecedented time near percent, fueled by improved job growth, Bureau of Labor Statistics Minimal inflation to further improve consumer spending and business investment, driving greater GDP gains and improved earnings mileage Notable over the past 12 months has been the sharp drop in inflation; the consumer price index has increased by only.4 percent over the year, in large part due to a sharp fall in oil prices. The energy and energy commodities components of the CPI are down 21.4 and 33.6 percent respectively from their 214 peaks, a downturn that has particularly impacted resource-intensive office markets such as Houston and Calgary. Aggregate drops in the prices of goods has helped to make the slow but steady rise in wages more meaningful, with average hourly pay up 2.3 percent year-onyear. In turn, personal expenditure growth is outperforming that of the overall economy by 1 basis points (+3.1 percent), concentrated particularly in durable goods. Flat CPI growth is having a meaningful impact on already rising wages, in turn boosting spending and GDP gains 5.% 4.% 3.% 2.% 1.%.% -1.% , 1-month net change (thousands) Federal funds rate (%), Bureau of Labor Statistics 6.% 5.% 4.% 3.% 2.% 1.%.% CPI growth GDP growth Wage growth

11 This level of increased personal consumption has displayed itself in a broader base of business investment as well as a return to higher levels of individual debt and lower savings rates; both signs of a more robust and dynamic economy. As with much of the recovery so far, highly technical and specialized segments of the economy (such as information processing, research and development and software) are surpassing base-line levels of growth, as is investment in the residential sector. Increased personal expenditures are placing upward momentum on retail sales, in turn augmenting demand for transportation and logistics providers and their equipment manufacturers. As year-to-date retail sales remain on the rise at 2. percent, and at 6.9 percent for motor vehicles, so too will profits be reinvested into business and growth. Investment in technical and residential business seeing growth triple that of the overall economy Other information processing Research and development Transportation equipment Arts and entertainment Industrial equipment Other equipment Personal expenditure growth is outperforming that of the overall economy by 1 basis points Residential Software Computers Structures -1.1% -1.2%, Bureau of Economic Analysis 4.% 3.9% 3.3% 2.6% 4.9% 6.5% 9.4% Geographical spread of growth solidified as nearly all markets are adding jobs; unemployment down across the board. Leading markets remain those with a strong tech foundation 1.5% -15.% -1.% -5.%.% 5.% 1.% 15.% 12-month % change Nearly all primary, secondary and even tertiary geographies are contributing to the recovery in the labor and office markets to varying degrees, with declining unemployment pushing employee underutilization below the national average and driving up wages as employers compete for a shrinking talent pool. Leading markets remain those with a strong tech foundation (the Bay Area, Seattle, Austin, Portland and Boston) as well as many parts of the Sun Belt and Mountain West particularly the hyper-diverse Dallas and Atlanta metro areas and smaller powerhouses such as Denver, Charlotte, Raleigh- Durham, Nashville and Salt Lake City. The office-using industries, which include many information and professional services subsectors prominent in tech, are gaining even greater momentum in many of these markets. In Silicon Valley, for instance, office-using gains of 8.2 percent are the highest of any large metropolitan area, with Austin only slightly behind at 6.4 percent. Tech and Sun Belt cities lead office-using job growth; Silicon Valley approaches double-digit increases Silicon Valley Austin Fort Lauderdale San Francisco San Antonio Salt Lake City West Palm Beach Seattle-Bellevue Atlanta Nashville Detroit Portland Washington, DC San Diego Dallas 4.2% 4.2% 4.1% 4.1% 3.9% 3.6% 3.4% 3.4% 3.4% 3.3%, Bureau of Economic Analysis 6.4% 6.3% 5.9% 5.8% Education and healthcare are notably edging out professional and business services (PBS) as the leader in job creation over the course of the year with 638, net new jobs A broader range of markets chipping away at unemployment has also been a boon to most subsectors and industries; with education and healthcare notably edging out professional and business services (PBS) as the leader in job creation over the course of the year with 638, net new jobs. Smaller, but rapidly growing, are areas such as other information services (+7.2 percent), computer systems design (+5.4 percent), management and consulting (+4.1 percent) and motor vehicles and parts (+3.7 percent). On the other hand, turmoil in the energy industry has resulted in a contraction of 123, jobs, or percent. As a result, organic growth is likely to lead to further net absorption across the U.S. office market, even as new space begins to come to the market throughout % 2.% 4.% 6.% 8.% 1.% 12-month % change in office-using jobs Turmoil in the energy industry has resulted in a contraction of 123, jobs, or percent 11

12 A strong 215 will lead to an even stronger 216, although global prospects remain difficult to predict Overall, 215 presented a more robust and resurgent economy, building on the foundations laid in 213 and increased throughout 214. Importantly, consistent employment growth has dwindled underutilization in the labor market in many geographies to the point that employees now have greater advantages and leverage in terms of pay and job choice. For the office market, the need to accommodate larger workforces will mean more expansionary activity, although a dearth of large blocks may lead to additional groundbreakings throughout the year. Similarly, rising wages in an environment of limited inflation will mean stronger consumer spending, pushing up real GDP growth further. Heading into 216, the effects of the Federal Reserve s bump in interest rates, coupled with changes in resource-based emerging markets and variations in net exports (due to a stronger dollar), will play an important role in shaping economic policy and the rate of both the GDP and corporate expansion throughout the remainder of the cycle. The need to accommodate larger workforces will mean more expansionary activity 12

13 Office investment sale volumes (billions of $US) UNITED STATES INVESTMENT SALES 215 transaction volumes up 16.5 percent despite a fourth quarter decline Realized diversification deeper into primary markets, secondary markets and larger transactions spurs 16.5 percent growth in 215 $25. $2. $15. $1. $5. $. Moderate growth forecasted in % 19.6% 32.1% 18.8% Q1 Q2 Q3 Q4 Forecast, Real Capital Analytics (Transactions larger than $5.m) Despite a year-over-year decline in quarterly sales in the fourth quarter, fourth quarter 214 is the largest quarter in terms of volume in the current cycle, totaling $38.3 billion. This remains the highest volume of quarterly sales since the prior peak in 27. Fourth quarter investment sales volume of $36.1 billion brought full-year volume for 215 to $14.9 billion, a 16.5 percent increase over 214. While the fourth quarter was the least active in the year, 215 recorded the highest volume in the office sector since 27. Strong growth in the first three quarters of the year (averaging 29. percent from Q1-Q3) offset declined quarterly figures this quarter. Noteworthy large acquisitions included 1211 Avenue of the Americas in the Plaza district of New York, a 5. percent stake of which was purchased by Ivanhoe Cambridge and Callahan Capital Partners for $895.2 million, and a portfolio of two assets in Boston, 5 Boylston Street and 222 Berkeley Street, acquired jointly by Oxford Properties and JP Morgan for $1.1 billion. Heading into 216, we anticipate stable full-year office growth between 1. and 15. percent. With interest rate hike, spreads remain stable with modest widening at year-end As we move further into the cycle, overall cap rate compression is being driven by secondary markets. However, secondary markets are still pricing at a discount to the long-term average. Secondary markets driving compression were Atlanta, Charlotte and Phoenix, each of which recorded 5 basis points of yield compression in 215. Primary markets recording stronger yield compression in 215 were San Francisco and Los Angeles, each exceeding 2 basis points. After a highly anticipated increase to the risk-free rate by the Federal Reserve, cap rate spreads to the 1-year Treasury are stable and, in fact, have modestly expanded since year-end 214. Spreads widened from 25 and 27 basis points in primary and secondary markets to 219 and 296 basis points, respectively. With strengthening leasing conditions and robust levels of unplaced capital active or entering the markets, spreads are expected to slowly tighten into 217. As inbound office investment increases 126. percent year-overyear, capital diversifying deeper into primary markets and into select secondary assets Canada is again the most active country of origin for foreign capital in 215 after Germany and Norway pushed ahead in 214. With $6.3 billion of investment, Canada was more than twice as active as the next largest source of capital, China, with $2.9 billion. Ivanhoe Cambridge was the most active foreign group in the year, primarily in New York. A notable transaction was 195 Avenue of the Americas, in which the highest price per square foot in any market was achieved over the year; $2,122 per square foot. The five most active foreign countries of origin Canada, China, Germany, Norway and South Korea in aggregate acquired $15. billion worth of product in the year, accounting for 81. percent of total foreign activity. While smaller in volume, buyers from Brazil, Spain, Australia and the Middle East have become more active this year at varying scales. Canadian and Asian capital continue to dominate inbound capital Most active foreign investors (214) Most active foreign investors (215) 9.% 13.5% 16.4% 15.3% 24.% 21.9% 5.6% 18.5% 9.5% 15.5% 15.8% 35.1% Canada China Germany South Korea Hong Kong Norway Singapore All others European and Middle Eastern groups are present, though did not buy at scale in 215 (Assets larger than 5, s.f.) 13

14 Secondary market investment volumes (millions of $US) Quarterly office investment volume (millions of $US) $2,323 $1,935 $1,184 $995 $79 $62 $515 $394 $347 $249 $172 $11,237 Despite inbound volume gains, foreign activity remains concentrated in primary markets, accounting for over 9. percent of acquisitions in 215. Four markets recorded over $1. billion of investment to foreign groups in the year: New York, Washington, DC, Boston and Seattle. These four markets made up over 51. percent of all inbound capital into the office sector with very little of this capital making its way to suburban assets. In 215, foreign investment into primary suburban assets decreased from 1.5 percent, on average, in 213 and 214 to 5.5 percent. While overshadowed by foreign activity in primary markets, secondary market investment doubled in 214, from $442.1 million in 213 to $81.4 million. In 215, the increase was even more substantial, reaching $2.2 billion. The largest secondary markets for foreign activity were Miami, Atlanta and Denver. Miami was the most active secondary market destination for foreign capital, with seven transactions totaling $79.1 million. Of these markets, 89.4 percent was in suburban assets, differing significantly from profile of assets purchased by foreign groups in primary markets. Of the top destinations for foreign capital, primary markets remain ahead, though secondary markets emerge Foreign activity into Class B increased from $644.5 million in 214 to $4.1 billion, equating to 2. percent of total Trophy A B 1.5% % 33.3% Trophy A B 6.7% % 33.3% 2.% Trophy A B % (Foreign acquisition activity, Assets larger than 5, s.f.) With strengthening leasing fundamentals, secondary markets driving investment sales growth, increasing by 76. percent compared to 46. percent in primary markets this year 22.9% $12, $1, $8, Sixteen secondary markets doubled activity in 215 with 11 recording transaction volumes over $1. billion $6, $4, $2, $ Primary markets Secondary markets (Foreign acquisition activity, Assets larger than 5, s.f.) Foreign buyers are also diversifying into Class B space. While Trophy and Class A (as a percentage of total) acquisitions declined slightly, Class B increased from 7.3 percent in 214 to 21.6 percent in 215. This equates to $4.1 billion of Class B acquisitions in 215, up from $644.5 million the prior year. New York has most evidenced this trend, having increased by a multiple of 8. this year to $1.7 billion. Relative to activity in 213 and 214, Class B investments have diversified from the Gramercy Park and Midtown submarkets to Chelsea, Grand Central and Columbus Circle. Outside of New York, diversification of Class B activity across submarkets is not as evident with groups focused on prime submarkets, including Central Loop (Chicago), CBD (Washington, DC), Westside (Los Angeles), Seaport (Boston) and Brickell (Miami). Secondary market momentum realized in 215 with 11 markets exceeding $1.b, led by Atlanta, Dallas/Forth Worth and Philadelphia $4, $3,5 $3, $2,5 $2, $1,5 $1, $5 $ (Assets larger than 5, s.f.) 14

15 Annual investment sales volume (millions of $US) Annual growth in price per square foot (%) This represents a near tripling from the four secondary markets which exceeded $1. billion last year. Of secondary markets, Atlanta, Dallas, Philadelphia and Denver recorded the most activity with Atlanta reaching volumes of $3.5 billion and Dallas, Philadelphia and Denver all over $2. billion. Strong leasing fundamentals defined these markets: Dallas, for instance, recorded nearly 5. million square feet of absorption in 215. Atlanta, Philadelphia and Denver recorded an average of 2.5 million square feet of absorption over the year. Other strengthening occupier markets of note include Phoenix and Miami. Outside of these markets, Mesirow Realty made the second largest transaction of the year a 49. percent stake of the net leased Verizon Center in the Route 78 submarket of New Jersey for $65.3 million, or $465 per square foot. In line with U.S. markets at-large, institutional investors and advisors have been the most active buyers in these markets; although, not by a large margin relative to private investors. While institutional investment remains disciplined outside of the primary markets relative to the prior cycle, expanding secondary market activity continues to provide attractive yields, averaging a 23-basis-point discount to primary markets, with lagging yield compression in markets such as Philadelphia and Dallas relative to the prior peak. Activity in Trophy space, while increasing, is lagging peer building classes a result of heightened transaction activity in the latter part of 214. Year-over-year, volume growth in the Trophy space was 2. percent, while growth in Class A and B has increased by 46. and 5. percent, respectively. This is broadly reflecting a capital supply-demand gap for Trophy assets which is pushing pricing appreciation to outperform the markets at-large. While Class A and B on average increased by 7. and 11. percent, respectively, Trophy assets recorded an increase in pricing per square foot of 32. percent this year. Of these transactions, Five assets traded at per-square-foot pricing in excess of $1, per square foot, all of which were located in New York or Washington, DC. Of buyers, 79. percent were institutional, an increase from 65. percent last year, with foreign capital accounting for 44. percent of overall activity. While defensive, core investors with lower return requirements remain focused on Trophy transactions, the overall pool of higher return, value add and opportunistic capital has and continues to expand, providing a boost to capital growth in markets. As Class A and B assets drive activity, supply-demand gap for Trophy pushing pricing appreciation Trophy investment volume was outpaced by Class A & B However, supply-demand gap for Trophy product spurred leading per-square-foot pricing appreciation in 215 $7, 4.% $6, $5, $4, $3, $2, $1, 35.% 3.% 25.% 2.% 15.% 1.% 5.% $.% Class A Class B Trophy 214 volumes 215 volumes Year-over-year pricing change (Assets larger than 5, s.f.) 15

16 ATLANTA - Ryan Harchar Senior Research Analyst, Atlanta Are landlords and investors letting off on the gas? Rent increases for large Class A blocks slowed substantially in Q4 Over the final months of 215, landlords seemed to be less aggressive relative to previous quarters. On the whole, average asking rates of large, contiguous blocks of Class A space (those 5, square feet and larger) increased by only $1.13 per square foot, much less than in previous quarters. Even more telling is how few blocks actually increased in price over the same period. Landlords of only eight blocks pushed rates. Could this foreshadow a softening in the office market or is it only the calm before landlords again use Q1 to put pressure on large occupiers seeking space options? Modest large available Class A block asking rate increases Average rate increase (p.s.f.) Total blocks which increased Q4 215 $1.13 Q4 8 Q3 215 $1.29 Q3 13 Q2 215 $1.24 Q2 14 Q1 215 $1.5 Q1 31 Q4 214 $1.29 Q4 13 Year-end office demand trends defy analyst projections Declines in the metro unemployment rate, meaningful population increases, a growing GDP and strong corporate cash positions all pointed to substantial increases in annual demand for Atlanta office space. On the contrary, 215 net absorption figures totaled less than in 214. Actual figures fell short of analysts projections of 3. million square feet by about 4, square feet. Diversification trends also moved counter to expectations as demand failed to broaden further into the Class B segment as one would expect in a supplyconstrained market with positive tenant demand. Could this signal a slowing of momentum in Atlanta s landlord-favorable conditions? Weakening Class B net absorption as % of total Class B 2.7% Class B.% Class B 32.5% Class B 19.9% Investors throttle acquisition pace in the year s final months November and December sales activity ended the year with somewhat of a whimper rather than a roar. Investors, presumably, are still digesting the massive buys from earlier in the year as others wait on the sidelines to see if the strong market fundamentals remain durable. Still, in the back of everyone s mind also remains the possibility of new development breaking ground, threatening buyers underwriting assumptions. Projects are increasingly justifiable in several pockets around the metro. Firms seeking space, especially smaller occupiers, would benefit greatly from the additional leverage that new inventory would bring. 215 Office sales dollar volume trails off $8,, $6,, $4,, $2,, $ 133,555, ,841 $ , 17.5% 2,578, % 22.3% 16

17 AUSTIN - Travis Rogers Research Analyst, Austin 215 is one for the record books in Austin Record breaking citywide absorption places Austin in second Austin closed out 215 with the second highest citywide absorption as a percent of inventory in the nation. Coming in first place was the San Francisco Mid- Peninsula region at 4.9 percent (1.4 million square feet), followed by Austin at 4.6 percent (2.3 million square feet) and Silicon Valley at 4.2 percent (2.9 million square feet). Austin has never experienced a greater amount of absorption within a twelve-month period. The submarkets that yielded the greatest absorption include the CBD (722, square feet), Northwest (66, square feet) and Southwest (574, square feet). The first half of 216 will also behold a period of record-high absorption as large leases executed in early 215 will commence. Top performing submarkets by YTD absorption (s.f.) CBD Northwest Southwest Far Northwest Central Southeast 9,272 75,923 26, ,442 66,36 722,319 Austin ranks third in the nation for most construction deliveries The top three markets for new deliveries in 215 are all located within the Lone Star State: Houston with 8.7 million square feet (3.6 percent of inventory), Dallas with 4.7 million square feet (4.7 percent of inventory) and Austin with 2.9 million square feet (4.1 percent of inventory). Two large projects in Northwest Austin expected to deliver during the fourth quarter have now been pushed to the first quarter of 216 (Research Park Plaza V and Domain 1). Fourth quarter deliveries include: Lamar Central (132, square feet), Aspen Lake 2 (129, square feet), Encino Trace II (158, square feet) and Quarry Oaks III (138, square feet). Collectively, these projects are 7. percent leased with the largest tenants being BazaarVoice at Quarry Oaks III (138, square feet) and Q2 Holdings at Aspen Lake 2 (129, square feet). Citywide projected construction deliveries by quarter (s.f.) 1,5, Next Wave 1,9,616 1,, 87, , ,173 5, 66,72 124, Q3 215 Q4 215 Q1 216 Q2 216 Q3 216 Q4 216 Q1 217 One in three tenants are searching in this submarket and it s not the CBD While demand for office space downtown is at an all-time high, tenants during the fourth quarter showed more interest in the Northwest submarket. Of 165 tenants searching for space, 32. percent searched Northwest (53 deals), 26. percent searched downtown (43 deals) and 15. percent searched Southwest (25 deals). While only 2. percent of tenants in the market (3 deals) looked Northeast, these tenants required the largest average size requirement of 11, square feet. Citywide searches boasted the second highest average size requirement at 83, square feet (7 deals) while Central ranked in at third with 53, square feet (11 deals). 49,189, % 724,467 2,253,197 Target submarkets from tenants in the market (%) 4% 2% 4% 4% 7% 15% 26% $ % 32% 165 Tenants In The Market > 5K SF Northwest Southwest East Southeast North South CBD Central Citywide Far Northwest Northeast 2,7,666 32% 17

18 Thousands s.f. BALTIMORE - Patrick Latimer Manager, Baltimore Construction increases as Class A vacancy dips Performance between Class A and Class B continues to diverge Vacancy for Class A space across the Baltimore metro market dipped to 1. percent while the lower segments of the market languished with low leasing velocity and elevated vacancy. In the Central Business District, Class B vacancy has jumped to 23. percent as off-water buildings struggle to backfill tenants who have upgraded to more modern and efficient space. In Howard and Anne Arundel counties, landlords have begun to reinvest in Class B product with extensive renovations: COPT fully renovated 71,99 square feet at 121 Winterson Road and demolished a vacant 56,452-square-foot Class B building at 921 Elkridge Landing Road to make way for retail amenities. Development activity significantly increases Following a record minimum for new deliveries in 215, construction across the market increased as projected deliveries for the coming year are set to be the highest since 211. The largest project scheduled for delivery is Exelon s 42,-square-foot headquarters at Harbor Point in Baltimore City. Several additional projects should break ground in the near term: 32, square feet at 99 Shawan Road for McCormick s consolidation in Hunt Valley and 13, square feet at 4 Wight Avenue for JMT Engineering, also in Hunt Valley. The development has come as large blocks of existing Class A space across the market have become increasingly limited. Select submarkets post Class A rental rate growth Several submarkets from Baltimore City to the suburbs experienced considerable rental rate growth for Class A product over the course of 215. As vacancy for Class A space has fallen below 1. percent in many of these submarkets and blocks of existing availability have dwindled, market leverage has shifted in favor of landlords for many Class A buildings and rental rates have accordingly risen. Rates have risen the sharpest in Columbia Town Center, which offers a mixed-use environment with walkable amenities, where available blocks of just 1, square feet have become scarce. In the CBD, Pratt Street drove rental rate growth as vacancy for Class A product dropped below 6. percent in the upper tiers of the market. Class A and Class B vacancy diverge at rapid pace 2% 15% 1% 5% Development pipeline increases 2, 1,5 1, Year-over-year rental rate growth in select submarkets I-83 North Baltimore Southeast CBD Annapolis Columbia South Columbia Town Center Class A vacancy Class B vacancy Preleased s.f. 4.8% 3.3% 4.2% 5.2% 5.% 6.5%.% 1.% 2.% 3.% 4.% 5.% 6.% 7.% 71,152, % 221, ,456 $ % 1,333,4 62.4% 18

19 Total s.f. of leases signed BOSTON - Lisa Strope Research Manager, New England 215 ends on a high note across all submarkets Q4 hits a high-water mark for leasing activity Boston has become a critical and strategic location for growing global brands and the nearly 1.9 million square feet in organic growth from local tenants this quarter such as Wayfair, HubSpot, Rockport, Bullhorn and LevelUp has pushed fundamentals across the market. s reached above the previous peak for the fifth quarter in a row to $34.4, and total vacancy dipped to its lowest point since 27; dropping 5 basis points over the quarter to 13.8 percent. 215 ended the year with a flurry of leasing activity closing nearly 3.5 million square feet in transactions in the fourth quarter, up nearly 15. percent quarter-over-quarter, and triple the volume of the snowy first quarter. Boston s Downtown and Rt. 128/Mass Pike submarkets were the most active, each closing nearly 1. million square feet in leases over 2, square feet. Spec development sprouting up The tightening market has created a supply-demand imbalance and developers have taken notice. With only 5. percent of the over 5.8 million square feet under construction available for deliveries through 218, speculative developments are sprouting in nearly every submarket. Early in 216, several fully available developments are expected to deliver including: the repositioned former mall in Chestnut Hill, Bulfinch s 286,-square-foot Atrium Center and the brick-and-beam renovation of 9 Channel Center in the Seaport. Tenants in the market now have the option to choose between new and older, existing office space. Tech cycle has room to run and Boston is well positioned Driven by knowledge-intensive industries such as tech and life sciences, Boston s job growth continues to outperform both Massachusetts and the nation. Forecasts through 22 remain optimistic with steady growth expected to continue at nearly 2. percent per year for the next two to three years; keeping the regional unemployment rate below 5. percent through 22. While there is a general consensus that the probability of recession by 217 is low, it will likely be a bumpy ride with a correction early in the next decade. Q4 Leasing transactions by submarket CBD Suburbs Cambridge, leases signed over 2, s.f. Forecast deliveries for projects under construction 4,, 3,, 2,, 1,, SF Delivered Forecast Boston MSA unemployment forecast through 22 9.% 7.% 5.% 3.% 1,, 75, 5, 25, 7.9% 17 21, Moody s, Boston MSA Underway for million sf 4.3% 4.6% F 218 F 22 F 3 165,361, % 1,8,136 3,45,721 $ % 5,573, % 19

20 CHARLOTTE - Patrick Byrnes Research Analyst, Charlotte Development coming on strong New product on the way in CBD For the first time in the past five years, development is surging in the CBD submarket. Highlighting the development in Uptown are three major projects that are underway. First, Portman Holdings is developing 38, square feet of space at 615 South College Street. Second, Spectrum Properties and Mass Mutual are behind the 3 South Tryon development which will total 63, square feet at completion. AvidXchange s new headquarters will be located at 935 Hamilton Street adjacent to the NC Music Factory. The Hamilton Street project is being developed by Red Rock Developments and will total 2, square feet at completion. Rental rates keep climbing Asking rates continued to push higher in the fourth quarter, currently sitting at $23.3 per square foot. The increase in average rental rates is due in large part to the CBD, SouthPark and Highway 51/Ballantyne submarkets that have set the bar above $3. per square foot. In the emerging Midtown submarket, the 1616 Center building is advertising rates above the $3. per square foot mark as well. As new projects capture significant preleasing activity, look for asking rates to hold steady in the foreseeable future. CBD Under Construction 3,,. 2,,. 1,, Asking rates continue to push (p.s.f.) $25. $23. $21. $19. $17. $ Investment sales noticeable to end the year There was plenty of sales activity to finish out 215 in the Charlotte office market. In the CBD, 121 West Trade Street sold for $71.6 million ($216. per square foot) to Lincoln Property Company. The building totals 33, square feet and was previously owned by The Dilweg Companies. In the Highway 51/Ballantyne submarket, Toringdon Office Park sold to American International Group and Trinity Capital Advisors for $114 million ($21. per square foot). The office park consists of six buildings that total 519,62 square feet and was previously owned by Stockbridge Capital Group Madison International Group, and Trinity Capital Advisors. Sales activity finishes out Q4 1,829,16 s.f. Total s.f. traded in Q4 46,615, % Q4 94, ,466 $23.3 Q4 direct average asking rate 6.2% 2,617, % 2

21 CHICAGO (CBD) - Hailey Harrington Research Analyst, Chicago CBD Rising tide lifts market and new developments Incredibly strong market momentum at year end For those watching the long-term leasing patterns in Chicago, 215 looks a lot like 27. Leasing activity, space absorption and vacancy rates are all essentially at their prerecession levels. Although space available for sublease continues to rise, many large blocks have been quickly backfilled; further indicating the positive momentum in the city. While new buildings attract major headlines and expanding tenants, the CBD continues to be a center of value-add investment with owners repositioning older properties, and attracting tenants from within and from outside the metro area. Fortunately for occupiers, rents have risen conservatively across most of the CBD; although tenants should be on the lookout for local rent spikes in 216. Historical Class A, CBD vacancy rates 2.% 15.% 1.% 5.% 16.6% 16.4% 16.2% 13.7% 14.3% 11.2% 11.3% 11.5% 11.4%.% River West (Fulton Market) expanding at an unprecedented pace In 215, all of the stars aligned for the River West submarket. The occupancy of 1K Fulton and surrounding tech office properties drove absorption to the highest levels on record. The continued growth of multifamily and hotel investment in the neighborhood has created a positive feedback loop for owners and investors. The question will be whether or not tenants will still be drawn to the area as rents rise dramatically. Asking office rents in River West now match those of other more established areas. Now, new entrants into the market, such as Tucker Development, are making large bets which will test the long-term strength of the market. All of this activity makes the River West submarket the area to watch in Chicago over 216 for continued growth, or for potential continued growth, or for potential signs of overheating. YTD absorption by submarket (as % of submarket stock) Net absorption vs. new construction ratio New office developments thriving and justified Two large towers currently under construction in the CBD (15 N. Riverside and 444 W. Lake) have seen incredibly strong preleasing demand. In this environment, it appears that limited new development is justified in the market. With year-to-date absorption of more than two million square feet (1.7 percent of inventory), downtown tenants are expanding at a pace that is sufficient to offset the efficiencies and consolidations of others. Well located and properly scaled developments, such as 151 N. Franklin, should be successful as leasing demand remains steady, downtown migrations continue and competing deliveries remain limited. 1:1 For every square foot of space absorbed in the CBD this year, there is one square foot of new inventory currently under construction a sign of a healthy balance for the Chicago office market. 135,843, % 718,676 2,38,24 $ % 2,32,164 64% 21