U.S. REGIONAL ECONOMIC OVERVIEW: A MORE BALANCED RECOVERY FOR MORE INFORMATION, CONTACT:

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1 U.S. REGIONAL ECONOMIC OVERVIEW: A MORE BALANCED RECOVERY A Cushman & Wakefield Research Publication U.S. REGIONAL ECONOMIC OVERVIEW: A MORE BALANCED RECOVERY SUMMARY AND CONCLUSIONS Some of the best opportunities in commercial real estate over the next year or two are most likely to be in secondary markets - the cities that were worst hit by the recession and have been slower to recover. The economic recovery has been sluggish and centered on a few metropolitan areas and regions. That pattern is now changing and is gradually returning to long term trends. The economies of many markets, such as Atlanta and San Diego, are now accelerating along with the U.S. economy as a whole and, in some cases, overtaking the coastal markets that have dominated this recovery. The U.S. economy has accelerated in 2014 as years of uncertainty have been replaced by rising confidence and an increasing readiness to take risk. This acceleration will lead to stronger growth in more metropolitan areas, creating opportunities in commercial real estate. About a year ago, the U.S. economy accelerated to a stronger growth trajectory. However, this acceleration wasn t immediately evident because of continuing confrontations in Washington, conflicting economic readings and the severe 2014 winter. The recent revisions to U.S. gross domestic product (GDP) make clear that the economy began to grow at a stronger pace in the third quarter of U.S. GDP has grown at annual rates of 3.5% or more in three of the last four quarters, with the only exception being the weather-affected contraction recorded in the first quarter of This acceleration can also be seen in employment data. In the latest 12 months (through August 2014), U.S. payroll employment increased an average of 206,000 jobs per month, up from 198,000 in the preceding 12 months and 183,000 in the 12 months prior. In the latest six months from February through August, job growth has averaged more than 226,000 per month, despite the winter economic slowdown. JOB GROWTH IS ACCELERATING (Average monthly emloyment change, preceding 12 months) Latest six months Aug-12 Aug-13 Aug-14 Feb-Aug-2014 Source: U.S. Bureau of Labor Statistics U.S. GDP has grown at annual rates of 3.5% or more in three of the last four quarters

2 As the recovery has been led by rising output in the technology sector and the boom in domestic energy production, many of the best performing MSAs have significant concentrations of employment in these sectors. a whole. We divide the MSAs into four major regions: Northeast/ Mid-Atlantic (6 cities), Southeast (12 cities), Midwest/Southwest (12 cities) and West (9 cities). During the recovery, economic growth has varied greatly across these U.S. metropolitan areas. Some recovered quickly and continued to grow at a strong pace while many others lagged behind. As the recovery has been led by rising output in the technology sector and the boom in domestic energy production, many of the best performing MSAs have significant concentrations of employment in these sectors. This is still the case today, as the energy and technology sectors remain strong. But as the national economy has accelerated in the last year, a new set of MSAs has begun to grow more rapidly. The following table identifies the 15 metropolitan areas of the 39 we are analyzing in this report that have experienced the strongest job growth in the first three and a half years of the current recovery. We expect the U.S. economy to remain on this stronger growth trajectory for at least another year, and probably longer. For more on our current outlook for the national economy, please see our report U.S. Economy: Finally Running on All Cylinders published in July REGIONAL VARIATIONS The U.S. Bureau of Labor Statistics publishes employment data on metropolitan statistical areas (MSAs) across the country. For this report, we have analyzed the data for 39 MSAs that are the largest office real estate markets in the nation. Payroll employment in these 39 MSAs accounts for 51% of all the jobs in the U.S. These MSAs have added jobs at a higher rate than the U.S. as a whole during the current economic expansion. Since U.S. employment reached bottom in February 2010, the number of jobs in these 39 MSAs has increased 8.9%, somewhat faster than the 7.2% gain for the U.S. as Only five of the top 15 markets that showed the largest decline in available space in the latest 12 months were on the list for the previous three year period.

3 RESEARCH REPORT Top 15 Metropolitan Areas for Job Growth February 2010 through July 2013 MSA Austin San Jose Nashville Houston San Francisco Charlotte Raleigh Denver Dallas Orlando Detroit San Antonio Seattle New York City Miami Annual Job Growth 2/10 to 7/13 3.9% 3.5% 3.3% 3.2% 2.8% 2.7% 2.6% 2.6% 2.6% 2.4% 2.4% 2.3% 2.3% 2.3% 2.2% The list is geographically diverse with every region represented: Northeast/Mid-Atlantic (1), Southeast (5), Midwest/Southwest (6) and the West (3). Only four MSAs recorded average annual job growth of 3.0% or more, a testament to the slow overall pace of recovery. One big surprise on this list is Detroit, where the strong recovery of the auto industry caused employment to jump in the first two years of the recovery. While the two-year surge was enough to put Detroit on the list, it has more recently fallen to the bottom of the growth list. However, most of the MSAs on this list are not surprises. Most of the MSAs with the strongest job growth have a significant employment base in one or both of the technology and energy sectors, including Dallas, San Francisco, Houston, San Jose and Austin. This list has changed since the economy began to accelerate about a year ago.

4 Top 15 Metropolitan Areas for Job Growth July 2013 through July 2014 MSA Job Growth 7/13-7/14 Raleigh 4.8% Houston 3.8% Dallas 3.7% Austin 3.6% Denver 3.1% Orlando 3.0% Inland Empire 3.0% Miami 3.0% Jacksonville 2.9% San Francisco 2.9% Charlotte 2.8% San Diego 2.7% Portland 2.6% Atlanta 2.6% Nashville 2.4% The acceleration in job growth across the nation is evident, with the overall pace of growth in the top 15 cities now stronger. In the 12 months to July 2014, the top 15 MSAs averaged a 3.1% increase in employment, compared with 2.7% per year in the February 2010 to July 2013 period. In addition, the number of MSAs with employment growth of more than 3.0% has doubled to eight. The composition has also changed, with one third of the top15 turning over. New York, San Antonio, Detroit, Seattle and San Jose have been replaced by Atlanta, San Diego, Portland, Jacksonville and the Inland Empire. Among the biggest surprises is the decline in ranking of San Jose. San Jose s job growth is still decent at 2.3% over the latest 12 months but not as strong as it was earlier in the recovery. San Francisco may be benefiting at the expense of San Jose. Employment growth in San Francisco has accelerated slightly in the latest 12 months and was faster than that in San Jose. In the first three and a half years of recovery, San Jose outpaced San Francisco by a considerable margin (3.5% vs. 2.8%). The broader changes are a result of a shift in regional growth to the Southeast (7 MSAs), followed by the Midwest/Southwest (4) and the West (4). The Northeast/Mid-Atlantic region has lagged in the last 12 months. This distribution of growth is more in line with historical patterns. From 1990 to 2008, the fastest growing region of the country was the Southeast with seven MSAs in the top 15 followed by the Midwest/Southwest with six and the West with two. RETURN TO TREND? Between 1990 and 2008, the strongest employment growth in the U.S. included such rapidly growing MSAs as Atlanta, Austin, Dallas, Houston and Miami. In the recession, several of these cities were especially hard hit. In Atlanta, for example, employment dropped by 8.4% compared with 6.3% for the U.S. as a whole. There were sharp employment declines in the manufacturing, retail and financial sectors. These sectors account for approximately 25% of all jobs in Atlanta. MSAs like Atlanta, Phoenix and Miami also experienced steep job declines in the construction industry, which had been an important contributor to growth during the housing boom. Nationally, the decline in construction employment accounted for 22% of all the jobs lost in the recession. In Phoenix it accounted for 35%! From 1990 to 2008, the fastest growing region of the country was the Southeast, with seven MSAs in the top 15, followed by the Midwest/ Southwest with six and the West with two.

5 This has led to a geographic growth pattern more consistent with historical trends than what we saw early in the recovery when a couple of strong sectors dominated the expansion. This return to historical growth patterns has important implications for the outlook for commercial office markets across the U.S. COMMERCIAL REAL ESTATE IMPLICATIONS We compared the change in the amount of available space on the market during the first three years of the recovery through the second quarter of 2013 in major U.S. metropolitan areas (central business district and suburban markets combined) with the change in the most recent 12 months through the second quarter of If the recovery continues to accelerate as we anticipate, a more rapid recovery should occur in markets in the Southeast in particular. Now these MSAs are coming back. Compared with the first three and a half years of recovery, job growth in the last year has accelerated by nearly 40% in Atlanta and is up 45% in Miami. The list of the top 15 MSAs in the latest year is now very close to that of the 1990 to 2008 period. In fact, 13 of the top 15 MSAs in the last year were also in the top 15 for the 18-year period from 1990 to It does appear that as the job recovery has accelerated over the last year it has also broadened into more industries. As of July, manufacturing production was within 0.1% of the all-time high reached in 2007 just before the recession began. In addition, other segments of the economy, like construction and local government, are growing and hiring more aggressively. Markets with the largest decline in available space 2Q-2010 to 2Q-2013 Change in Available Space Per Year 2Q-10 to 2Q-13 Market (MSF) Dallas Boston Houston Orange County San Francisco Denver Chicago Silicon Valley San Diego Portland Orlando Atlanta Phoenix Midtown NY Miami In the first three years of the recovery, commercial real estate markets mirrored national employment trends with the bulk of the improvement taking place in cities with heavy technology and energy components. Among the markets that showed the largest decline in available space were Houston, Dallas, San Francisco and Boston.

6 Markets with the largest decline in available space 2Q-2013 to 2Q-2014 Change in Available Space Per Year 2Q-13 to 2Q-14 Market (MSF) Chicago Atlanta Central New Jersey Los Angeles Metro Downtown NY Denver Miami Phoenix Ft. Lauderdale Philadelphia Fairfield County Jacksonville San Francisco Peninsula Palm Beach Inland Empire As the recovery has diversified, different markets have begun to show significant improvement and move up the list. These include Los Angeles, Atlanta, New Jersey and Miami. Only five of the top 15 markets that showed the largest decline in available space in the latest 12 months were on the list for the previous three year period. In fact, in the past year, four of the top 15 best performing metropolitan areas were in Florida, which was far less represented in the previous three years of recovery. If the economy continues to accelerate as we anticipate, a more rapid recovery should occur in markets in the Southeast in particular. OUTLOOK The U.S. economy has entered a period of strong, sustained growth that will likely last for the next year or two. In this new phase, the recovery is broadening into more metropolitan areas across the country. This can be seen in the shifts in job growth away from almost exclusively energy and technology driven markets to a much broader group. This is not to say that technology and energy MSAs This combination of stronger overall growth and spreading recovery means that we are likely to see more improvement in terms of declining vacancy rates and upward trending rents in more markets across the U.S. during the coming year. are weakening far from it. They will likely remain an important contributor to growth in the U.S. economy for several more years. Today, markets that had languished during the early years of the recovery are among the strongest markets. As the recovery has spread and deepened, growth today is closer to the trends we saw before the recession with many cities in the South and the West among the strongest. For the commercial real estate industry, this combination of stronger overall growth and spreading recovery means that we are likely to see improvement in terms of declining vacancy rates and upward trending rents in more markets across the U.S. during the coming year. This suggests that some of the best opportunities in commercial real estate over the next year or two are likely to be in metropolitan areas where economic performance has lagged. The markets that were slowest to recover have some off the best upside potential now.