Q4 2017 Office Brief.Indd
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The Lee Offi ce Brief 1 LEE OVERVIEW 2 NATIONAL OVERVIEW 2017 3 KEY MARKET SNAPSHOTS 4 SIGNIFICANT TRANSACTIONS Q4 5 NATIONWIDE LEE OFFICES 1 CANADA THE POWER OF THE LEE NETWORK THE LEE ADVANTAGE LEE & ASSOCIATES IS A COMMERCIAL REAL EAST WEST MIDWEST ESTATE BROKERAGE, MANAGEMENT AND APPRAISAL SERVICES FIRM. ESTABLISHED IN 1979, LEE & ASSOCIATES HAS GROWN ITS SOUTH SERVICE PLATFORM TO INCLUDE OFFICES IN THE UNITED STATES AND CANADA. Every Lee SOUTH & Associates offi ce delivers world class service to WEST an array of regional, national and international clients--from small businesses and local investors SERVING OUR CLIENTS to major corporate users and institutional THROUGHOUT THE U.S. AND investors. Our professionals combine the latest CANADA technology, resources and market intelligence ARIZONA with their experience, expertise and commitment BRITISH COLUMBIA to superior service to optimize your results. CALIFORNIA COLORADO INDUSTRY 1 FLORIDA SPONSORSHIPS & MARKET LEADER GEORGIA ORGANIZATIONS SPECIALIZING IN MARKET INTELLIGENCE IDAHO 2 ILLINOIS RELEVANT WORK INDIANA SEASONED PROFESSIONALS WITH RELEVANT MARYLAND TRANSACTION EXPERIENCE MICHIGAN 3 MINNESOTA WE SAVE YOU TIME MISSOURI CREATIVE PROBLEM SOLVING SKILL SETS NEVADA NEW JERSEY 4 ABILITY TO UNDERSTAND NEW YORK EFFECTIVE CLIENT COMMUNICATION OHIO PENNSYLVANIA 5 INTEGRITY SOUTH CAROLINA SHAPES OUR CULTURE & TEXAS DEFINES THE CHARACTER WASHINGTON WISCONSIN AFFILIATE INTERNATIONAL RELATIONSHIP 62% $11.6 billion 900 ▶ AUSTRIA ▶ NETHERLANDS ▶ BELGIUM ▶ POLAND ▶ FRANCE ▶ POLAND increase transaction volume professionals ▶ IRELAND ▶ SLOVAKIA in transaction 2016 and growing ▶ LUXEMBOURG ▶ SPAIN volume over 5 years nationwide ▶ TURKEY lee-associates.com 1 LEE OVERVIEW2 NATIONAL OVERVIEW 3 KEY MARKET SNAPSHOTS 4 SIGNIFICANT TRANSACTIONS 5 NATIONWIDE LEE OFFICES 2 National Economic Overview US OFFICE MARKET Remote Workers Crimp Growth - The Amazon Sweeps TRENDING IN Q4 ECONOMIC Although rents ticked upward and buildings traded at record prices, demand for offi ce space nationwide declined nearly a third in 2017, falling to its lowest level in four DRIVERS years as landlords face new economic realities of the changing workplace culture. A LOOK AHEAD The sidebar headline of the year, of course, was the Amazon sweepstakes with 20 cities that were short-listed from 238 vying to become the e-commerce giant’s GDP GROWTH second headquarters. EMPLOYMENT VACANCY RATES BY CLASS 2002-2017 EAST WEST MIDWEST ClasC s A ClasC s B ClasC s C Total Market SOUTH BC 17% CANADAC SOUTHWEST 15% 13% MONETARY POLICY 11% Amazon says it will pick a city in 2018 9% where it will create up to 50,000 jobs 7% paying an average of more than $100,000. The mammoth retailer 5% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 says it will need more than a half Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 million square feet of offi ce space to open its fi rst phase and up to 10 million square feet by 2024. Nineteen U.S. cities and Toronto are jockeying with FUTURE DELIVERIES incentives. New Jersey is offering Amazon up to $7 PRE-LEASED & UN-LEASED SF IN PROPERTIES SCHEDULED TO DELIVER UULn-Leased PreleasedPl billion in indirect tax subsidies. Atlanta is fl aunting an 55 eight-block Midtown technology hub with big blocks of spec high-rise space underway and a pool of top talent. 45 35 RECENT DELIVERIES 25 LEASED & UN-LEASED DELIVERIES LAST 5 YEARS UnUUn- LeasedLLeasedd LLeasedd 15 100 90 5 80 Millions SF Millions 0 70 2012 7 2012 8 201202 8 2012 8 Q1 Q2 Q3 Q4 60 50 Around the country, landlords faced weaker growth 40 in traditional offi ce occupancies. Net absorption 30 for premium space in 2017 gained 1.3%, Class B 20 absorption was down 43% from 2016 and overall 10 demand declined 32%. Millions SF Millions 0 2012001013 201010 4 20120015 201200 6 201017 lee-associates.com 1 LEE OVERVIEW2 NATIONAL OVERVIEW 3 KEY MARKET SNAPSHOTS 4 SIGNIFICANT TRANSACTIONS 5 NATIONWIDE LEE OFFICES 2 National Economic Overview The changing dynamics in tenant requirements have come hard and perhaps faster than expected. Legions of workers are plugging in remotely, and companies are cutting back on space an estimated 30% or more. Increasingly, the offi ce environment has become vital in recruiting and keeping talent. Requirements include more meeting space and common areas and buildings that are steps from shops, ABSORPTION & DELIVERIES PAST 7 QUARTERS restaurants and entertainment. Tenants want shorter leases. Downtowns are preferred. Absorption & Deliveries Despite rising construction costs and operating Past 7 Quarters expenses, building owners are spending heavily 30 to compete. Co-working – a term describing a 24 25 23.4 niche formerly known as executive suites, has 18.7 19.1 19.4 20 18.7 17.4 accounted for 9.1% of growth in the current cycle 15.5 16.5 14.7 14.3 and is led by WeWork’s $20-billion valuation. 15 12.4 11.9 11.9 Requirements for big blocks of space are less 10 common in downtown and suburban markets. 5 On the investment side, pricing has kept up with 0 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 GDP growth. But offi ce sales volumes nationally were down 8% in 2017 and 12% since 2015, Net AbsorpƟon Deliveries HISTORICAL RENTAL RATES 2002 - 2017 ClassClC A ClassClC B ClassCl C TotalT Market $35 $30 $25 Year es/SF/Y r $20 Dollar $15 $10 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 when the market saw big declines in mega portfolio deals. Additionally, CBD sales fell 21% in 2017. In Manhattan, transactions were down 36% in 2017 and 50% since 2015. Chicago and Dallas CBD offi ce sales also were down signifi cantly, partially due to an expectation of higher interest rates, increasing the bid-ask gap in markets where cap rates are below their long-term averages. This has also driven some investors into secondary markets in search of yield and higher cap rates. This shift in investor sentiment is benefi cial for offi ce owners and investors in second-tier CBD markets. California’s South Bay/San Jose market led the nation in offi ce growth, posting 6.1 million SF of net absorption, including the 2.8-million-SF Apple Park build-to-suit. Dallas/Ft. Worth weighed in with 5.7 lee-associates.com 1 LEE OVERVIEW2 NATIONAL OVERVIEW 3 KEY MARKET SNAPSHOTS 4 SIGNIFICANT TRANSACTIONS 5 NATIONWIDE LEE OFFICES 2 National Economic Overview million SF. Chicago’s offi ce market rallied with more than 3.9 million SF of absorption for the year after going 840,758 SF negative in 2016. Deliveries in 2017 totaled 89.2 million SF, the most in eight years, with Dallas/Fort Worth adding more than 9 million SF of space. More than 7.5 million SF were completed in South Bay/San Jose and 3.2 million SF was delivered in Houston. Top-lease-of-the-year honors go to Amazon’s 722,000-SF deal for the fi rst 40 fl oors of the 58-story Rainier Square Tower in Seattle. Dropbox leased 735,550 SF in San Francisco, and Ernst and Young leased 736,550 SF in Manhattan. Speaking of Manhattan, the six tallest buildings under construction in the U.S. are in the Big Apple and total 12.2 million SF. They are led by 3 World Trade Center. Silverstein Properties’ 80-story tower comes out in Q2 with 1.8 million SF of space available. Most of the other fi ve buildings are pre-leased. lee-associates.com 1 LEE OVERVIEW2 NATIONAL OVERVIEW 3 KEY MARKET SNAPSHOTS 4 SIGNIFICANT TRANSACTIONS 5 NATIONWIDE LEE OFFICES 2 National Economic Overview GDP GROWTH TRENDING IN Q4 Stronger-than-expected economic activity will produce a 3.98% fourth-quarter rise in GDP and Q1 2018 projection of 3.15%, according to estimates by the New York Fed. Other early estimates peg 2017’s GDP growth at a 2.3% annual rate. The tax overhaul passed late in the year certainly shakes up the landscape. The consensus is it will provide a fresh tailwind to what many see is a late-stage economy. Research popular with the overhaul’s proponents broadly suggests the tax cut will slice the trade defi cit in half and deliver a QUARTER-TO-QUARTER GROWTH IN REAL 1% shot or more to the GDP. Research also shows it will result in more of an accounting effect than improvement in worker income. Exhuberance about the economy is not exactly an emotion shared by Americans lately, and it’s looking less likely they’ll be able to help fuel more growth by shopping. U.S. consumer sentiment slid for the third straight month in January after hitting a 13-year high in October. Consumer debt as a share of disposible income is already at its highest level since the fi rst quarter of 2009. The personal savings rate has fallen to its lowest rate since 2007, meaning consomers have no more to give. If it’s the soaring stock market that is making people feel wealthy, there’s reason for concern. The savings rate was 5.7% in 1996 when a previous Fed chairman mused about “irrational exhuberance” during the dot-com bubble. A decade later, consumers were able to tap into frothy home equity to keep the economy humming. It all adds up to be an added burden on business to increase wages and give cover for elected leaders to increase domestic spending.