Global Real Estate Markets Gaining Traction. Global Market Perspective Q1 2014

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1 Global Real Estate Markets Gaining Traction Global Market Perspective Q1 2014

2 Global Market Perspective First Quarter 2014 Global Real Estate Markets Gaining Traction The world s dominant commercial real estate markets have moved into 2014 in better shape than at any time since the Global Financial Crisis of Capital markets are exhibiting remarkable strength and the disconnect, that has emerged over the past two years with a more cautious occupational market, is showing signs of narrowing. This latest edition of Global Market Perspective presents an encouraging picture of a global real estate market that is regaining its pre-crisis vigour: The global economy is steadily improving, GDP growth is accelerating, and higher business confidence and perceptions of fewer downside risks are spurring corporations to spend again. Crucially, the U.S. economy and real estate market look finally to be gaining some traction. The real estate investment market is displaying exceptional liquidity in both the equity and debt markets, with a huge weight of money chasing commercial property, as evidenced by: Full-year 2013 sales transactions up 21% to US$563 billion Q volumes hitting nearly US$200 billion; a level not seen since mid countries achieving in excess of US$1 billion in transactions during Q4 Several major markets registering record transaction levels in 2013, including China, Australia, Canada and Singapore Further prime yield compression and an acceleration in capital value growth, increasing by an average of 7.5% year-on-year for prime office assets Very strong competition for a limited stock of core assets is forcing investors up the risk curve, into non-core assets in core markets and core assets in non-core markets. For example: Global investment volumes in the hotel sector were up a massive 40% in 2013, while industrial transactions in Europe grew by 70% Second-tier cities, such as Seattle, Atlanta, UK regional cities and Osaka, are capturing a greater proportion of real estate capital Investors are seeking out markets that until recently were considered out of bounds, notably in Southern Europe where there has been a rapid change in sentiment Investors are also targeting value-added opportunities and moving into development in order to access product A buoyant investment market is being assisted by a robust recovery in the debt markets. This is most evident in the U.S where debt capital providers are boosting funding levels to new post-recession highs. CMBS issuance was up a significant 78% in 2013 to US$86 billion, a level that could well exceed US$100 billion this year. The European debt markets are lagging, but are nonetheless also showing strong improvement. Deals already in the pipeline point to further growth in global investment activity during JLL s initial forecasts indicate volumes of US$650 billion, a 15% uplift on 2013 levels and representing the fifth consecutive year of growth. Several factors point to continued investment market momentum over the coming year: A substantial weight of capital is sitting on the sidelines looking for product; and a broad range of investors have announced intentions to make fresh commitments in 2014 COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 2

3 US$ billions Global Market Perspective, First Quarter 2014 New capital sources are constantly emerging, with a surge of new capital anticipated from Asia and specifically China, which is exporting capital on a large and increasing scale More product is expected to come onto the market as vendors take advantage of the current market cycle Further growth in activity in secondary markets and assets is anticipated, supported by better access to finance Direct Commercial Real Estate Investment, c. 15% % 10% 10% 0 Americas EMEA Asia Pacific Global Source: Jones Lang LaSalle, January (F) Projected Change c. 15% Meanwhile the occupational markets are exhibiting early signs of a more sustainable recovery. Improvements are uneven however - corporate occupiers are still exercising caution and remain firmly focused on value: The office leasing markets in the U.S. are now showing a much more cohesive recovery, with volumes up 7% year-on-year. Europe s volumes bounced back by 18% during Q4, with London taking a clear lead. In Asia Pacific, volumes rose by 6% in Q4, although leasing activity remains mixed across this diverse region. The technology and energy sectors continue to be the main drivers of corporate occupier activity, while improving prospects are also apparent in insurance and life sciences. Confidence is gradually spreading to other business sectors, and corporate demand in 2014 is likely to be more broadly based than in either of the last two years. Even the finance sector is showing signs of life, accounting for the largest deal in London during the last quarter. During 2014, corporates will be less capital constrained and, with higher business confidence, there should be greater willingness among senior business leaders to authorise capital expenditure, contributing to a 5-10% uplift in leasing volumes during the year. We also predict more expansion demand, with net absorption up by 20-25% globally, although the paucity of supply may constrain some expansion plans. COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 3

4 The development pipeline across all commercial sectors is largely under control, and shortages of high-quality space will intensify during the year. Construction levels are well below trend, but early evidence points to an uptick in development starts during 2014 and Even so, new deliveries will be below trend until Rental growth for prime offices is expected to gain pace from the weak 1-2% rates of 2012 and 2013, increasing over 4% in Growth will be led by several supply-constrained global gateway cities such as Singapore, Tokyo, London, New York and San Francisco - where there is potential for double-digit rent increases. Prime Offices Projected Changes in Values, 2014 *New York Midtown, London West End, Paris - CBD. Nominal rates in local currency. Source: Jones Lang LaSalle, January 2014 As we move into 2014, optimism is certainly the prevailing mood in the global real estate markets, but downside risks remain that could temper activity and suppress confidence during the year. The impact of tapering and rising interest rates on global capital flows is an underlying concern, particularly for emerging markets. In the occupational markets, cost and efficiency are still at the forefront of corporate mindsets, and business sentiment could quickly be dented by renewed macroeconomic instability. Nevertheless on balance, our prognosis for the global real estate market is more positive than at any time since launching our Global Market Perspective in COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 4

5 Global Market Perspective Contents Global Real Estate Markets Gaining Traction... 2 Global Economy... 6 Real Estate Capital Markets... 8 Investment Volumes... 8 Capital Values and Yields Corporate Occupiers Global Real Estate Health Monitor Office Markets Office Demand Dynamics Office Supply Trends Office Rental Trends Retail Markets Industrial Warehousing Markets Hotel Markets Residential Markets Recent Key Investment Transactions COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 5

6 Global Economy Quiet start to an important year for the global economy The past two years have started in a mood of crisis with grave concerns about global economic prospects. This year has been refreshingly different. The recent news has not all been positive, but there is a sense of steady economic improvement and of reducing risk as the developed world emerges from its long slump. The upheaval of the autumn s U.S. budget crisis appears to be past now and the figures are generally pointing to a healthier The year ahead will be critical for policymakers in setting the tone for the recovery. In the West, the focus of the past five-years has been simple: healing the damage from the financial crisis and restarting growth. With that largely achieved, the choices become more complex. The list of challenges ahead will include: resetting interest rates back to normal levels; cutting still-bloated fiscal deficits; unwinding the QE stimulus; and dealing with early signs of overheating in financial markets. In the emerging world, the emphasis will be on reforms to sustain growth and dealing with greater competition from the developed world for investment capital. U.S. tapering marks start of sea change in monetary conditions After all the previous upheaval, when the Fed eventually finally announced a tapering in its QE programme just before Christmas, the market response was surprisingly muted. Few felt the previous postponement was anything but a temporary pause with the economy strengthening, while the Fed has underpinned its latest statement with some cautious guidance on future interest rates rises. Nonetheless, Bernanke has confirmed that tapering could be complete by year s end and many now expect rates to rise again next year. The consequences for the U.S. economy should not be too painful. Elsewhere there are more concerns. In the Eurozone, for instance, the recovery is not yet as well established; a recent ECB cut in policy rates highlights the very different monetary environment. Of even more concern will be how monetary changes impact on emerging markets, which have thrived in recent years. The risk is that tapering will boost the dollar and weaken commodity prices, adversely affecting the more vulnerable parts of the developing world. GDP Projections 2014 in Major Economies Recent Movements Australia China France Germany India Japan UK USA October January 2014 (Latest) Change (bps) India relates to fiscal year. Source: IHS Global Insight, January 2014 Recovery appears on track, but outlook remains cautious into 2014 Data releases have generally been more encouraging, and over the last three months, there have been notable upward movements in GDP growth expectations for 2014 in the U.S., the UK and Germany. A key point to note is that even though an improvement on last year is generally expected, most economies will still only be returning to their historic trend after five years of below-par expansion. COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 6

7 U.S. leads the revival in the developed world Global GDP is expected to rise by 3.3% during 2014, a rate slightly ahead of the historical average. This expansion is supported by emerging markets, where growth rises to 5.3% this year, with reviving exports to the West an increasingly important factor. In the developed world, after anaemic growth since 2010, an acceleration is also in prospect. Global expansion is then anticipated to build over the medium term as recovery in both emerging and developed markets broadens. Emerging markets in Asia will continue to drive global growth this year and beyond. In China s maturing economy, medium-term prospects will be constrained by the need to shift growth towards consumers and avoid asset price bubbles; sub-8% growth rates are becoming the new norm in China. India faces even more challenges in the immediate future, but GDP growth is likely to recover steadily over the medium term. The U.S. is forecast to lead the upturn in the developed world, with 2.7% growth predicted in 2014 and returning to trend in 2015, even as the Fed begins to tighten interest rates. Japan s near-term prospects have improved with Abenomics and 2014 is expected to see further respectable activity, but there remain doubts over the sustainability of the upturn beyond. The Eurozone is projected to emerge from recession this year. Germany is expected to show the strongest upturn during 2014, while France s recovery is weaker. Recessions in Spain and Italy are forecast to continue into a third successive year, though the contraction is less severe and growth is in prospect from In the rest of Europe, prospects are more solid. The UK has seen a further upward revision in projections for this year, while the Nordics are slightly less buoyant, but are also expected to see growth rates above those of their Eurozone neighbours. Emerging Europe is likely to see the continent s strongest growth, led by Turkey. COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 7

8 Q107 Q207 Q307 Q407 Q108 Q208 Q308 Q408 Q109 Q209 Q309 Q409 Q110 Q210 Q310 Q410 Q111 Q211 Q311 Q411 Q112 Q212 Q312 Q412 Q113 Q213 Q313 Q413 US$ billions Global Market Perspective, First Quarter 2014 Real Estate Capital Markets Investment Volumes Investment markets finish 2013 with a bang Investment markets have barely missed a beat over the holiday period as the momentum created towards the end of the year continues into the first few weeks of Final quarter volumes exceeded our expectations at US$198 billion, 41% higher than an already busy Q and 22% ahead of a strong Q The consistent quarter-on-quarter growth that was recorded throughout 2013 took final year volumes to US$563 billion, 21% higher than 2012 and the first time the market has broken above US$500 billion since The growth in transactional volumes is broadly based, with both large and small markets across all three regions seeing growth, a trend we expect to continue into Direct Commercial Real Estate Investment - Quarterly Trends, Source: Jones Lang LaSalle, January 2014 Americas EMEA Asia Pacific Rolling Four-Quarter Average Record year for Asia Pacific as Japan s volumes double Asia Pacific has now surpassed volumes recorded at the peak of the last cycle; the first region to do so. Final quarter transactions of US$37 billion helped push full-year volumes above the previous peak of US$121 billion in 2007 to US$127 billion. Investment activity has been buoyed by the ongoing improvements in both debt and equity markets, heightened liquidity across the asset class, and higher allocation to the real estate sector from multi-asset managers. The standout market in 2013 was Japan, where volumes doubled in local currency terms and were 66% higher in US$ terms. The boom in Japan was accompanied by record-breaking years in Australia (US$22 billion), China (US$25 billion) and Singapore (US$12 billion). Momentum continues to build in Q1 2014, with a number of funds raising significant equity in line with strong acquisition plans for the year. COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 8

9 Direct Commercial Real Estate Investment - Regional Volumes, $US billions Q3 13 Q4 13 % change Q3 13-Q4 13 Q4 12 % change Q4 12-Q % change Americas % 75 18% % EMEA % 61 18% % Asia Pacific % 27 39% % TOTAL % % % Source: Jones Lang LaSalle, January 2014 Resurgent smaller markets combine with the majors to take European volumes higher While the major markets of the UK, France and Germany continued to grow during 2013 on the back of consistent demand for core product, the year also saw the return of the peripheral European markets; Ireland, Portugal and Italy all experiencing triple-digit percentage growth. Final quarter volumes of US$72 billion are well ahead of the final quarter of 2012, and the fact that the previous three quarters all exceeded their 2012 equivalents has seen the market move 21% higher to US$195 billion over the full-year. The wider spread of activity across the continent did raise fears that volumes in London, Paris and the German cities may contract, but demand for prime real estate is as strong as ever. Lack of political problems and growing U.S. economy should benefit the Americas in 2014 In the Americas, sales transaction activity during 2013 has exceeded expectations, the region witnessing in the final quarter the highest investment volumes in the past six and a half years at US$88 billion. For the year, overall volumes totalled US$241 billion, representing an 18% increase on 2012, and easily the highest annual activity level since Investors in the U.S. market overwhelmingly brushed off any concerns regarding 2013 increases in interest rates, as well as the Federal Reserve s late-quarter decision to begin tapering its asset purchase programme. For 2013 in its entirety, investment volumes in the U.S. reached US$215 billion, the greatest annual transaction activity since Both Canada and Mexico experienced very robust investment trading in the closing months of Volumes in Canada at US$18 billion were at record levels, while in Mexico volumes were up 27% for the full-year, boosted by the activities of its REIT sector. Softer capital markets conditions were evident in Brazil, as still sluggish economic growth, higher interest rates and weak equity markets created a challenging environment. JLL forecasts volumes of US$650 billion for 2014 On the back of much stronger than expected growth in 2013, we predict global transactional volumes to break through the US$600 billion level in 2014 with our initial forecast at around US$650 billion. The momentum of 2013 has been carried over immediately into 2014 with a number of new buyers emerging and vendors increasingly willing to offer product as pricing continues to improve. New capital sources are constantly entering the market, especially in Asia where investors continue to look at opportunities in the U.S. and Europe on the back of continued residential cooling measures in their domestic markets. Asia Pacific is expected to have another record year in 2014, supported by further growth in Japan and China. The Americas, and specifically the U.S., is expected to show the strongest momentum, up 20% in Many different investor types from institutional capital, private equity sources, non-traded REITs to overseas investors have large property appetites, and bidding for desirable product in the U.S. will be highly competitive. In Europe, the broad range of investors targeting the continent points to further uplift in volumes during 2014 of approximately 10%. COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 9

10 Direct Commercial Real Estate Investment - Largest Markets, $US billions Q3 13 Q4 13 % change Q3 13-Q4 13 Q4 12 % change Q4 12-Q % change USA % % % UK % % % Germany % % % Japan % % % China % % % France % % % Australia % % % Canada % % % Sweden % % % Singapore % % % Italy % % % Russia % % % South Korea % % % Norway % % % Hong Kong % % % Denmark % % % Switzerland % % % Netherlands % % % Poland % % % Mexico % % % Taiwan % 1.3-1% % Spain % 1.2 9% % Finland % % % Ireland % % % Source: Jones Lang LaSalle, January 2014 Direct Commercial Real Estate Investment Top 20 Cities in 2013 London New York Tokyo Paris Los Angeles Chicago Singapore Shanghai Washington DC Seoul Hong Kong Boston Dallas Houston Silicon Valley Seattle Sydney Munich San Francisco Moscow Americas EMEA Asia Pacific US$ billions Source: Jones Lang LaSalle, January 2014 COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 10

11 Capital Values and Yields Capital values accelerate; yields compress further A re-energised investment market has provided a boost to capital value appreciation. Growth on prime office assets shifted up a gear during the second half of 2013, achieving 7.5% uplift by year-end (across 25 major markets); more than double the rate recorded in The weight of money has continued to push prime yields down to new lows, with more than half a dozen major office markets recording basis point yield compression during Q alone, including the U.S. gateway cities of New York, Washington DC and San Francisco, as well as Paris, Madrid and Stockholm. Capital appreciation to continue into 2014 With more buyers than sellers, capital values are likely to continue to appreciate during 2014, at a rate in excess of 5% for prime office assets (across 25 major markets). Expectations of further yield compression are not widely anticipated, with most investors looking to rental growth. The gateway cities of Tokyo, San Francisco, New York and London are forecast to register the strongest uplift in values over the next 12 months. Yield Compression and Capital Value Change, % % 5.4 % pa Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q % % 5 7.5% 0 3.2% Unweighted average of 25 major office markets across the globe Source: Jones Lang LaSalle, January 2014 COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 11

12 Prime Offices Capital Value Change, Q Q San Francisco London New York Madrid Stockholm Washington DC Los Angeles Frankfurt Boston Seoul Tokyo Singapore Chicago Sydney Mexico City Brussels Shanghai Moscow Hong Kong Toronto Mumbai Sao Paulo Paris Beijing Americas EMEA Asia Pacific % change Prime Offices Capital Value Clock, Q v Q Hong Kong, Singapore, Paris Sao Paulo Toronto Stockholm Berlin San Francisco Houston Moscow London Mexico City Sydney Frankfurt Dallas Capital value growth slowing Mumbai Capital value growth accelerating Tokyo Seoul, Brussels Q New York, Boston, Chicago Singapore, Los Angeles, Shanghai, Beijing Chicago, Toronto, Amsterdam Washington DC Boston, Los Angeles, Washington DC Berlin, Stockholm Sydney, New York, Frankfurt Milan Capital values falling Capital values bottoming out Madrid Houston, San Francisco, Moscow Dallas Seoul London Americas EMEA Asia Pacific Tokyo Mumbai Brussels Shanghai Madrid Notional capital values based on rents and yields for Grade A space in CBD or equivalent. In local currency. Source: Jones Lang LaSalle, January 2014 Mexico City Capital value growth slowing Capital value growth accelerating Q Hong Kong Capital values falling Capital values bottoming out Amsterdam Milan Paris Beijing Sao Paulo COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 12

13 Corporate Occupiers A mixed picture in was a year of marked variation in corporate occupier activity. While certain markets (including several U.S. cities, London and Mexico City) and industry sectors (i.e. technology and energy) experienced increasing levels of activity, the majority of corporate occupiers still exercised caution and conservatism. In many core global markets, the continued domination of financial services occupiers as value players served to suppress activity levels marks a turning point Early indicators point to a turning point in Corporate confidence is returning to long-run averages amid a more stable macroeconomic environment; PMI surveys show increased demand for products; corporate balance sheets remain strong and are now supplemented by supportive debt markets; and there is a greater willingness among senior business leaders to authorise capital expenditure. Increasing workplace investment While significant expansionary activity is unlikely to emerge outside of the technology and energy sectors during 2014, there are other industries, such as insurance and life sciences, that are showing improving prospects. Across the board, corporate occupiers in 2014 will continue to get to grips with their occupied portfolios through a mix of consolidation, space acquisition and workplace investment. This will be influenced by a number of broad corporate themes, namely: A renewed war for talent placing the workplace at the heart of attracting and retaining human capital A growing corporate focus on employee well-being - a further driver to changes in working styles and the workplace Improving M&A volumes, which will fuel portfolio restructuring Selective emerging market investment. Africa is an increasing target The re-emergence of sustainability considerations amid rising utility costs and concerns about energy efficiency A desire to increase worker productivity and innovation leading to a stronger consideration of the workplace at a macro and micro level. COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 13

14 Global Real Estate Health Monitor Economy Real Estate Investment Markets Real Estate Occupier Markets National GDP OECD Leading Indicator City Investment Volumes Capital Value Change Prime Yield Yield Gap Rental Change Net Absorption Vacancy Rate Supply Pipeline Dubai 3.5% na 32% 30.4% 7.3% na 14.6% na 29.0% 18.2% Frankfurt 2.1% % 8.3% 4.7% % 1.4% 11.1% 4.4% Hong Kong 3.7% na -35% 2.5% 2.9% % -0.3% 4.3% 5.6% London 2.7% % 17.9% 3.8% % 1.0% 5.4% 5.4% Moscow 2.7% % 2.9% 8.8% % 5.2% 13.3% 11.0% Mumbai 5.4% % 1.3% 10.1% % 9.8% 23.0% 16.9% New York 2.7% % 15.9% 4.2% % 1.0% 11.1% 1.2% Paris 0.5% % -2.4% 4.3% % 0.2% 7.5% 5.0% Sao Paulo 3.0% % 0.2% 8.5% na -10.3% 5.2% 18.4% 33.0% Shanghai 8.0% % 3.0% 5.9% % 11.4% 12.8% 36.2% Singapore 3.4% na 38% 5.9% 3.4% % 3.0% 6.5% 4.4% Sydney 2.4% % 4.3% 6.8% % -0.9% 10.5% 3.0% Tokyo 1.8% % 6.1% 3.7% % 4.5% 3.4% 11.1% Real estate data as at end Q Definitions and Sources National GDP: Change in Real GDP. National Projection, Source: IHS Global Insight OECD Leading Indicator: Composite Leading Indicator. Change in Index. Latest Month. Source: OECD City Investment Volumes: Direct Commercial Real Estate Volumes. Metro Area Data. Rolling Annual Change. Source: Jones Lang LaSalle Capital Value Change: Notional Prime Office Capital Values. Year-on-Year Change. Latest Quarter. Source: Jones Lang LaSalle Prime Yield: Indicative Yield on Prime/Grade A Offices. Latest Quarter. Source: Jones Lang LaSalle Yield Gap: Basis Points that Prime Office Yields are above or below 10-year Government Bond Yields. Latest Quarter. Source: Jones Lang LaSalle, Datastream Rental Change: Prime Office Rents. Year-on-Year Change. Latest Quarter. Source: Jones Lang LaSalle Net Absorption: Annual Net Absorption as % of Occupied Office Stock. Rolling Annual. Source: Jones Lang LaSalle Vacancy Rate: Metro Area Office Vacancy Rate. Latest Quarter. Source: Jones Lang LaSalle Supply Pipeline: Metro Area Office Completions ( ) as % of Existing Stock. Source: Jones Lang LaSalle COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 14

15 Office Markets Office Demand Dynamics Signs of improvement following a disappointing turned out to be a disappointing year for the office leasing market, with full-year global leasing volumes virtually unchanged on the subdued 2012 levels; Europe and Asia Pacific witnessed annual volumes down by 4% and 12% respectively. Nonetheless, there were definite signs of improvement during the final quarter of 2013, with volumes up 18% quarter-on-quarter in Europe and by 6% in Asia Pacific. The U.S. was the most active leasing market in 2013 where full-year volumes were an encouraging 7% higher than in Office Leasing Volumes 2013 v 2014 USA Europe Asia Pacific Global FY % -4% -12% Flat FY % +5-10% +5-10% +5-10% Source: Jones Lang LaSalle, January 2014 Modest upswing in demand in 2014 The recovery in global leasing volumes is expected to build during 2014 (subject to macroeconomic stability). Business confidence is improving, corporations will be less capital constrained and we anticipate a greater willingness to commit to longer-term real estate. Global gross leasing volumes for the year are projected to be 5-10% higher than in 2013 in all three global regions. We also expect more expansionary demand, with global office net absorption likely to be 20-25% higher than in Momentum builds in the U.S. The U.S. office market in particular is showing the brightest signs of a more cohesive, across-the-board uptick in leasing activity. Net absorption levels are at their highest since 2007, and more than 65% of U.S. markets have reported higher tenant touring activity. COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 15

16 Projection millions sq m Global Market Perspective, First Quarter 2014 Gradual improvements in Europe Europe s occupational markets have maintained their recovery, but at a slower pace than the investment market. Aggregate statistics show only a gradual recuperation, but sentiment is improving strongly in line with hardening evidence of economic expansion. London continues to see the strongest office market momentum in Europe, but conditions in Paris remain impacted by ongoing headwinds (in sharp contrast to its robust investment market). The German cities are still experiencing solid demand and, encouragingly, there were significant quarterly increases in the Dutch markets, Dublin, Milan and Madrid. For the year ahead the vast majority of European leasing activity will, again, involve consolidations or portfolio improvements. Corporate occupiers will continue to be cost-conscious, focusing on modern, grade A space to drive both efficiency, productivity and hence return on real estate expenditure. Overall, we expect total European leasing volumes to increase by 5-10%. Office leasing activity starting to improve in Asia, but still slow in Australia For Q4 2013, both net and gross absorption increased year-on-year in aggregate for Asia (by 5% and 7% respectively). However, at this stage, the improvement is patchy and there are no sub-regions which are unambiguously improving. Australia witnessed a further contraction in occupied space in Q4, and gross leasing was down almost 50% year-onyear. As a result, quarterly net absorption across the whole region fell 12% year-on-year while gross leasing was down 10%. Global Office Demand Net Absorption Trends, markets in Europe; 25 markets in Asia Pacific; 44 markets in the U.S. Asia related to Grade A only. Australia relates to all grades. Source: Jones Lang LaSalle, January 2014 COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 16

17 Toronto San Francisco New York Mexico City Washington DC Los Angeles Sao Paulo Chicago Boston London Paris Stockholm Brussels Frankfurt Madrid Moscow Tokyo CBD Hong Kong Beijing Singapore Sydney Shanghai Seoul Mumbai Global Market Perspective, First Quarter 2014 Office Supply Trends Vacancy rates broadly unchanged The global office vacancy rate (across 98 markets) has hovered at around the % level for the past five quarters and as at Q stood at 13.2%. Over the past year, the largest falls in vacancy have occurred in the U.S. markets, while London and Tokyo have also seen a significant decline in new supply. By contrast, vacancy rates have continued to rise in some cities in India and China, and across a number of Latin American markets. As global leasing activity improves, and with new deliveries well below trend, we expect the global vacancy rate to gradually fall into the % range. However, persistently high structural vacancy in the advanced markets, as corporates shed excess space, will prevent a more rapid decline in rates, despite low levels of new supply. Office Vacancy Rates in Major Markets, Q Global 13.2% % 25 Americas 15.7% Europe 9.7% Asia Pacific 11.9% Quarterly movement Increased Decreased 0 Stable Regional vacancy rates based on 49 markets in the Americas, 24 markets in Europe and 24 markets in Asia Pacific. Covers all office submarkets in each city. All grades except Asia and Latin America (Grade A only). Tokyo relates to CBD 5 kus. Source: Jones Lang LaSalle, 2014 Single-digit vacancy rates in the major Asian markets Most major Asian markets still feature single-digit vacancy rates (the main exceptions being Seoul, Shanghai and most Indian cities). The lowest rates were seen in Hong Kong, Tokyo, Manila and Jakarta (at between 3 and 5%). At the same time, rates have risen across all CBD office markets in Australia. COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 17

18 Stable vacancy rate in Europe The European regional vacancy rate has remained static at 9.7% for a fourth consecutive quarter, and while new space is being quickly absorbed, the overhang of low-quality supply will hinder further falls in the regional vacancy rate in London, Stockholm and Dublin are bucking the regional trend, and have seen notable reductions in vacancy during U.S. vacancy at lowest level for five years With net absorption in the U.S. at it strongest rate since 2007, vacancy levels over the past 12 months have declined 40 basis points to 16.6%, the lowest rate in five years. Vacancies are projected to fall below 16% by the end of the year, another key milestone in migrating back to full equilibrium levels (at circa 14% on the overall national basis). Global development activity below trend At a global level, office development activity remains low office completions in 2013 totalled only 11.2 million square metres; 20% below the long-term trend. As yet, there is little firm evidence of a surge in development activity JLL is projecting a modest increase in completions during 2014 of 6%, with a further 19% rise in 2015, by which time completion levels will be at the historic average of around 14 million square metres. Construction levels rising in the U.S. and Europe A loosening of the construction lending market in the U.S., an increase in the weight of money looking to invest in new construction and an improvement in market fundamentals all point to an uptick in development starts during 2014 and Significantly, most of this new supply is unlikely to begin hitting the market until at least late Likewise in Europe, improved confidence among developers and investors as well as enhanced access to finance is feeding through to higher construction levels. As a result, completions for 2014 are anticipated to increase by 19%, with a further 21% forecast for Yet, it should be recognised that 2014 volumes will still be below trend, and that almost 50% of new completions this year are already pre-let or for owner-occupation. In Asia Pacific, full-year 2013 office completions at 5 million square metres were comparable with levels in 2012, and we expect volumes to remain within the 4.5 to 5.5 million square metre range in both 2014 and A few markets across the globe will continue to struggle with high and/or increasing supply, notably in Latin America, with São Paulo and Mexico City witnessing a surge in new supply. The development pipeline in several Canadian cities will also present a challenge over the next couple of years. In the Middle East, Dubai, Abu Dhabi, Riyadh and Cairo are all dealing with excessive levels of supply, with demand focused on a limited number of prime buildings. COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 18

19 millions sq m Global Market Perspective, First Quarter 2014 Global Office Completions, USA Europe Asia Pacific 15 Average (F) 2015 (F) 24 markets in Europe; 25 markets in Asia Pacific; 44 markets in the U.S. Asia relates to Grade A only. Source: Jones Lang LaSalle, January 2014 Office Supply Pipeline - Major Markets, Shanghai Sao Paulo Mexico City Dubai Mumbai Tokyo Moscow Hong Kong London Beijing Paris Frankfurt Singapore San Francisco Boston Sydney Seoul Stockholm Brussels Toronto Washington DC New York Madrid Los Angeles Chicago Source: Jones Lang LaSalle, January Covers all office submarkets in each city. Tokyo CBD - 5 kus Completions as % of existing stock COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 19

20 Prime Offices Rental Change, Q Q Dubai London San Francisco Frankfurt Singapore Los Angeles Toronto Boston Mexico City New York Tokyo Shanghai Washington DC Mumbai Stockholm Moscow Madrid Brussels Chicago Hong Kong Seoul Sydney Beijing Paris Sao Paulo Americas EMEA Asia Pacific % change Based on rents for Grade A space in CBD or equivalent. In local currency. Source: Jones Lang LaSalle, January 2014 COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 20

21 Rental Change (% Y-o-Y) Global Market Perspective, First Quarter 2014 Office Rental Trends Weak rental growth characterises 2013 A quiet leasing market during 2013 was reflected in weak rental performance, with 25 major office markets achieving growth averaging only 1.6% during the year; this follows a disappointing 2.1% increase in A few cities have stood out and managed to achieve double-digit rental growth, including London whose leasing market is recovering strongly and Dubai, which is still benefiting from its safe haven status in a turbulent region. Meanwhile, demand from the technology sector continues to boost rents in supply-constrained San Francisco. Momentum builds in 2014, notably in the major gateway cities Rental growth is likely to be a feature of many more markets in 2014, with a combination of brighter economic prospects, improving corporate demand and a low supply pipeline pushing leverage in favour of landlords. Prime rents are projected to rise by an average of more than 4% in 2014 (across 25 major markets), with the strongest growth projected for a number of gateway cities including Singapore, Tokyo, Dubai, London, New York and San Francisco. Rental Growth on Prime Assets, % 8.6% % % 1.6% Jones Lang LaSalle Prime Office Rental Growth, Unweighted average of 25 major markets. Source: Jones Lang LaSalle, January 2014 Increased leasing activity and shrinking options drive rents up in the U.S. In the U.S, landlords lifted rents for the twelfth consecutive quarter in Q4 2013, increasing 0.4% over the past three months and 3.5% in the past 12 months. Leverage, in the form of concessions, continues to shift away from tenants. The tech-rich markets such as San Francisco Bay, Seattle and Austin have led the recovery in 2013, but growth is COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 21

22 likely to be more broadly based this year. A combination of a lack of new supply coming to the market in , a dwindling number of large and mid-sized blocks, and increasing tenant activity will help enhance rents and reduce concessions in London boosts Europe s performance The European Office Rental Index increased by 0.7% over the quarter, the largest uplift since mid This is primarily due to the continued strong performance of London, and the stabilisation of rents in Paris following a sharp decline in mid Going forward, a shortage of quality supply together with improving occupier sentiment is expected to filter through to more robust rental growth, with a 3.3% increase projected for the 24 European Index cities in Net effective rents grew in just one-third of all Asia Pacific markets Net effective rents grew in just one-third of Asia Pacific markets in Q The healthiest rental growth was in Singapore and Jakarta, and small rental increases were seen in Tokyo, Shanghai and a few other emerging SEA markets (e.g., Manila). Rents trended slightly lower in Hong Kong and continued to fall in Beijing and all Australian CBD markets due to weak leasing demand. Single-digit rental growth is generally expected for 2014 and the most significant uplifts are likely to be seen in Singapore and Tokyo, due to low and falling vacancy. Prime Offices Rental Clock, Q v Q Toronto Sao Paulo Stockholm Berlin Sydney, Moscow San Francisco Houston Rental value growth slowing Q Rental values falling Shanghai, Beijing Amsterdam, Paris Milan Hong Kong Singapore Stockholm Berlin, Moscow Houston San Francisco Frankfurt Dallas Mexico City Rental value growth slowing Q Rental values falling Amsterdam, Johannesburg Toronto Sao Paulo Dallas, London Rental value growth accelerating New York Mumbai Johannesburg Istanbul Boston Los Angeles, Tokyo Mexico City Chicago, Brussels Dubai, Frankfurt Rental values bottoming out Seoul Washington DC Madrid London Boston Tokyo Los Angeles New York Mumbai, Istanbul, Dubai Americas EMEA Asia Pacific Singapore Shanghai Rental value growth accelerating Brussels, Madrid Sydney, Chicago Rental values bottoming out Paris, Milan Beijing Hong Kong Washington DC Seoul Based on rents for Grade A space in CBD or equivalent. U.S. positions relate to the overall market. Source; Jones Lang LaSalle, January 2014 COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 22

23 Retail Markets Eurozone retail sales in surprise surge Retail sales in the Eurozone grew at their fastest pace for 12 years during November 2013 (up 1.4%), highlighting the improved confidence among consumers. After a year of near zero growth (0.1%), sales across the EU are predicted to see a moderate increase of 1.4% during Polarisation of Europe s retail markets Retailer demand is expected to improve in 2014, but performance remains a top priority for retailers. Portfolio rightsizing will drive new store closures in some less attractive markets, while the search for growth will increase demand in prime markets. Prime high street rents have been stable in most major European cities, but grew by 9.1% over the quarter in Moscow, by 7.3% in Copenhagen and 3.8% in Düsseldorf. London s luxury quarter, Cologne, Düsseldorf and Moscow are likely to see the strongest rental growth during Pace of improvement in U.S. retail still gradual U.S. retail property market conditions have continued on the same, gradually-improving path. Demand for space from retailers has maintained its moderate levels, and the market s recovery is being aided by only minimal levels of new construction, a trend that will not change over the near term. Rents are now increasing nationally, however growth is still very slow, at approximately 0.6% for the full-year does look more encouraging for the U.S. market as fundamental drivers for demand are firming. Discretionary consumer spending is expected to strengthen in 2014 given increased confidence, a much-improved housing market, and a probable lack of self-induced political crises. As such, dividends should begin to flow through to retail property sector fundamentals later in the year. Healthy retailer demand in Asia Pacific despite mixed retail sales Across the Asia Pacific region, retailer demand remains healthy despite mixed retail sales. In Greater China, demand from mid-tier retailers and F&B operators has helped to offset slow expansion by luxury brands. Elsewhere, leasing is slow in India but demand in SEA cities (e.g., Jakarta and Manila) is buoyant as international brands continue to open stores and/or expand their footprints. Meanwhile, Australia has seen limited evidence of improving leasing activity. Rents across the region were generally flat in Q COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 23

24 Prime Retail Rental Clock, Q Berlin, Paris, Hong Kong Americas EMEA Asia Pacific Moscow Beijing London Rental Value growth slowing Rental Values falling Tokyo Rental Value growth accelerating Rental Values bottoming out Dubai, Mumbai, San Francisco, Miami New York, Houston, Delhi Singapore Boston, Los Angeles, Shanghai Chicago Madrid Washington DC Milan, Sydney Prime Industrial Rental Clock, Q Hong Kong Frankfurt, Singapore Beijing Philadelphia Rental Value growth slowing Rental Values falling Tokyo, Dallas Chicago, New York, Los Angeles London, Houston Rental Value growth accelerating Rental Values bottoming out San Francisco Atlanta Shanghai Sydney Madrid, Warsaw Boston, Amsterdam, Paris Americas EMEA Asia Pacific Relates to prime space. U.S. positions relate to the overall market Source: Jones Lang LaSalle, January 2014 COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 24

25 Industrial Warehousing Markets U.S. industrial quietly approaching previous cycle s vacancy low Industrial markets across the U.S. have been quietly recovering for more than two years, demonstrated by 15 consecutive quarters of positive net absorption. Widespread demand across size segments has resulted in the U.S. vacancy rate falling to 8%, inching closer to its prior cyclical low of 7.5%. Warehouse rents continue their gradual climb across most U.S. markets. U.S supply pipeline increasing, yet speculative construction measured From 2010 to 2012, only 10 million square metres of warehousing inventory was built in the U.S. a record-setting, three-year low (since records began in 1950). New construction is increasing, but speculative ground-breakings will be measured, as the lessons developers learned from overbuilding during the last cycle s peak still linger. As a result, buildto-suits account for half of current development activity. Rent growth is expected to continue to be solid in 2014, and West Coast markets (the first to recover) will show the strongest uplift. European logistics demand maintained at high levels due to supply chain reconfiguration Corporate occupier activity in Europe has remained at a high level, with the strongest demand being for large-size/mega units along with urban sortation centres and parcel hubs, as corporate occupiers adjust to the growth in online sales and omni-channel distribution models. Indeed we are now seeing demand spreading from the more advanced e-commerce markets into a wider geographical area, and particularly into CEE and Russia. A lack of modern supply supports a return of limited speculative development in Europe A lack of suitable modern supply led to a significant growth in development activity in 2013, albeit largely build-to-suit and owner-occupied schemes. However, with supply levels at historical lows there has been a move back into speculative development, although this will continue to comprise only a small part of the market. Rental outlook brightens for 2014 Continued rent adjustments in Europe s most challenged markets pushed the European Warehousing Index down by a marginal 0.2% year-on-year, thus marking the seventh consecutive quarter of falling rents. This trend is expected to reverse in 2014 however, with rents returning to growth in several markets over the next 12 months. Asia Pacific warehousing demand underpinned by retailers Across the Asia Pacific region, retailers have continued to drive leasing demand, while the export-related segment has remained subdued as exports from some major markets remain weak. E-commerce and logistics companies are underpinning leasing demand in China, while activity has continued to be quiet in Hong Kong and Australia. Moderate rental growth is projected for most major Asian markets this year on gradually improving exports and retail sales, even if somewhat constrained by cost-sensitive occupiers. COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 25

26 US$ billion Global Market Perspective, First Quarter 2014 Hotel Markets Hotel investment on the rise 2013 proved to be an extraordinarily strong year for hotel investment, with transaction volumes increasing 40% year-onyear to total US$46.7 billion, marking a five-year high. Deal volumes for the year exceeded expectations, driven by steady hotel operating performance, increased debt market activity and investors quest for yield. Hotel Investment Volumes, US$ billions % change Q Q % change Q4 12 -Q4 13 Americas % % EMEA % % Asia Pacific % % TOTAL % % Figures include hotel property transactions of US$5 million and above and exclude note sales, land sales, foreclosures and recapitalisations. Source: Jones Lang LaSalle, January 2014 Deal volumes to hit US$50 billion in 2014 In 2014 we anticipate that global deal volumes will hit the US$50 billion mark, representing an 8-10% increase on The further uplift in transactional activity will be supported by a combination of factors including strong hotel operating fundamentals, improving debt financing for hotels in mature markets, growing interest in assets located in secondary markets, more deals in the select service and budget sectors, and increasing cross-border activity. Regional Investment Volumes, Americas EMEA Asia Pacific F Source: Jones Lang LaSalle, January 2014 COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 26

27 Private equity continues to dominate the market Private equity investors continue to dominate hotel acquisitions, particularly in the U.S. and Europe, accounting for onethird of investment in Hotel operators, REITs and Middle Eastern Sovereign Wealth Funds were also very acquisitive. Hotel operators used their balance sheets for selective buys, encouraged by opportunities to acquire single assets in key markets as well as attractive portfolio plays. REITs maintained their strong interest in core markets where the investments are accretive to their share prices; however, they are increasingly seeking opportunities to diversify their portfolios, particularly in the U.S. and some markets across Europe. Sovereign Wealth Funds from Qatar and Abu Dhabi kept their focus on trophy opportunities, but are gradually starting to look outside of gateway markets. Private equity firms were also the most active players on the sell-side as their hold periods are shorter than those of more traditional investors. Hotel operators were the second most active sellers in 2013, selectively disposing of their non-core assets. Developers and property companies accounted for 15% of all transactions in 2013, selling some of their properties in pursuit of additional capital to repay their loans and finance new projects. Extraordinary momentum in Americas The Americas experienced a particularly strong year with investment volumes up 30% year-on-year, representing a fiveyear high. Leverage continues to flow back into the U.S. capital markets and this, along with active private equity funds and REITs, are the primary drivers of the significant uptick. Investment activity in the U.S. had a greater geographical and asset type spread in 2013, with markets such as Atlanta, Houston and New Orleans joining the top ranks of deal flow. As a result, the share of investment volume in secondary markets doubled in Canada was the second most liquid market in the Americas in 2013 with transaction volumes having nearly tripling to US$1.5 billion. Activity was boosted by the sale of a number of single, large full-service hotels in major cities where pension funds and institutional investors sought to dispose of high-value assets. Traditionally a market dominated by local investors, the hotel real estate market in Mexico is increasingly attracting foreign buyers, notably from Spain and the U.S. Although sales volumes remained muted with only US$0.5 million in transactions closed in 2013, liquidity is expected to be boosted further by the formation of several new investment vehicles focusing on the hotel sector, including the first two Mexican hotel-focused REITs FIBRA Hotelera Mexicana and Fibra Inn. Further improving operating fundamentals in most markets across the Americas, an abundance of equity capital and a strong and growing debt market will create an attractive environment for acquisitions and financings throughout JLL forecasts a 15% rise in transaction volumes across the Americas for the year. This would mark the third highest level of transactions on record, following 2007 and A successful year and positive outlook for EMEA 2013 was a resurgent year for the hotel investment market in EMEA, with transaction volumes up 17%. Together, the U.K. and France accounted for more than half of the deals and attracted three-quarters of all the cross-border investments into the region. Activity in these two core markets is being boosted by their familiarity, maturity and good economic and hotel trading fundamentals. Middle Eastern capital continued to focus on trophy assets in Europe s key markets, such as Paris and London, investing US$2.8 billion in European hotels in 2013, a sum that represents half of all cross-border transactions in the region completed in the year. Despite the continued economic challenges across Europe, we are forecasting hotel investment volume to grow by more than 20% in 2014, to approximately US$16 billion. The increase will be bolstered by a continued sell-down of over- COPYRIGHT JONES LANG LASALLE IP, INC All Rights Reserved 27