u.s. office market trends and outlook (q1 2016)

United States office overview and

outlook

Q1 2016

Although net absorption

fell to 7.7 million square

feet in Q1 2016, local

markets expect to see a

rebound later in the year

Q4’s strong occupancy

growth of 18.6 m.s.f. may

have hindered Q1 gains

as well.

Q1 2016 U.S. office market at a glance

1

Local markets slowed slightly during Q1, but fundamentals remain intact

Source: JLL Research

25,944,624 s.f. Leasing activity > 20,000

s.f.

96,773,145 s.f. Q1 2016 under

construction

Total leasing volumes

declined in Q1 2016, while

the share representing

growth fell. This mirrors

previous trends of slower

first quarters and comes

off the back of a strong

Q4. Activity will likely

rebound later in the year.

4,818,003 s.f. Q1 2016 tech leasing

40.0% Share of volume

representing growth

14.8% Total vacancy

$32.28 p.s.f. Q1 2016 average

asking rents

7,666,904 s.f. Q1 net absorption (s.f.)

78.2% Class A share of quarterly

net absorption

77.2 vs. 155.9 m.s.f. CBD vs. suburban net

absorption since 2010

14.0% vs. 15.8% CBD vs. suburban

vacancy

-1,501,300 s.f. Quarterly drop in

sublease space

The increasing frequency

of speculative completions

and lower pre-leasing

rates, coupled with a

slowdown in occupancy

growth during the first

quarter, kept vacancy

relatively flat at 14.8

percent.

+3.2%/+8.7% Quarterly and annual

rent growth

8:45 U.S. office market

clock position

Quarterly rental growth

reached its highest point

this cycle as the market is

near the 9:00 position on

the clock, representing the

fastest rate of rent growth.

Quality assets and core

Class B properties are

seeing sustained gains.

51.4% Pre-leasing rate

10,330,565 s.f. Q1 2016 construction

starts

Development has yet to

reach the 100 m.s.f. mark

and may not hit it this

cycle as the market nears

its cyclical peak. Over the

course of 2016, we

anticipate an increase in

deliveries that will begin to

add needed new supply.

Leasing activity

Leasing activity

30,000,000

35,000,000

40,000,000

45,000,000

50,000,000

55,000,000

60,000,000

65,000,000

70,000,000

2008 2009 2010 2011 2012 2013 2014 2015 2016

Leas

ing

activ

ity (

s.f.)

Total leasing activity (s.f.) 4-quarter moving average (s.f.)

3

Leasing volumes dropped substantially in Q1 2016 as macroeconomic uncertainty paused activity


Leasing by industry

585,175

750,158

896,172

907,215

947,266

986,749

1,373,322

1,715,609

1,806,035

1,856,068

2,638,713

4,818,003

0 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000

Transportation

Energy and utilities

Government

Real estate

Accounting and consulting

Insurance

Law firm

Media and entertainment

Professional services

Healthcare

Financial services

Technology

Leasing activity (s.f.)

4

Tech and finance continue to dominate activity; despite slowdown, energy still a large component


Expansionary and contractionary activity

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016

Sha

re o

f act

ivity

(%

)

Growing Stable Shrinking

5

A slowdown in expansionary leasing due to limited options for growth became pronounced in Q1

53.8% Stable

40.0% Growing

6.2% Shrinking


Growth by industry

8.6%

17.4%

22.8%

23.9%

24.7%

27.3%

28.0%

29.4%

31.5%

31.5%

36.8%

43.1%

44.4%

54.7%

54.8%

56.1%

56.4%

61.3%

63.6%

65.1%

71.0%

72.1%

83.1%

85.8%

100.0%

68.2%

22.9%

77.2%

76.1%

45.3%

60.0%

37.1%

70.6%

62.4%

68.5%

42.0%

56.9%

55.6%

45.3%

38.9%

43.9%

43.6%

38.7%

36.4%

31.0%

29.0%

27.9%

16.9%

14.2%

0.0%

23.1%

59.6%

0.0%

0.0%

30.0%

12.6%

34.9%

0.0%

6.1%

0.0%

21.3%

0.0%

0.0%

0.0%

6.3%

0.0%

0.0%

0.0%

0.0%

3.8%

0.0%

0.0%

0.0%

0.0%

0.0%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Law firm

Aerospace and defense

Nonprofit

Media and entertainment

Telecom

Government

Insurance

Automotive

Financial services

Wholesale

Education

Marketing and advertising

Energy and utilities

Architecture and engineering

Accounting and consulting

Other

Healthcare

Real estate

Transportation

Technology

Profesional services

Travel services

Food and beverage

Life sciences

Retail and hospitality

Share of activity (%)

Growing Stable Shrinking

6

High-growth sectors such as life sciences and tech remain on the rise, but rate slowing


Market Q1 2016 leasing volume (s.f.)

New York 3,527,026

Chicago 2,073,539

Boston 1,644,348

Washington, DC 2,812,190

Dallas 1,099,689

Austin 916,661

Seattle-Bellevue 883,959

San Francisco 790,011

New Jersey 779,740

Los Angeles 767,567

All other markets 10,649,894

United States 25,944,624

Leasing volume by market

7

Primary markets continue to drive activity, but top 10 share equates to only 2/3 of national volume

New York Chicago Boston Washington, DC

Dallas Austin Seattle-Bellevue San Francisco

New Jersey Los Angeles All other markets


Leasing activity

8

Although not necessarily large users, high-growth creative and technical industries are expanding


Boston

Shire Pharmaceuticals

45-55 Hayden Avenue

177,000 s.f.

Miami

Telemundo

45-55 Hayden Avenue

150,000 s.f.

Los Angeles

Netflix

ICON at Sunset Bronson

123,221 s.f.

Clear Channel

3400 W Olive Avenue

75,214 s.f.

Silicon Valley

Pharmacyclics

920 Stewart Drive

35,422 s.f.

New York

MG Engineering

116 W 32nd Street

45,000 s.f.

Leasing activity by type

9,852,316

6,653,773

3,766,592

2,816,753

1,419,696

258,109

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

Relocation withinmarket

Renewal Expansion in market New Expansion in building Extension (< 36-month term)

Leas

ing

activ

ity (

s.f.)

9

Movements to new space now on the market helped to boost in-market relocation activity in Q1


Net absorption

Net absorption

-5,000,000

0

5,000,000

10,000,000

15,000,000

20,000,000

2010 2011 2012 2013 2014 2015 2016

Qua

rter

ly n

et a

bsor

ptio

n (s

.f.)

11

Despite dropping sharply compared to a heavy-hitting Q4, YTD 2016 totals higher than 2015


Market Net absorption (s.f.)

Chicago 1,655,104

Seattle-Bellevue 838,562

Silicon Valley 824,960

Austin 774,647

Philadelphia 604,158

San Diego 442,206

Los Angeles 432,114

Phoenix 423,748

Fairfield County 402,225

San Antonio 395,164

All other markets 1,419,748

United States 8,212,636

Chicago Seattle-Bellevue Silicon Valley Austin

Philadelphia San Diego Los Angeles Phoenix

Fairfield County San Antonio All other markets

Net absorption by market

12

Market-by-market performance was mixed, with diversified economies continuing to lead in Q1


Net absorption by market

13

Declines in energy and occupancy losses in New York reduced diversity of growth in Q1 2016


2,937,589

841,876 0

3,408,606

0 478,833

38.3% Tech

0.0% NYC/DC

11.0% Sun Belt

0.0% Energy

Q1 2016

44.5% Diverse

2014 2012

12,753,090

3,170,589

5,875,838

16,315,899

8,366,896

8,609,523

23.1% Tech

15.2% NYC/DC

5.8% Sun Belt

10.7% Energy

29.6% Diverse

10,565,544

2,439,798

4,413,421

11,523,886

0 0

36.5% Tech

0.0% NYC/DC

8.4% Sun Belt

15.2% Energy

39.8% Diverse

Net absorption by asset class

4,869,934

1,550,062

805,013 784,047

145,982 57,598

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

Suburban Class A CBD Class A Suburban Class B CBD Class B CBD Class C Suburban Class C

Qua

rter

ly n

et a

bsor

ptio

n (s

.f.)

14

Take-up of quality space continues to drive absorption gains, particularly in new construction


78.2% Class A share

19.3% Class B share

2.5% Class C share

Net absorption by submarket

202,358

230,179

235,542

238,113

256,913

258,555

273,712

279,473

308,656

312,416

440,925

514,896

528,770

0 100,000 200,000 300,000 400,000 500,000 600,000

Cupertino (Silicon Valley)

Midtown (Atlanta)

Mid-Cambridge (Boston)

Greenway Plaza (Houston)

Charlotte CBD

Playa Vista (Los Angeles)

Northwest (Austin)

South Financial District (San Francisco)

Seattle CBD

River North (Chicago)

East Loop (Chicago)

Sunnyvale (Silicon Valley)

Route 28 South (Northern Virginia)

Quarterly net absorption (s.f.)

15

Despite muted occupancy growth, industry-heavy submarkets (especially suburban) led the way


Net absorption by asset class

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2010 2011 2012 2013 2014 2015 2016

Cum

ulat

ive

net a

bsor

ptio

n (%

of i

nven

tory

)

CBD Class A Suburban Class A CBD Class B

Suburban Class B CBD Class C Suburban Class C

16

Flight to quality, industry drivers and more space make suburban Class A lead in occupancy growth


+10.1% Suburban Class A

+7.7% CBD Class A

+3.1% Suburban Class B

+2.1% CBD Class B

+0.4% CBD Class C

+0.4% Suburban Class C

Cumulative net absorption

(% of inventory)

Vacancy

Total vacancy

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

Tot

al v

acan

cy (

%)

18

Total vacancy remained largely flat as deliveries countered slower absorption


13.8% vs. ~14.7% Current cycle will likely have

slightly higher cyclical low

Total vacancy by asset class

11.5%

12.0% 12.2%

14.2%

15.4%

17.5%

8.0%

9.0%

10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

16.0%

17.0%

18.0%

CBD Class C CBD Class A CBD Class B Suburban Class C Suburban Class A Suburban Class B

Tot

al v

acan

cy (

%)

19

Quality and creative core asset vacancy remains limited; commodity dealing with surplus


Total vacancy by asset class

-600

-500

-400

-300

-200

-100

0

100

200

300

2010 2011 2012 2013 2014 2015 2016

Vac

ancy

dec

line

sinc

e Q

1 20

10 (

bp)



20

As with absorption, vacancy has fallen fastest in quality suburban properties


-510bp Suburban Class A

-420bp CBD Class A

-330bp Suburban Class B

-300bp CBD Class B

-170bp CBD Class C

150bp Suburban Class C

Vacancy decline

since Q1 2010

Total vacancy by submarket

21.2%

12.0%

14.1%

17.3%

12.3%

13.9%

15.1%

30.6%

17.5%

4.5%

5.1%

5.5%

6.4%

7.2%

9.1%

10.4%

11.5%

11.6%

0% 5% 10% 15% 20% 25% 30% 35%

Tempe (Phoenix)

Seaport District (Boston)

Playa Vista (Los Angeles)

East Loop (Chicago)

Market Street East (Philadelphia)

Times Square (New York)

West (Minneapolis)

Central Perimeter (Atlanta)

Brickell (Miami)

Total vacancy (%)

Class A Class B

21

Class A/B variance wide in many markets, but commodity suffers from functional obsolescence

Source: JLL Research – submarkets ranked by Class A vacancy

Sublease vacancy

30,000,000

40,000,000

50,000,000

60,000,000

70,000,000

80,000,000

90,000,000

100,000,000

2009 2010 2011 2012 2013 2014 2015 2016

Sub

leas

e va

canc

y (s

.f.)

22

Even as sublease vacancy rises in Houston and begins to in the Bay Area, it fell in Q1 on aggregate


U.S. office clock (overall)

24

As landlords pushed rents up by 3.2 percent, markets move farther along in the cycle


Peaking

phase

Falling

phase

Rising

phase

Bottoming

phase

Dallas

Jacksonville, Miami, Orange County

New Jersey,

Washington, DC

Atlanta, New York, Portland, Tampa

Charlotte, Fort Lauderdale, Milwaukee,

Oakland-East Bay, Orlando, Salt Lake City

Baltimore, Detroit, Hartford, West Palm Beach

Los Angeles, San Diego, Seattle-Bellevue

Cleveland, Raleigh-Durham, Sacramento, St. Louis

San Francisco Peninsula

San Francisco

Denver, Silicon Valley

Phoenix

Boston, United States

Hampton Roads, Long Island, San Antonio

Minneapolis

Chicago, Indianapolis, Richmond

Philadelphia, Pittsburgh, Westchester County

Austin, Nashville

Houston

Columbus

Cincinnati, Fairfield County

U.S. office clock (CBD)

25

CBDs are moving slightly faster than the market overall, entering peaking phase of the cycle

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, Richmond

Minneapolis, Seattle

Chicago, Jacksonville

Cincinnati, Phoenix, San Antonio, West Palm Beach

Austin, Tampa

Milwaukee, Raleigh-Durham, Sacramento

San Francisco, San Jose CBD

Columbus, St. Louis

Salt Lake City

Detroit, Hartford, Washington DC, White Plains

Cleveland, Indianapolis

Houston

Fairfield County, Pittsburgh


U.S. office clock (suburban)

26

Peaking

phase

Falling

phase

Rising

phase

Bottoming

phase

Dallas

Silicon Valley

Miami, Phoenix

Lehigh Valley,

Northern NJ Central NJ, Columbus, Hartford, Northern DE, West Palm Beach

Charlotte, Chicago, Cleveland, Milwaukee,

Oakland-East Bay, Westchester County

Fort Lauderdale, Hampton Roads, Orlando, Long Island,

Raleigh-Durham, Philadelphia, Sacramento, San Antonio

Baltimore

Bellevue, Cambridge

Boston, Orange County, Seattle, St. Louis, United States

Atlanta, Jacksonville, Portland, Tampa

Los Angeles, Nashville, San Diego, Seattle-Bellevue

San Francisco Peninsula

San Francisco

Minneapolis, Salt Lake City

Washington, DC

Indianapolis

Austin, Richmond

Denver

Southern NJ

Houston

Cincinnati, Fairfield County

Detroit, Pittsburgh


Quarterly asking rent growth

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

2008 2009 2010 2011 2012 2013 2014 2015 2016

Qua

rter

ly r

ent g

row

th (

%)

27

Landlords confidence is still on the rise, with a 3.2-percent spike in rents the highest this cycle


Rent growth by asset class

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

2010 2011 2012 2013 2014 2015 2016

Ren

t gro

wth

sin

ce Q

1 20

10 (

%)



28

CBD Class A rent growth continues unabated, while suburbs and commodity see modest increases


+14.4% Suburban Class A

+29.0% CBD Class A

+9.9% Suburban Class B

+12.2% CBD Class B

+13.8% CBD Class C

+12.7% Suburban Class C

Rent growth since

Q1 2010

CBD rent premium

$15.00

$20.00

$25.00

$30.00

$35.00

$40.00

$45.00

2010 2011 2012 2013 2014 2015 2016

Ave

rage

ask

ing

rent

($

p.s.

f.)

29

The gap between CBD and suburban rents continues to rise without signs of slowing


CBD rents are

62.3% higher than in

the suburbs

Rent growth by submarket

7.4%

7.9%

8.8%

8.9%

10.2%

11.9%

14.8%

16.5%

17.3%

18.5%

19.8%

20.9%

39.2%

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Metropark (New Jersey)

CBD (Washington, DC)

Austin CBD

Redmond (Seattle)

Fort Lauderdale CBD

River North (Chicago)

South Financial District (San Francisco)

Irvine Spectrum (Orange County)

Santa Monica (Los Angeles)

Portland CBD

BWI/Anne Arundel (Baltimore)

Gramercy Park (New York)

Redwood City (SF Peninsula)

Class B year-over-year rent growth (%)

30

As demand spills into the Class B sector, rents in many submarkets are rising appreciably


Concessions

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

$22

$23

$24

$25

$26

$27

$28

$29

$30

$31

$32

2008 2009 2010 2011 2012 2013 2014 2015 2016

Fre

e m

onth

s

TI a

llow

ance

($

p.s.

f.)

TI allowance ($ p.s.f.) Free months

31

Concessions have remained steady as new deliveries counter tightening conditions elsewhere

Source: JLL Research – concessions based on 10-year term

Construction

Under construction

0

20,000,000

40,000,000

60,000,000

80,000,000

100,000,000

120,000,000

140,000,000

160,000,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Und

er c

onst

ruct

ion

(s.f.

)

33

A spike in starts boosted development activity to 96.8 m.s.f. in Q1


Construction starts

7,322,061

11,407,786

13,060,032

4,781,395

11,818,372

9,168,187

9,855,374

12,720,560 12,810,553

9,748,464

8,484,369

7,331,979

10,330,565

0

2,000,000

4,000,000

6,000,000

8,000,000

10,000,000

12,000,000

14,000,000

2013 2014 2015 2016

Con

stru

ctio

n st

arts

(s.

f.)

34

After a three-quarter slowdown, starts are back above the 10 m.s.f. mark


Construction starts

35

Active developers continue to boost the pipeline, with many confident to start fully spec projects


A

1800 Owens Street

680,000 s.f.

Kilroy

0.0% pre-leased

222 2nd Avenue S

386,000 s.f.

Hines

19.9% pre-leased

425 Park Avenue

670,000 s.f.

L&L

29.9% pre-leased

151 N Franklin Street

825,000 s.f.

John Buck

48.5% pre-leased

3675 Market Street

300,000 s.f.

BioMed

100.0% pre-leased

The Boardwalk

537,224 s.f.

Trammell Crow

0.0% pre-leased

B

C

D

E

F

A B C

D E F

Completions

0

20,000,000

40,000,000

60,000,000

80,000,000

100,000,000

120,000,000

140,000,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Com

plet

ions

(s.

f.)

36

7.7 m.s.f. of the more than 44.0 m.s.f we expect to deliver in 2016 came to the market in Q1


Construction starts

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

40,000,000

45,000,000

50,000,000

2016 2017 2018 2019

Com

plet

ions

(s.

f.)

Speculative (pre-leased) Speculative (available) BTS

37

As the development cycle nears its peak in 2016, deliveries will diminish slowly through 2019


Completions

260,000

270,614

287,200

297,583

342,000

406,600

445,000

459,186

496,505

572,173

916,136

0 200,000 400,000 600,000 800,000 1,000,000

Cupertino (Silicon Valley)

Menlo Park (SF Peninsula)

128/Mass Pike (Boston)

Northwest (Austin)

Southwest (Washington, DC)

Houston CBD

Westchase (Houston)

Richardson/Plano (Dallas)

Far North Dallas

Santa Clara (Silicon Valley)

Sunnyvale (Silicon Valley)

Quarterly completions (s.f.)

38

Deliveries were overwhelmingly concentrated in select submarkets during the first quarter


Top submarkets Rest of U.S.

44.7%

Investment sales

Following five consecutive years of strong growth, office

transaction volumes increase by 1.0 percent year-on-year

40

$0.0

$50.0

$100.0

$150.0

$200.0

$250.0

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

Offi

ce in

vest

men

t sal

e vo

lum

es (

billi

ons

of $

US

)

Q1 Q2 Q3 Q4

Source: JLL Research, Real Capital Analytics (Transactions larger than $5.0m)

Primary and secondary cap rates continue to decline

41

1.8%

4.2%

5.2%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

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

10-year Treasury (%) Primary cap rates (%) Secondary cap rates (%)

Source: JLL Research, NCREIF, Board of Governors of Federal Reserve

Despite the interest rate hike, the spread between office cap rates and the 10-year Treasury has

widened slightly for primary and secondary markets

Occupational markets remain strong yet disjointed from

investment sales activity in Q1, notably in primary markets

42

-1,000

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2013 2014 2015 2016

Q1

2016

hig

hest

abs

orpt

ion

mar

kets

(th

ousa

nds

of s

.f.)

Chicago Seattle Silicon Valley Austin Philadelphia Los Angeles


Macro volatility, caution over pricing and limited asset

availability spurs quarterly declines in most primary markets

43

Source: JLL Research (Assets larger than 50,000 s.f.)

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

Prim

ary

mar

ket i

nves

tmen

t vol

umes

(m

illio

ns o

f $U

S)

Q1 2015 Q1 2016

Secondary markets have strongest first quarter in three years, as

primary markets in aggregate decline

44

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

$16,000

$18,000

$20,000

2013 Q1 2014 Q1 2015 Q1 2016 Q1

Prim

ary

mar

ket i

nves

tmen

t vol

umes

(m

illio

ns o

f $U

S)

Primary Secondary


45

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Ann

ual c

ap r

ate

fluct

uatio

ns

Compressing Stable Softening

Source: JLL Research, NCREIF; Includes 32 major office markets; Stable defined as markets seeing fluctuations within 10 basis points year-over-year.

Cap rates continue to compress with nearly 94.0 percent of markets

seeing compressing or stabilizing yields

Germany dominates as top origin of inbound capital, surpassing active

Asian and Canadian capital from prior two years

46


24.0%

21.9%

15.3%

13.5%

9.0%

16.4%

Norway Germany

Canada Singapore

South Korea All others

35.1%

15.8% 15.5%

9.5%

5.6%

18.5%

Canada China

Germany South Korea

Hong Kong All others

Most active foreign investors

(2014)


(2015)

37%

22%

12%

10%

6%

2%

Germany Qatar

South Korea Canada

China United Kingdom


(Q1 2016)

COPYRIGHT © JONES LANG LASALLE IP, INC. 2016

Julia Georgules Director – Office Research

+1 415 354 6908

[email protected]

Phil Ryan Senior Research Analyst – Office and Economy Research

+1 202 719 6295

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Sean Coghlan Director – Investor Research

+1 215 988 5556

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Rachel Johnson Research Analyst – Capital Markets

+1 312 228 3017

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u.s. office market trends and outlook (q1 2016)

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