economic and office market outlook · in the u.s. domestic strength is outweighing global weakness...

Economic and office

market outlook

U.S., DC, and Boston

Presented at:

Tel Aviv Capital Markets Conference

Ben Breslau

International Director,

JLL, Research

May 18, 2016

The headlines are unsettling…

Goldman Sachs Financial Conditions Indicator

Volatility in the public markets drop after a bumpy six months

Source: Bloomberg As of 29 April 2016

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105

Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16

Inde

x (H

ighe

r =

Tig

hter

Con

ditio

ns)

China slowdown,

Fed Rate hike

fears

Oil falls below

$27GFC

In the U.S. domestic strength is outweighing global weakness and non-

manufacturing offsetting manufacturing

40.0

45.0

50.0

55.0

60.0

65.0

2015 2016

ISM

inde

x (p

oint

s)

Source: JLL Research, ISM

Expansion

Contraction

Non-Manufacturing

ISM = 55.7

Manufacturing

ISM = 50.8

U.S. labor market shows continued growth in April

Source: JLL Research, Bureau of Labor Statistics

+160,000(67 consecutive months of growth)

1-month net change in jobs

+2,692,00(+1.9% y-o-y)

12-month change in jobs

5.0%(-40 bps)

Unemployment, 12-month change

5,445,000(+6.1% y-o-y)

Job openings

U.S. CBD office clock still in the sweet spot

Source: JLL Research

Peaking

phase

Falling

phase

Rising

phase

Bottoming

phase

Dallas, Downtown (New York), Los Angeles

Denver

Boston, Miami, San Diego, United States

Midtown (New York)

Midtown South (New York), Nashville

Charlotte, Oakland CBD, Orlando, Philadelphia

Atlanta, Fort Lauderdale, Portland

Baltimore

Minneapolis, Seattle

Chicago

Cincinnati, Phoenix

Austin, Tampa

San Francisco, San Jose CBD

St. Louis

Detroit, Washington DC

Cleveland

Houston

Fairfield County, Pittsburgh

Investment transaction volumes slow in early 2016

U.S. investment sales declined 11.2 percent in Q1 year-over-year

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$100.0

$200.0

$300.0

$400.0

$500.0

$600.0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016YTD

Tota

l inv

estm

ent s

ale

volu

mes

(bi

llion

s of

$U

S)

Multifamily Industrial Office Retail Hotels Forecast

24%

Forecasted

FY 2016:

~0%

22%

19%

Source: JLL Research, Real Capital Analytics (Transactions larger than $5.0m; Includes portfolio, entity-level transactions)

25%

Low interest rates supporting current pricing with spreads healthyTen-year U.S. Treasury yield vs. overall institutional cap rates

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1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

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10.0%

19

95

Q4

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00

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16

(f)

20

17

(f)

20

18

(f)

10-Yr. Treasury Yield Overall Cap Rate

*Interest rates are quarterly average, cap rate is for privately-owned, mainly institutional-quality assets and is appraisal-based and market value-weightedSource: Moody’s Analytics, Federal Reserve Board of Governors, NCREIF, JLL

forecast

Spreads still at healthy levels

Macro drivers and disruptors for 2016 and beyond

INNOVATIONPOLITICS?

DEMOGRAPHICS

The D.C. Story

Metro Washington, DC at a glance

2ndlargest U.S. downtown

office market

(behind New York)

6thlargest regional population

in the U.S.

(6.1 million residents)

2ndhighest population growth

(trailing 3-yr)

(behind North Dakota)

1stin educational attainment

(nearly 60% possess a

college degree)

Highest average

household income

($109,892 per year)

Low historical unemployment

(currently 4.3% vs. U.S.

average of 5.3%)

3 major airports located within

30 miles

Recognized as a durable, low volatility,

“safe haven” market

due to federal government presence

Washington, DC submarkets snapshot

Georgetown2.2 MSF

$56.92 PSF

5.9% vacant

* Rents are average full-service asking

rents for Class A buildings

West End3.3 MSF

$57.42 PSF

14.4% vacant

East End40.3 MSF

$66.69 PSF

13.1% vacant

CBD33.8 MSF

$62.28 PSF

10.0% vacant

NoMa9.3 MSF

$51.23 PSF

12.8% vacant

Capitol Hill4.6 MSF

$62.03 PSF

10.9% vacant

Uptown 5.3 MSF $45.83 PSF 18.1% vacant

Southwest12.7 MSF

$49.53 PSF

14.9% vacant

Southeast3.9 MSF

$47.26 PSF

10.9% vacant

Government presence in Metro DC

48.8M s.f.of Government leased

properties (14.8%)

25% in total occupancy

-10,000,000

-5,000,000

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

0

100

200

300

400

500

600

700

800

public bills enacted into law

Metro DC net absorption

Bills enacted into law Net absorption s.f.


Washington, DC remains a political town and legislation fuels net absorption

The government is not the only large occupier headquartered in Metro DC


The high-tech sector is the new driver of growth

0.4

1.5

1.8

24.6

0.0 5.0 10.0 15.0 20.0 25.0 30.0

Legal services

Financial services

Federal government

Technology


Notable recent tech / creative

sector leases

Jobs added

year-over-year

(in thousands)

In the core, space upgrades and tenant search for efficiency fuel a split between

trophy performance and commodity

0%

5%

10%

15%

20%

25%

30%

35%

40%

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

To

tal v

ac

an

cy

am

on

g b

uil

din

gs

o

cc

up

ied

or

rec

en

tly

va

ca

ted

by

law

firm

50

K+

Built pre-2007 Built 2007+Projected



Creative tenants seeking offices in non-traditional locations

84

11

3

6

5

10

7

CORE21

8

Hecht Warehouse

4

Progression Place

11

700 Penn

3

Manhattan Laundry

6

Uline Arena

7

Union Market

The Yards

5

Wonder Bread Factory1050 30th Street1025 Thomas Jeff.

10

21

9

The Wharf

9

Share of leasing activity occurring within ½ mile of existing or

planned Metro…i.e. transit oriented activity


60.1

%

62.2

% 69.6

%

59.5

%

57.4

%

66.3

%

59.2

%

71.5

%

67.5

%

71.4

%

80.4

%

92.1

%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Sha

re o

f lea

sing

act

ivity

with

in ½

mile

of e

xist

ing/

plan

ned

Met

ro

65.0%2004-2013 avg.

92.1%2015

Washington, DC sales slow as owners adopt “hold” mentality


$591.6 M

5.0% avg. cap rate

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

$0.0

$1.0

$2.0

$3.0

$4.0

$5.0

$6.0

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Q1 2016

Sal

es v

olu

me

(in

bill

ion

$)

Sales volume

Average cap rate

Our Washington, D.C. market forecast

TENANT DEMAND

Grown driven by the emerging

tech/creative sector

DEVELOPMENT ACTIVITY

3 million s.f. of redevelopment activity

planned in the DC core

ASKING RENTS

Increases expected at the top (Trophy)

and bottom (Class B/C)

CAP RATES

Core assets will continue to achieve

record-low yields

SALES VOLUME

Attractive refinancing options will limit

buying opportunities

ECONOMIC GROWTH

Diversifying employment base will drive

Gross Regional Product


The Boston Story

Resilience

2015 Record

snowfall

Boston

MarathonSpirit

BO

ST

ON

BO

ST

ON

Boston at a glance

10thlargest MSA in the

US (4.7 million)

4thDensest population

#1 U.S. City for NIH

funding for 21 consecutive

years

#3 in U.S. for

VC investment Above peak

employment for the last two

years

4.0% unemployment rate,

below U.S. average of 5.0%

2ndhighest high tech

employment for US behind just

Silicon ValleyHighest concentration of life

science employment in the U.S.

Boston submarkets snapshot

Logan Airport

North

End

Beacon

Hill

Theater

District

South

End

South Station

2.3M s.f.

Longwood

Medical Area

Fenway

2.3M s.f.

8.2% vacant

$49.67 avg. asking rent

North Station

2.8M s.f.

2.9% vacant


East Cambridge

6.4M s.f.

3.8% vacant


14.6% yoy growth

Back Bay

12.3M s.f.

8.6% vacant


9.7% yoy growth

Seaport District

9.0M s.f.

7.9% vacant


Downtown

34.9M s.f.

8.3% vacant


8.5% yoy growth

South Station

2.3M s.f. 2.9%

vacant $45.25 avg.

asking rent

Fenway

2.3M s.f.

East Cambridge

6.4M s.f.

Back Bay

12.3M s.f.

North Station

2.8M s.f.

Seaport District

9.0M s.f.

Downtown

34.9M s.f.

Meds & Eds give Boston a stable coreGrowth in health services and education jobs provide a resilient foundation of the Boston economy

380.00

400.00

420.00

440.00

460.00

480.00

500.00

520.00

540.00

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Health services and education jobs have grown over 25% over the last decade,

With NO drop during the recession.

116,000 new jobs

Largest Employers

Source: JLL Research, Moodys.com, Boston Redevelopment Authority

It’s all about the talentCity of Boston Population Curve

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

15 to 19 20 to 24 25 to 29 30 to 34 35 to 39 40 to 44 45 to 49 50 to 54 55 to 59 60 to 64 65 to 69

millennials = 39%

gen-x = 21%boomers = 20%

34%people ages 20-34 in

City of Boston

Highest share of all

major cities in the U.S.

43.9%25+ with Bachelor’s or higher

City of Boston

28.9%25+ with Bachelor’s or higher

United States

150,000Graduates each year in

Greater Boston

A perfect storm for Boston

Big Dig / Greenway beautify

the city

Economic drivers hit

Boston’s sweet spot

Millennials drive vibrant

urban places

InnovationAccess & Aesthetics Demographics

Boston rents still have room to run while Cambridge rents surpass previous

peak on tech boom


Boston CBD Class A rent growth shows a ground up expansionQ2 2015 Q1 2016

$50.21

$57.34

$62.91

$71.24 $71.03

$65.64

$61.25

$54.10

Low-Rise (1-10)

Mid-Rise (11-20)

High-Rise (21-30)

Premier (31 plus)

Q3 2015 Q4 2015

-0.3%

4.4%

6.8%

7.6%

Boston’s hot investment market leaves few available trophy assetsTrophy sales last three years. Current Class A pricing: 4 – 5 percent cap rates; 5.5 – 6.5 percent unlevered IRRs; 7,7,5,3 percent annual rent growth

Our Boston office market forecast

TENANT DEMAND

Grown driven by life sciences and

technology

DEVELOPMENT ACTIVITY

2.2 million s.f. of development underway in

Boston and Cambridge – 49% preleased

ASKING RENTS

CBD Class A rents have room to grow,

still 12.6 percent off-peak

CAP RATES

Stabilized assets will continue to achieve

record-low yields

SALES VOLUME

Due to lack of trophy product on

the market

ECONOMIC GROWTH

Growth in knowledge and innovation

industries


Thank you.

Ben Breslau

International Director, Research

economic and office market outlook · in the u.s. domestic strength is outweighing global weakness...

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