Investment Outlook
United States | Q1 2016 WHAT TO KNOW
JLL | United States | Investment Outlook | Q1 2016 2 WHAT YOU The effects of recent capital markets volatility on transactions is being WILL FIND felt in early 2016, and the sheer bumpiness of this volatility is further
reflected in shifts throughout the quarter itself across global financial WHERE and real estate capital markets. What started with elevated VIX levels, TO FIND IT atypical downward S&P trending with crude oil pricing and a broad lack of consensus around Federal Reserve policy has since shifted into VIX
index declines by less than half the quarter’s peak. Regardless of what
some believe to be newfound, near-term stability, current pricing levels, 4 Top 7 investment themes cycle longevity concerns and a heightened sensitivity to risk have
brought volatility into the real estate capital markets, driving an 11.2 11 Office 12 Overview percent decline in first-quarter volumes with early cautionary sentiment 13 Key investment themes 18 Notable transactions expected to impact second-quarter volumes. However, strong property
fundamentals, a robust and historic level of active capital and alleviated 19 Industrial 20 Overview investor angst is expected to drive flat to moderate declines in activity 21 Key investment themes 25 Notable transactions at year-end. Despite volume declines, pricing dynamics broadly remain
26 Multifamily resilient, with spread levels healthy and cap rates compressing 31 Overview 27 basis points on average over the last 12 months across sectors. With 28 Key investment themes Notable transactions 32 the latter stages of the cycle, the risk of macro or sector pressures
33 Retail impacting markets naturally increases. 34 Overview 35 Key investment themes 39 Notable transactions THIS YEAR we are monitoring markets closely with a keen eye on a few factors:
40 Lodging • Impact of new regulations, referendums, elections 41 Overview and the Fed 42 Key investment themes • Shifts to currently controlled financing standards 45 Notable transactions • Value-add underwriting 46 Net Lease • Foreign investment levels • Weak points in property markets, notably in 47 Overview 48 Key investment themes multifamily construction 51 Notable transactions THE EFFECTS
JLL | United States | Investment Outlook | Q1 2016 3 TOP INVESTMENT THEMES
After a bumpy January and February spur heightened caution in markets, signs of stability emerge 1. late in Q1
2016 started off with uncertainty in the equity markets due to fears of a throughout the first-quarter as investors closely monitored OPEC’s global economic slowdown. This came amid a heightened focus on the willingness to negotiate an agreement to curtail oil production to a slowing Chinese economy and plunging oil prices. These market jitters manageable amount. As a result, the markets rode the roller coaster of were felt throughout January, averaging 24 on the CBOE Volatility Index volatile crude oil pricing throughout the quarter, having declined nearly (VIX) and reaching a peak of 29, its highest level since September 2015. 12.0 percent in the month of January alone and reached a 13-year low While January might have been the most volatile month, February also had below $27. While still at compressed levels, oil pricing has been trending instances of heightened volatility, as when the S&P 500 sank to 1,829—its up in March and early April with four-week, rolling pricing growth lowest point since April 2014. Since January’s lows and February’s bottom, averaging 16.1 percent as of April 12. As the market has been gaining however, the market has rebounded. From its lowest point, the S&P has ground, the atypically strong correlation between oil and markets rebounded 14.3 percent and is now up 2.6 percent on the year. With this, diverged for a short period of time but has since converged again. In the the VIX index declined to as low as 13 in early April, less than half of the near term, a continued focus on oil pricing is warranted, providing an quarter’s peak and the lowest level on the indicator since August 2015. atypical yet relevant indictor for sentiment and the stability of the markets. The decoupling of the two will be reliant on increased certainty Oil pricing has been a key factor in the decline and more recent rebound of from OPEC on near-term production. the equity markets. The commodity and S&P 500 were correlated
Volatility in the public markets drops after a bumpy six months
40 2,500 Volatility Index China slowdown; Fear over first Fed rate China & Global S&P 500 RMB devaluation hike; Falling uncertainty; Oil 2,300 35 commodity prices falls below $27 2,100 1,900 30 China slowdown; Oil falls below $40; Fed 1,700 Falling commodity rate hike angst 25 prices; 1,500 Currency volatility Greece debt S&P 500 crisis 1,300 Volatility Index 20 1,100 900 15 Fed rate hike 700 10 500 15 15 15 16 15 15 16 15 15 16 16 Jul- 15 15 15 15 15 Oct- Apr- Apr- Jun- Jan- Jan- Feb- Mar- Feb- Mar- Aug- Sep- Nov- Dec- May- Source: JLL Research, CBOE, Bloomberg (data as of April 6, 2016)
6/2 6/23 11/8 12/24 Key OPEC Meeting, “Brexit” U.S. presidential CMBS regulation dates Vienna vote election goes into effect
to FOMC FOMC FOMC FOMC FOMC meeting meeting meeting meeting meeting watch 6/16–17 7/28–29 9/16–17 10/27–28 12/15–16
JLL | United States | Investment Outlook | Q1 2016 4 All eyes on OPEC: Concerns about oil and global growth is being reflected in atypical correlations to equity markets
Historically not correlated Strong correlation in 2016 60 2,150 2,070 42 55 2,100 40 50 2,020 38 2,050 45 1,970 36 40 Recent 2,000 divergence 34 S&P 500 S&P 500 Crude oil price
1,920 Crude oil price 35 32 1,950 Correlation 30 back on 30 1,900 1,870 S&P 500 25 28 Crude Oil 1,850 20 1,820 26 Jul-15 Apr-15 Oct-15 Apr-16 Jan-15 Jun-15 Jan-16 Feb-15 Mar-15 Feb-16 Mar-16 Nov-15 Dec-15 Aug-15 Sep-15 Apr-16 Apr-16 May-15 Jan-16 Jan-16 Jan-16 Jan-16 Feb-16 Feb-16 Feb-16 Feb-16 Mar-16 Mar-16 Mar-16 Mar-16 Source: JLL Research, CBOE, Bloomberg
2. CMBS pricing follows the wave of market volatility with recent signs of needed stability
During the first-quarter, financial market volatility caused CMBS new issued deal or designate a B-piece buyer to take on that risk. This goes issuance to briefly halt. CMBS new issuance dropped to $19.0 billion into effect in December of this year. The direct impact of risk retention is versus $27.0 billion this time last year, a 29.6 percent decline. With this still unknown, but the overwhelming consensus among the investor decline, spreads to swaps for AAA CMBS widened on a weekly basis, community indicates that CMBS pricing will be negatively impacted with reaching levels as high as 170 basis points versus 90 basis points during spreads likely to widen. Given recent volatility in the CMBS space, the same period last year. The unreliability of pricing in the market competing lenders such as life companies, banks and, more recently, impacted deal closings, leading CMBS to fall out of favor on recent debt funds are filling the gap with debt funds especially, popular in acquisitions and refinancings. Full-year new issuance estimates have secondary and tertiary markets. Life company lenders also recently since been significantly reduced to approximately $60.0 billion, a nearly committed $63.4 billion to commercial mortgages at the end of 2015, the 40.0 percent year-over-year decline. Issuance declines will be further highest in 11 years. Relative to levels earlier in the quarter, however, impacted by the modification to Dodd-Frank risk retention, which CMBS spreads have since tightened with declining market volatility, requires CMBS issuers to retain a 5.0 percent portion of every new exhibiting needed stabilization in pricing in the sector.
CMBS issuance takes a hit with market volatility Equity market volatility causes gradual increase in CMBS Spreads $250.0 40 165 170 170 165 180 140 160 35 127.5130 $200.0 120 140 30 114.5 99 120 Volatility Index 25 90 90 90.5 $150.0 100 20 80 $100.0 (bps) 15 60 10 $50.0 40 5 CMBS issuance (billions of $US) issuance (billions of CMBS 20 $0.0 0 0 Monthly Peak AAA Spreads to Swaps 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Jul-15 Apr-15 Apr-16 Oct-15 Jun-15 Jan-16 Mar-15 Feb-16 Mar-16 Aug-15 Sep-15 Nov-15 Dec-15 May-15 2016 YTD Source: JLL Research, Bloomberg, Commercial Mortgage Alert (through March 31, 2015) Source: JLL Research, Commercial Mortgage Alert (data as of April 1, 2016)
JLL | United States | Investment Outlook | Q1 2016 5 Capital deployment pressures heighten with increased caution, decline in deal flow and 3. continued discipline
So far in 2016, closed-end real estate funds have not raised capital equal to the expanded global buyer pool, increased caution, decreased deal to that of the historic year in 2015. Fundraising for real estate started the flow early in the year and continued discipline in markets. year with $12.7 billion through the first-quarter of 2016, a decline of 27.0 percent from this time last year. This comes following three years of Private equity funds have been most successful in early 2016 in elevated fundraising which averaged $68.5 billion annually; as a point of deploying this capital, having accounted for 26.1 percent of investment reference, this is $5.1 billion more than the average raised between 2005 sales activity in the first-quarter—thanks to large, noteworthy acquisitions and 2007. Over 50.0 percent ($6.4 billion) of the $12.7 billion has been by Blackstone and Starwood Capital, who collectively drove 68.7 percent raised for value-add deals and is the fastest-growing segment, as it is 9.6 of all equity fund acquisitions. With minimal funds raised and the growing, percent higher than the $4.5 billion raised last quarter. As a result of historic amount of capital sitting on the sidelines, it is becoming more fewer but larger acquisitions, global dry powder hit record highs once evident that investors are struggling to source desirable deals at target again both in North America and elsewhere, with $133.0 and $104.0 return levels. As the cycle proceeds, the continued discipline of this billion, respectively, at the close of the first-quarter. With pressures of capital will be a key leading indicator for future risks of distress and placing capital, large investors are struggling to deploy raised funds due liquidity across markets.
Following three elevated years, fundraising slowing in 2016 Record levels of global dry powder in the markets
$80.0 $140.0 Rest of the world North America $70.0 $120.0 $60.0 $100.0 $50.0 $80.0 $40.0 $60.0 $30.0 $20.0 $40.0 Capital raised billions (in $US) $10.0 (billions Dry powder of $US) $20.0 $0.0 $0.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016… Source: JLL Research, Preqin Source: JLL Research, Preqin 2016 YTD 2016 (Data includes North American closed funds as of April 12, 2016) 2016 YTD (Global data is an aggregate of historic closed funds as of April 1, 2016)
Resurgence of private equity
Institutional capital participation Private equity / investment fund participation 60.0% 60.0% 2015 50.0% 2016 YTD 50.0% Since 2004 40.0% 40.0%
30.0% 30.0%
20.0% 20.0%
10.0% 10.0%
0.0% 0.0% Industrial Multifamily Office Retail Hotels Industrial Multifamily Office Retail Hotels
Source: JLL Research, Real Capital Analytics (Transactions larger than $5.0m; Excludes hotels)
JLL | United States | Investment Outlook | Q1 2016 6 4. Slow start to 2016 in debt and equity markets parallels cautious investor sentiment
As the debt and equity capital markets have worked to find a floor, anticipated uptick in the latter half of the year, a function of a strong and increased cautionary investor sentiment early in 2016 over asset pricing, expanding pipeline in the multifamily, office and increasingly retail instability in the debt markets, cycle longevity and a resulting heightened sectors. With this, 2016 is looking to be a transitional and stable year near-term sensitivity to risk impacted first-quarter investment sales, with the U.S. forecasted to see activity flat at year-end. having declined year-over-year by 11.2 percent to $96.9 billion. Investment sale indicators presented a mixed picture at the close of the Heightened sensitivity to risk spurs early slowdown in 2016 first-quarter: $600.0 Multifamily Industrial Office $500.0 Retail Hotels Forecast • What is declining? Compared to the first-quarter of 2015, the hotels $400.0 (down 62.9 percent), industrial (down 52.5 percent) and retail (down 25.8 percent) sectors have all experienced notable declines early in $300.0 the year. The industrial sector, specifically, fell to its least active $200.0 quarter in nearly three years. $100.0 • What is growing? The multifamily sector (up 8.6 percent) reached its Total investment sale $0.0 second most active quarter of all time, with $35.4 billion of activity, $US) volumes (billions of positioning the sector to see yet another record year of activity 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016… following the same in both 2014 and 2015. • What about office? Office-sector deal closings in the first-quarter Source: JLL Research, Real Capital Analytics (Transactions larger than $5.0m; YTD 2016 remained modestly positive, up 1.0 percent to $35.6 billion of activity. Includes portfolio, entity-level transactions)
The continued expansion of portfolio transaction volumes is playing a key Excluding multifamily, slow start felt across sectors role in those sectors growing. After three consecutive years of +$100.0 $40.0 80.0% billion portfolio volumes with an acceleration to $163.7 billion last year— $30.0 60.0% the highest level since the historic high set in 2007—relative portfolio volumes continue to rise. If looking at portfolios as a percentage of $20.0 40.0% overall activity, first-quarter activity exceeded the 34.5 percent seen at $10.0 8.6% 20.0% year-end, reaching 35.5 percent of overall activity. While declining levels 1.0% of portfolios in the industrial and hotels sectors are paralleling overall $0.0 0.0% sector investment sale losses, peak expansionary portfolio levels in the -25.8% multifamily and office sectors led them to collectively drive over three- ($10.0) Q1 2013 -20.0% fourths of portfolio activity in the first-quarter. Both sectors experienced ($20.0) Q1 2014 -40.0% outsized portfolio levels relative to overall sector deal flow, representing -52.5% Q1 2015 -62.9% 39.9 and 36.9 percent of overall activity, respectively. ($30.0) Q1 2016 -60.0% Year-to-date change (%) Q1 investment sale volumes (billions of $US) investment sale volumes (billions of Q1 ($40.0) -80.0% Despite the slow start in the real estate capital markets, U.S. property Year-to-date change, Q1 2016 (%) markets remain strong, deliveries controlled and active capital levels robust, supporting stabilizing and calming investor sentiment as markets look to find a floor. Moving forward in 2016, cautious first-quarter Source: JLL Research, Real Capital Analytics (Transactions larger than $5.0m; sentiment is expected to impact second-quarter activity as well with an Includes portfolio, entity-level transactions) Multifamily and office sectors leading portfolio volumes to rise 60.0% Rising Stable Declining
39.9% 36.9% 40.0% 34.1% 24.2% 20.3%
transactions 20.0% Sector portfolio (as a % (asof sector a % total) 0.0% Source: JLL Research, Multifamily Office Retail Industrial Hotels Real Capital Analytics 2009 2010 2011 2012 2013 2014 2015 2016 YTD (Transactions larger than $5.0m)
JLL | United States | Investment Outlook | Q1 2016 7 5. Meeting the gap: REIT performance pressures benefitting dry powder in markets
With market volatility negatively impacting REIT performance throughout REIT disposition efforts benefitting dry powder in markets 2015, REIT acquisition participation declined to 9.2 percent in the first- quarter, down from 15.2 percent in 2015. With this, REITs are acquiring 4.2% almost as little relative deal flow as they had in 2009, with a muted and 5.7% 7.6% declining impact felt across all sectors, excluding hotels. However, while 15.1% less active on acquisitions, REITs have ramped up liquidity events to 14.5% 13.6% 17.6% raise capital, driving dispositions to rise 47.9 percent year-over-year and 14.4% 30.7% reaching $23.7 billion—the highest level of such activity since 2007. Nearly 75.0 percent of these dispositions reflect public-to-private and portfolio transactions, the highest level again since 2007. Year-to-date, 21.0% the multifamily and office sectors have experienced the highest 20.9% 20.5% concentration of REIT dispositions, accounting for more than three- 20.3% fourths of such activity. However, REIT pressure is being felt across nearly all sectors: 6.0% 21.6% • In the multifamily sector: Equity Residential closed on its $5.4 billion, 72-property portfolio disposition to Starwood Capital, with notable 2015 –Acquirers of REIT product, Q1 2016 25.3% 21.3% single-asset sales by both Equity and AvalonBay; • In the office sector: Blackstone closed on its $4.8 billion acquisition of 81.3% BioMed Realty Trust, and Brandywine Realty Trust exited a 58- property, 3.9 million-square-foot suburban office portfolio to Och-Ziff 47.1% 31.6% for $398.1 million, as well as Cira Square to South Korea–based Korea 57.8% Investment Management for an additional $354.0 million; and • In the retail sector: DRA closed on its $2.3 billion acquisition of Inland Real Estate Corp, and Macerich completed the closing of its all-in $2.3 38.0% billion, eight-property partial interest dispositions to Singapore-based 34.5% GIC and Heitman. 15.2% As REITs have sold nearly four times as much product as they have 10.7% acquired, public and private groups alike are taking advantage of the current gap between public and private markets. While REITs are leveraging currently liquid markets to raise capital to buy back shares, Retail Office Hotels reduce debt and rightsize portfolios—to name a few, private equity and Overall Industrial investment funds have acquired 38.0 percent of REIT-disposed product Multifamily over the last five quarters, meeting pressures to place capital amid record levels of dry powder on the sideline. Acquisitions had the highest Other Public concentrations in the hotels and multifamily sectors. This latter-cycle Private Institutional investors / SWFs shifting of product is not over. With REIT returns down 82.0 percent across property types in 2015 and 85.0 percent in 2016, respectively, Private equity / Investment funds from the recent 2014 peak and a robust supply of capital in competitive Source: JLL Research, Real Capital Analytics markets, REITs will continue to look to new deal structures, asset (Transactions larger than $5.0m; Excludes hotels) dispositions and other opportunities to improve performance.
JLL | United States | Investment Outlook | Q1 2016 8 6. Cross-border down but far from diminished
With the decline in U.S. activity in early 2016—notably in segments with levels decline. This was led by German capital, which accounted for high foreign participation last year such as primary office markets, 14.1 percent of first-quarter acquisitions, driven almost entirely by national industrial portfolios and Trophy hotels—cross-border primary market office acquisitions. acquisitions were down in the first-quarter. $7.8 billion of foreign transactions in the first-quarter puts the United States at a comparable Not all has reverted from 2015 activity: Partial interests continue to occur base to that seen in 2013 and 2014. Activity further points to a at structurally higher levels, with relative activity levels increasing over normalization of activity across various key indicators relative to 2015 full-year 2015 in four of the five sectors. As a result, 27.3 percent of deal flow: foreign investments this year have been via partial interests relative to the 14.0 percent average in the 2005-2007 period. With this, questions • The office sector reemerged as the most active sector, capturing remain unanswered and transparency low about the true impact of 64.2 percent of total inbound capital following a year of industrial- changes in FIRPTA regulation on the prevalence of these transactions. driven volumes; While strategic risks are present at the moment to ineligible sovereign • Capital is selectively transacting in the retail and multifamily sectors, wealth funds and insurance companies, these transactions are expected as well as in secondary markets. Net leased assets remain the to remain a structural norm in the U.S. in 2016 and beyond. gateway sector to secondary markets for most groups, with Philadelphia seeing the two largest transactions of foreign-acquired, The reversion to the norm is not expected to necessarily hold. net lease office transactions, both of which were over $100.0 million; Transactional data will remain volatile as groups across global regions • The prevalence of portfolios shifted back from the majority to minority, evolve strategies to identify opportunities, whether that entails varied deal accounting for one-third of total deal flow—the longer-term norm for structures, a deeper exploration into more niche subsectors or a this activity as well; disciplined look at secondary markets. The pace of cross-border • Europeans emerged as the dominant driver of activity, increasing transactions will increase throughout the year, with the buyer segment participation from 23.9 to 29.0 percent of first-quarter deal flow, as increasingly an active yet more selective group. neighboring Americas nations and Asia both saw relative participation Where is the capital focused? First quarter sees a shift from Cross-border investment normalizing in 2016 industrial back to office product
$80.0 Multifamily 64.2% Hotels $71.7 Office 27.0% $70.0 Industrial 39.4% Office 17.5% $60.0 Retail Multifamily 12.0% 13.9% 2016 YTD $50.0 7.6% 2015 $40.7 Retail 9.4% $40.0 17.6% 10-year average $33.4 5.3% $30.0 $29.2 $28.3 $23.8 Hotels 15.5% $22.3 20.7% $19.1 $20.0 $17.7 $13.0 5.4% Offshore investment sale volumes (billions of $US) investment sale volumes (billions of Offshore $9.2 Industrial 36.1% $10.0 $8.3 $7.8 8.4% $3.5
$0.0 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Inbound investment by sector (as a percentage of overall inbound) 2016 YTD Source: JLL Research, Real Capital Analytics (Transactions larger than $5.0m) Source: JLL Research, Real Capital Analytics (Transactions larger than $5.0m)
JLL | United States | Investment Outlook | Q1 2016 9 7. Fear factor remains, despite market rebound and lower volatility
Despite currently low volatility, recent unprecedented swings are Fear Barometer reflecting concern of a market sell-off harboring fear among investors. While the recent rebound could be 60 attributed partly to negotiations for oil production to remain at current Fear Barometer levels, lack of noise out of China and continued strong U.S. employment 50 Volatility Index news, the underlying fear among investors remains. This is rooted for some in a concern that markets could drop at any moment with catalytic 40 news related to China, oil, European political tension or the unknown. This sentiment was reiterated by recent comments from the Fed, which 30 echoed a sense of caution with slower-than-expected global growth and continued global economic and financial risk. The Credit Suisse Fear 20 Barometer, which measures investors’ appetite for down-side risk protection over the next three months, hit its highest point since its 10 inception in 1994. This is a key indication—further reiterated in other 16 indices such as Citibank’s Economic Surprise Index—that investors are - Jul-15 Apr Apr-15 Oct-15 Jan-15 Jun-15 Jan-16 Feb-15 Mar-15 Feb-16 Mar-16 Aug-15 Sep-15 Nov-15 Dec-15 expecting far worse than what economic statistics are showing, a factor May-15 in recent volatility in CMBS pricing and the heightened sensitivity to pricing dynamics. Source: JLL Research, Credit Suisse, CBOE, Bloomberg (data as of April 12, 2016)
JLL | United States | Investment Outlook | Q1 2016 10 Office
JLL | United States | Investment Outlook | Q1 2016 11 OFFICE Limited opportunities and high barriers to entry in primary markets benefitting expanding secondary market activity
U.S. Office property market U.S. Office investment -84 1.4% $35.6 1.0% 12-month change in total vacancy (bp) 12-month net absorption (as a % of inventory) Investment sales (YTD, billions of $US) YTD investment sale growth (%) 1.7% 8.7% 4.5% -41 12-month completions (as a % of inventory) 12-month rent growth (p.s.f., %) Average cap rate (%) 12-month change in cap rate (bp)
Compressed vacancy pushes rental rates. Supply constraints persist Secondary-market activity increase driven by large portfolio across the country as demand for quality and location remain high on the acquisitions and urban submarkets. While primary markets are list of must-haves for occupiers. In CBDs across the U.S., 11 markets are seeing moderate decreases in activity, diversification into secondary recording vacancy rates below 10.0 percent with an average vacancy in markets is evidenced, leading secondary markets to drive U.S. CBDs of 12.1 percent. The suburbs are recording an average vacancy of investment sale growth. 16.3 percent. Yield compression continues, though divergence appears in Rents on the rise as available large blocks diminish. In Q1, new secondary markets. Nationally cap rates have compressed 30 basis developments was partially responsible for the 3.2 percent increase in points over the past 12 months from 4.8 to 4.5 percent. All primary rents across the U.S. In particular in the Class A space, large block markets have recorded compression, while secondary markets are supply is depleting with rents rising in tandem by 5.5 percent over the bifurcating. One cluster of select leading secondary markets are slowing past 12 months. in the cycle, while the other cluster of emerging secondary markets is driving compression nationally with over 60 basis points of downward New supply outpaces occupancy growth. Development volume movement in the past 12 months. increased in the first-quarter by 9.7 million square feet, a 31.8 percent increase quarter-over-quarter. This marks the highest level of Foreign activity declines in the first-quarter, while European groups development thus far in the cycle. overtake Asian as most active source. Foreign activity accounted for 12.1 percent of total volume in the first-quarter, a decrease quarter-over- First-quarter pullback in investment volume after five years of quarter and below the cycle norm. In the first-quarter, Germany growth. Modest growth of 1.0 percent year-over-year recorded $35.4 accounted for 37.0 percent of total foreign activity, shifting from Chinese billion of capital markets activity. Despite the softening, $35.4 billion still and Canadian groups, who dominated in 2015. makes it the second most active quarter of the past five years. While primary market activity is down quarter-over-quarter, secondary markets reach peak levels relative to primary.
Following five consecutive years of strong growth, office Primary and secondary cap rates continue to decline transaction volumes increase by 1.0 percent year-over-year 10-year Treasury (%) $250.0 10.0% Primary cap rates (%) Q1 Q2 Q3 Q4 Secondary cap rates (%) $200.0 5.3% $150.0 5.0% $100.0 4.2% $50.0 1.8%
sale volumes 0.0% (billions of $US) (billions of
Office investment $0.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: JLL Research, Real Capital Analytics (Transactions larger than $5.0m) Source: JLL Research, NCREIF, Board of Governors of Federal Reserve 2016 YTD
JLL | United States | Investment Outlook | Q1 2016 12 TOP OFFICE THEMES
Over the course of 2016, rental rate increases will continue but may slow Compressed vacancy rates push rental rates as markets in the peaking phase of the cycle reach an inflection point 1 while welcoming new supply across markets. In the longer term, the eventual cool-down of the labor market and further economic uncertainty globally will likely signal a slowdown in leasing dynamics starting in 2017 Supply constraints persisted across the country as demand for both and moving into 2018. quality and location remain high on the list of must-haves for occupiers. Across CBDs, 11 markets posted vacancy rates below 10.0 percent, and below the CBD average vacancy rate of 12.1 percent. Compared to the suburbs, which came in at a 16.3 percent vacancy rate, six suburban New supply outpaces occupancy growth, but not markets reported single-digit vacancy rates—each benefitting from 2 for long proximity to dynamic, urban CBDs that have captured occupier demand accordingly over the course of this cycle. During the first-quarter, total U.S. development volume increased by 9.7 Total Total million square feet—a 31.8 percent quarter-over-quarter increase in CBD vacancy Suburb vacancy construction starts—to bring the total development pipeline to 96.8 rate rate million square feet. This marks the highest level of development thus far in the cycle as consistent expansionary activity has encouraged Oakland 5.1% Nashville 4.5% developers to break ground where supply constraints persist. Despite Portland Central City 6.5% Salt Lake City 5.4% improved fundamentals in most U.S. office markets, however, many Austin 6.7% Boston (Cambridge) 6.7% secondary and tertiary markets await minimal new supply, and where New York 6.9% Portland-Eastside 7.2% development is under way, high preleasing rates have reduced the (Midtown South) supply relief tenants would like to see. Primary markets, which compose Raleigh-Durham 7.6% San Francisco 7.5% 44.8 percent of the total office market, also contribute the largest share Seattle (Downtown) 7.7% Seattle (Eastside) 9.3% of developments to the total pipeline with 53.8 million square feet. San Francisco 8.5% Portland-Vancouver 9.3% Conversely, among the 24 tertiary markets that JLL tracks, only 11.3 Charlotte 8.5% million square feet (or 1.4 percent of total inventory) is currently under Philadelphia CBD 8.6% construction. Additionally, eight markets, including Jacksonville, Tampa and West Palm Beach, remain without any projects in the pipeline. Salt Lake City 9.2% Boston 9.6% As the development cycle nears its peak in 2016, deliveries will diminish slowly through 2019
During the first-quarter, new developments were partially responsible for 50,000,000 Speculative (pre-leased) the 3.2 percent spike in rents seen across the 50 markets that JLL 40,000,000 Speculative (available) tracks, but rent growth continues to be highly variable at the class level. BTS Quarterly growth in CBD Class A submarkets continues to exceed the 30,000,000 national average by 30 basis points, but this gap is lower than in earlier quarters. With the readily available supply of large, Class A blocks in the 20,000,000 suburbs depleting, landlord confidence in that sector has risen appreciably. Asking rents in this segment increased by 1.9 percent over Completions (s.f.) 10,000,000 the quarter and 5.5 percent over the year. The spillover into Class B space has also been notable as well, with a 6.3 percent annual jump 0 2016 2017 2018 2019 in rents. Source: JLL Research
JLL | United States | Investment Outlook | Q1 2016 13 First-quarter pullback in capital markets activity Despite softened growth, occupancy markets 3 after five consecutive years of growth 4 remain strong and disjointed from capital markets
First-quarter 2016 volumes increased a modest 1.0 percent year-over- Despite the slowdown in investment sales, office leasing fundamentals year after five consecutive years of strong increases in office capital remain strong, with rents increasing across the U.S. by 3.2 percent. At markets activity. Despite this increase, $35.4 billion of investment sales 7.7 million square feet of absorption, take-up has slowed from the latter still makes it the second most active quarter of the last five years, a part of 2015, although the lack of expansionary activity is likely due to function broadly of 2015 deal closings. Current volatility in the macro supply constraints in single-digit occupancy markets. The first-quarter economy, caution over pricing levels and scarcity of assets on the saw a realized divergence in occupancy and capital markets market drove declines in most primary markets. Chicago, following a fundamentals, especially in the primary markets. Overall primary very strong year in 2015 and the first acquisition of an office asset priced markets saw a positive absorption reading, indicating that strong leasing at over $1.0 billion, saw volumes decrease to $472.6 million. Silicon fundamentals are catching up to the capital markets, which drove pricing Valley also recorded a sharp decline after 2015 sales volume reached in the early stages of the cycle. As an example, Chicago, the primary $3.1 billion and per-square-foot pricing of $1,300, while first-quarter 2016 market with the largest decrease in investment sales, recorded the volumes in Silicon Valley dropped to $147.0 million. Instability in energy largest quarterly absorption figure of any market in the U.S. with 1.7 markets is further suppressing capital markets activity in Houston, with million square feet. Seattle came in after Chicago in terms of absorption less than $100.0 million in transactions year-to-date in 2016. While and posted investment volumes slightly higher than average, although primary market activity overall is down quarter-over-quarter, Boston and below the high levels recorded at earlier points in the cycle. Los Angeles posted strong first-quarters with $2.5 billion and $1.8 billion On the other hand, leasing and capital markets fundamentals continue to in transactions, respectively. Los Angeles activity was boosted by the more so move in tandem in the secondary markets. Austin, however, the Westside portfolio acquisition, totaling 1.7 million square feet, by Douglas highest secondary market for absorption, posted a moderate decrease in Emmett Realty and Qatar Investment Authority for $1.3 billion, while in volume quarter-over-quarter. Other secondary markets leading in Boston, Blackstone’s acquisition of BioMed Realty Trust, 21.0 percent of absorption for the quarter—Philadelphia, San Diego and Phoenix—are asset square footage being in Cambridge, elevated overall sales volume. continuing to see upward trending investment volume. Across the U.S. In secondary markets, however, investment activity remains strong, this cycle, strong capital markets activity outperformed occupier markets, reaching peak levels relative to primary markets in the first-quarter, with which had been slower to recover after the downturn. In early 2016, this two markets recording transaction volumes over $1.0 billion. As we move outperformance has reversed, driving disjointed indicators across most further into 2016, flat growth to moderate declines in activity are markets—reflective of an underlying improvement in income projected as a result of these dynamics. fundamentals across more markets.
Following five consecutive years of strong growth, office Occupational markets remain strong yet disjointed from investment transaction volumes increase by 1.0 percent year-over-year sales activity in Q1, notably in primary markets
$250.0 7,000 Chicago Q1 Seattle 6,000 Q2 Silicon Valley $200.0 Austin Q3 5,000 Philadelphia Q4 Los Angeles 4,000 $150.0
3,000 (thousands of s.f.)
$100.0 2,000 Q1 2016 highest Q1 absorption markets
1,000 $50.0
Office investment sale volumes (billions of $US) 0
$0.0 -1,000 2013 2014 2015 2016 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: JLL Research, Real Capital Analytics (Transactions larger than $5.0m) Source: JLL Research
JLL | United States | Investment Outlook | Q1 2016 14 Momentum in yield compression continues, though Secondary market activity increase driven by large divergence appears, with select secondary markets portfolio acquisitions and urban submarkets 5 6 beginning to show signs of softening
In the first-quarter of 2016, 37.0 percent of total transaction volumes Nationally, cap rates remain in compression mode, declining 30 basis flowed into secondary markets, totaling $7.6 billion. Quarter-over-quarter, points in the past 12 months from 4.8 to 4.5 percent. At this level, primary markets accounted for the overall moderation in volume growth, national cap rates are below the prior peak of 4.8 percent, leading while secondary markets recorded a modest increase. In secondary investor concerns over current pricing. Across the primary markets, all markets in particular, this was boosted by large portfolio and entity-level have recorded compression in the last 12 months by 39 basis points in acquisitions. In the largest transaction of the quarter, Blackstone aggregate. Of these, while New York and Chicago cap rates remain flat, acquired BioMed Realty Trust, taking over their life sciences-centric West Coast markets Seattle, Silicon Valley and San Francisco continue office and lab portfolio for $4.8 billion, boosting activity in San Diego as to see strong cap rate compression, having decreased over 30 basis well as some of the primary markets, such as Boston’s Cambridge points over the last 12 months. However, cap rates in three primary submarket, the San Francisco Peninsula and Seattle. In another markets—Houston, Boston and Los Angeles—have not yet surpassed noteworthy secondary market portfolio, Och-Ziff Capital Management their respective prior peaks. While Houston is unlikely to see further purchased 58 properties of suburban product from Brandywine Realty compression due to the slowdown in energy markets, strong property Trust for $398.1 million, totaling 3.9 million square feet located along the market fundamentals and resilient investor demand in Boston and Los Northeast Corridor from New Jersey to Virginia. Angeles are expected to drive continued compression, notably in high- Outside of the large portfolio acquisitions in the secondary markets, barrier-to-entry submarkets. increased activity was concentrated in urban submarkets. In particular, Philadelphia, Atlanta, New Jersey and Oakland boosted secondary Secondary markets are seeing a dichotomous trend as two clusters market activity with urban volumes increasing in aggregate by 165.6 emerge: one leading national cap rate compression and the other percent year-over-year. Though secondary markets are recording showing signs of slowing. The secondary markets driving compression— stronger investment volume growth than primary markets, there is not a Nashville, Minneapolis, Salt Lake City, Phoenix and Charlotte—have comparable level of institutional activity. Institutional acquisitions each recorded over 60 basis point of downward movement in the past 12 decreased, while purchases by private equity groups increased. The months. These markets are emerging as destinations for diversifying largest acquisition by this investor group was 70 and 90 Hudson Street in capital and, as a result, are seeing cap rates compress as the risks Jersey City in the Northern New Jersey market, which was acquired for associated with smaller secondary markets recede. Meanwhile, select $299.0 million by Spear Street Capital. The most active buyer in leading secondary markets are beginning to move in the opposite secondary office this quarter was Shorenstein, who purchased a Trophy direction, indicating a moderation of investor confidence. Raleigh- asset in Pittsburgh and Class A assets in Philadelphia and Atlanta for a Durham, Tampa and St. Louis cap rates are softening, with Dallas total of $566.2 million. While the primary markets are seeing activity stabilizing. In 2016, cap rate compression will continue across most decline, the diversification into secondary markets remains strongly markets, though at modest levels, with perceived fully priced secondary evidenced, leading these markets to drive U.S. investment sale growth. markets beginning to show signs of stabilization or softening. This will continue through the year. However, despite resurgent economic and property market fundamentals in select small- and Cap rates continue to compress, with nearly 94.0 percent of midsized markets such as Austin, San Diego and Phoenix, institutional markets seeing compressing or stabilizing yields capital remains disciplined and selective. Compressing Stable Softening Secondary markets have strongest first-quarter in three years, as primary markets in aggregate decline
$20,000 $18,000 Primary $16,000 Secondary $14,000 $12,000 Annual cap rate fluctuations rate Annual cap $10,000 $8,000 (millions of $US) (millions of $6,000 $4,000
Primaryinvestment market volumes $2,000 $0
2013 Q1 2014 Q1 2015 Q1 2016 Q1 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: JLL Research, NCREIF. (Includes 32 major office markets; Stable defined as Source: JLL Research (Assets larger than 50,000 s.f.) markets seeing fluctuations within 10 basis points year-over-year.)
JLL | United States | Investment Outlook | Q1 2016 15 As foreign activity declines in first-quarter, European overtake Asian groups as most active 7 source
Foreign activity made up 12.1 percent of total volume in the first-quarter, percent of total acquisitions. In the first-quarter of 2016, the foreign buyer totaling $2.6 billion—a decrease of 20.5 percent year-over-year and pool has shifted, with groups from Germany accounting for 37.0 percent slightly below established current cycle norms on a percentage basis in of the total. This was driven by Deutsche Bank and Jamestown, who recent years. A factor in this decline statistically is the decline in primary acquired assets in New York, Silicon Valley and Seattle. New inbound market activity, where this capital remains focused with selective entrants to the market decreased other than smaller groups from the diversification into secondary markets. Foreign investment into the office United Kingdom and Canada, who were active in Chicago, Atlanta and sector reached a peak in 2015 of $22.0 billion, equating to 20.9 percent New York. In 2016, it is likely that further increases in inbound capital of total volume. In 2015, groups from Canada and China were the most from European groups, including Germany, will be evident given ongoing aggressive in purchasing U.S. office real estate, accounting for 40.9 economic and political concerns with resilient capital from Asia as well.
Germany dominates as top origin of inbound capital, surpassing active Asian and Canadian capital from prior two years
MOST ACTIVE FOREIGN INVESTORS
2% 16.4% 18.5% 6% 24.0% 10% 35.1% 9.0% 5.6% Q1 37% 2014 2015 12% 9.5% 2016 13.5% 21.9% 15.5% 15.3% 15.8% 22%
Norway Germany Canada China Germany Qatar Canada Singapore Germany South Korea South Korea Canada South Korea All others Hong Kong All others China United Kingdom
Source: JLL Research (Assets larger than 50,000 s.f.)
JLL | United States | Investment Outlook | Q1 2016 16 Continued cap rate compression evident to sub-5.0-6.0 percent in most primary and rising secondary markets in the CBD, while suburban markets sit between 6.0-8.0 percent
U.S. core product office CBD cap rates
Seattle 4.25 WA– 5.50%
MT ND ME
Portland MN VT 4.50 – 6.50% ID OR Minneapolis NH Boston WI NY SD 6.00-7.00% Detroit MA 4.00– 5.00% WY 9.50 – 10.50% Pittsburgh CT MI NewRI York Sacramento Chicago Cleveland 8.00 – 9.00% 3.25-3.75% 5.75-6.75% IA 4.75-5.50% 7.50 – 8.50% PhiladelphiaNJ NE Columbus 5.50– 7.00% San Francisco Indianapolis NV IN 8.00OH – 9.00% PA DE 3.00 – 4.00% UT 8.50IL – 9.50% Washington, DC CA Denver Cincinnati WV East Bay CO Kansas City 4.00 –MD 6.00% 5.25-7.25% 8.50 – 9.50% 6.00-7.00% KS MO VA 7.00-8.00% KY Los Angeles Raleigh Charlotte 6.50 – 7.50% 4.80-6.00% Phoenix NC AZ TN 6.25 – 7.50% San Diego 7.00-7.50% OK 6.00-7.00% NM AR SC Atlanta 5.00-6.00% Dallas MS AL GA 5.00-7.00% TXAustin 4.50-5.25% Houston LA Orlando 6.00-6.50% Tampa FL6.00– 7.00% 6.00-7.00%
Miami 4.50 – 6.00% U.S. core product office suburban cap rates
Seattle 5.50-6.25%WA
MT ND ME
Portland MN VT 6.00%-7.50% ID OR Minneapolis NH Boston WI NY SD 7.00-8.00% Detroit MA 6.00-7.00% WY 8.00 – 9.00% Pittsburgh New JerseyCT MI RI Sacramento Chicago Cleveland 7.50 – 8.50% 7.00 - 8.50% IA 8.00 – 9.00% Philadelphia 6.75-7.50% NE 7.00-8.00% NJ Columbus 6.00 – 7.00% East Bay Indianapolis NV IN 8.00OH – 9.00% PA DE 6.00-7.00% UT IL8.00– 9.00% Washington, DC CA Denver Cincinnati WV Silicon Valley CO 6.00 –MD 8.00% 6.00-8.00% 8.50 – 9.00% 5.00 – 6.00% KS MO VA KY Los Angeles Raleigh Charlotte 7.00 – 8.00% 4.00-7.00% Phoenix NC AZ TN 6.75 – 8.00% San Diego 5.00-7.00% OK 5.00-6.50% NM AR SC Atlanta 6.00-8.00% Dallas MS AL GA 4.00 – 5.00% 5.50-7.50% 5.00 – 6.00% AustinTX 5.00 – 6.00% Houston LA Orlando 6.00 – 7.00% 6.50-8.00% Tampa FL6.50-.8.00% 7.00 – 8.00% 6.25-7.50%
8.00 – 9.00% Miami 9.00% + 6.00 – 7.00% Source: JLL Research, January 2016
JLL | United States | Investment Outlook | Q1 2016 17 Notable primary market transactions, Q1 2016
Market Property Buyer Seller Price ($) Size (s.f.) Price (p.s.f.)
Biomed Realty Trust, 108- Multiple - National Portfolio Blackstone Biomed Realty Trust $4,800,000,000 3,400,000 $1,412 Property Portfolio
New York 388-390 Greenwich Street Citigroup SL Green $2,000,000,000 2,634,670 $759
New York 787 Seventh Avenue CalPERS AXA Investment $1,932,900,000 1,761,781 $1,097
Blackstone, 4-Asset Douglas Emmett Realty (60%) / Los Angeles Blackstone $1,340,416,500 1,725,501 $777 Westside Portfolio Qatar Investment Authority (40%)
New York 5 Times Square RXR Realty David Werner $800,000,000 1,101,779 $726
George Comfort & Sons / George Comfort & Loeb Partners Realty, 2- New York Jamestown Sons / Loeb Partners $563,499,651 1,565,000 $360 Asset Gramercy Park and Realty Grand Central Portfolio Deutsche Asset & Wealth AEW Capital Seattle-Bellevue 2001 8th Ave $370,000,000 516,985 $716 Management Management
Beacon Capital Los Angeles Pasadena Towers I&II CBRE Global Investors $257,000,000 439,650 $585 Partners
Washington, DC 1615 L Street, NW Carr Properties Spitzer Enterprises $229,000,000 417,852 $548
Hudson Pacific San Francisco Peninsula Bayhill Office Center Google Properties / Farallon $215,000,000 515,000 $417 Capital Partners
Notable secondary market transactions, Q1 2016
Market Property Buyer Seller Price ($) Size (unit) Price (per unit)
Coretrust Capital Partners / Korea Brandywine Realty Philadelphia Cira Square $354,000,000 862,692 $410 Investment Management Trust
CBRE Global Northern New Jersey 70 & 90 Hudson St Spear Street Capital $299,000,000 857,940 $349 Investors
Santa Fe Summit - Intuit San Diego Intuit Kilroy Realty $262,300,000 465,812 $563 Campus
Atlanta Bank of America Plaza Shorenstein Properties CWCapital $220,000,000 1,294,590 $170
Northern New Jersey Metropark Office Center Metropark Investor LLC Tishman Speyer $200,000,000 918,656 $218
Philadelphia 1700 Market Street Shorenstein Properties Nightingale Properties $198,000,000 841,172 $235
Oakland-East Bay Kaiser Center Rockpoint Group Swig Company $197,000,000 811,005 $243
Prism Capital Northern New Jersey Princeton Pike JFR Global Investments $156,000,000 800,546 $195 Partners
Oxford Development Pittsburgh One Oxford Centre Shorenstein Properties $148,752,900 1,011,000 $147 Company
Charlotte Carillon Tower KBS Realty Advisors Hines $147,000,000 476,308 $309
JLL | United States | Investment Outlook | Q1 2016 18 Industrial
JLL | United States | Investment Outlook | Q1 2016 19 INDUSTRIAL Shift from national to regional portfolios and single-asset activity resetting industrial deal sizes to historic norms
U.S. Industrial property market U.S. Industrial investment -70 1.9% $8.5 -52.5% 12-month change in total vacancy (bp) 12-month net absorption (as a % of inventory) Investment sales (YTD, billions of $US) YTD investment sale growth (%) 1.6% 3.1% 5.1% -29 12-month completions (as a % of inventory) 12-month rent growth (p.s.f., %) Average cap rate (%) 12-month change in cap rate (bp)
Continued but moderated rent growth anticipated in 2016 amid border buyer participation fell from 40.5 percent of total volume in full- sound fundamentals. Despite increased development volumes, year 2015 to 5.3 percent in the first-quarter. quarterly net absorption was 7.3 percent higher than new construction in the first-quarter of 2016. This caused the U.S. vacancy rate (6.2 percent) Market-specific portfolios emerging as effective way to build scale. to drop 10 basis points from year-end 2015. Vacancy, after 24 With many domestic industrial investors being outbid by new-to-the- consecutive quarters of net absorption gains, is now at a 16-year low. segment institutional capital in 2015 on large-scale portfolios and thus increased competition, some investors increased a focus on regional, Amid heightened volatility, decline of portfolio opportunities driving secondary markets to search for non-fully priced assets. Seattle-Bellevue down investment volumes. As investment volumes receded in the first- experienced the highest volume of market-specific portfolio investments quarter, investment strategies also shifted and were marked by the return of any JLL tracked market, with just under $600.0 million in the past year in prevalence of single-asset transaction volumes, as single-asset activity alone. Other markets such as South Florida (Miami) and Washington, DC represented the bulk of investment in the U.S. The investment volume also continue to attract investors looking to build footprints in regional pendulum is expected to remain shifted toward single-asset activity secondary markets that have diverse and expanding populations. throughout 2016, as a scarcity of large-scale portfolio availabilities has become pronounced. Class A compression endures in most markets, although select non-core markets soften. Institutional-grade cap rates sustained a pace With shifts in overall deal sizes, cross-border participation was of compression or stability throughout most markets with a limited few stifled in early 2016. The scarcity of large-scale portfolio availabilities in exceptions where cap rates have softened. Persistent expected rent 2016 shifted the lion's share of investment activity into transactions that growth, tightening tenant demand and the scarcity of available assets will fell between $20.0 and $150.0 million in the first-quarter, and this is likely further foster increases in valuations throughout 2016. Although cap rate to contribute to an overall shift toward this range throughout 2016. These compression continued in Class A assets, the buyer pool in the first- first-quarter trends represent hurdles in gaining or expanding exposure to quarter receded a modest amount, as buyers were more selective of the U.S. industrial sector for cross-border investors. As a result, cross- transaction targets, particularly in secondary markets.
Investment volumes down amid heightened volatility Escalation in global market volatility further widens spreads $80.0 10.0% 10-year Treasury yield (%) Q1 Q2 Q3 Q4 $60.0 Average weighted primary cap rate (%)
128 4.93% $40.0 5.0% bps 189 bp 316 spread bps $20.0 differential sale volumes (billions of $US) (billions of 0.0% Industrial investment $0.0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: JLL Research, Real Capital Analytics (Transactions larger than $5.0m)
Source: JLL Research, NCREIF, Board of Governors of Federal Reserve 2016 YTD
JLL | United States | Investment Outlook | Q1 2016 20 TOP INDUSTRIAL THEMES
Continued but moderated rent growth anticipated in Amid heightened volatility, decline of portfolio 1 2016 amid sound fundamentals 2 opportunities driving down investment volumes
The first-quarter of 2016 showed sustained strength in most markets as First-quarter year-over-year investment volumes were down 52.5 trend lines continued to favor warehouse leasing activity. Vacancy rates percent, which at first glance appears to be a drastic reduction. However, remained taut in most U.S. markets as tenant demand exceeds available if the closing of the largest industrial transaction in the history of the space, and a push to secure modern and efficient space drives vacancy segment (IndCor) is excluded from the first-quarter of 2015, first-quarter rates lower. Despite increased development volumes, quarterly net volumes were only down 11.4 percent and remain 10.2 percent above absorption was 7.3 percent higher than new construction in the first- the 10-year first-quarter average. This is indicative of the asset class’s quarter of 2016. This caused the U.S. vacancy rate (6.2 percent) to drop ability to weather volatility and continue to attract investment even during 10 basis points from year-end 2015. Vacancy—after 24 consecutive uncertain economic environments. The appetite for industrial assets quarters of net absorption gains—is now at a 16-year low. remains prevalent and expanding, as investors continue to describe Speculative construction is back in a big way in Atlanta (15.3 million themselves as under-allocated to the sector. square feet) and Central Pennsylvania (8.6 million square feet) compared to two years ago. In this time period, it was up roughly 100.0 Investment volumes down amid heightened volatility percent in Dallas–Fort Worth and Chicago (6.7 million square feet) as well, and volumes are generally consistent in the Inland Empire over the $70.0 Q1 Q2 Q3 Q4 same time period. Although vacancy rates are tight in these markets, there will likely be a lag between when new supply delivers and when it $60.0 is leased. This is especially true in the big-box segment (500,000 square IndCor Acquisition feet and greater), which comprises 49.4 percent of these markets’ $50.0 collective spec construction. As a result, total rent growth over the next 12 months is expected to be slower than it was over the course of the $40.0 prior 12 months. Atlanta, for instance, had annual warehouse asking rent growth of 7.3 percent during the quarter; the forecast calls for 3.0 percent $30.0 annual growth by year-end 2016. Similar dynamics are expected across other major industrial markets amid new construction starts. Fortunately, $US) (billions of industrial development is fairly nimble, with the average warehouse $20.0 facility taking nine to 12 months to complete; if a size segment becomes Industrial investment sale volumes Industrial investment overbuilt, developers can pull back on planned groundbreakings, $10.0 mitigating oversupply risks to the sector. $0.0 Warehouse rents to continue moderate growth in 2016 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 300 12.0% Source: JLL Research 10.0% 200 As investment volumes receded in the first-quarter, investment strategies 100 8.0% 6.0% also shifted and were marked by a return in prevalence of single-asset 0 4.0% transaction volumes, as single-asset activity represented the bulk of -100 Q1 Q2 investment in the U.S. The ratio between single-asset and portfolio
Net absorption Q3 Q4 2.0% (in millions of s.f.) -200 Total vacancy 0.0% transactions experienced a drastic shift of the pendulum, as an almost National vacancy rate exact reversal of deal volume occurred: single-assets represented the vast majority of volumes, outpacing portfolio activity on a 3:1 basis Source: JLL Research
JLL | United States | Investment Outlook | Q1 2016 21 year-over-year. The investment volume pendulum is expected to remain Cross-border investment into the industrial sector sent waves into the shifted toward single-asset activity throughout 2016, as a scarcity of investment environment in 2015, as foreign direct investment (FDI) large-scale portfolio availabilities has become pronounced. constituted over 40.0 percent of all investment volumes. Cross-border investors became particularly attracted to the industrial sector, as Single-asset transactions significantly lead activity in first-quarter industrial assets provided an avenue to gain exposure to investment- grade tenants and e-commerce economic activity with minimal day-to- Single asset transactions day management requirements and decreased ongoing capital Portfolio/entity-level transactions requirements. 2015 offered the ability for cross-border investors to 100% deploy capital at scale as several industrial aggregators searched for 15% buyers after building massive footprints throughout the country. First- 32% 26% 30% 26% 80% 38% 34% 41% quarter trends such as the scarcity of large-scale portfolio availabilities 44% 51% 56% and shift toward deal sizes between $20.0 and $150.0 million represent 60% hurdles in gaining or expanding exposure to the U.S. industrial sector for cross-border investors. As a result, cross-border buyer participation fell 40% 85% from 40.5 percent of total volume in full-year 2015 to 5.3 percent in the 68% 74% 70% 74% 62% 66% 59% first-quarter. 56% 50% transaction type 20% 44% Decline in deal sizes stifles foreign participation in early 2016 0% 60.0% 2015 Q1 Total industrial investment volumes by industrial investment volumes Total Offshore total: 2015 Offshore total: 50.0% Source: JLL Research, Real Capital Analytics (Transactions larger than $5.0m) 40.0%
30.5% 9.0% 30.0% With shifts in overall deal sizes, cross-border 7.2% 3 participation was stifled in early 2016 2016 Q1 3.9% 20.0% Offshore 2.9% total: 10.0% The scarcity of large-scale portfolio availabilities in 2016 shifted the lion’s 5.3% FDI participation as % participation FDI as % of total volume 46.6% share of investment activity into transactions that fell between the $20.0 and $150.0 million range in the first-quarter, and this is likely to 0.0% contribute to an overall shift toward this range throughout 2016. The first- $0.0 $1,000.0 $2,000.0 $3,000.0 Average FDI deal size (millions U.S.$) quarter was indicative of this trend, as 50.5 percent of total investment volumes fell in this range—a stark contrast to the first-quarter of 2015 in Source: JLL Research, Real Capital Analytics (Transactions larger than $5.0m) which comparable deal sizes drove a minor 21.6 percent of volumes. As the year progresses, single-assets and regional portfolios are likely to drive acquisition activity for the majority of investors, creating strategic There are several factors contributing to this reduction, none more telling investment issues for some investor groups, notably offshore investors. than the lack of available large-scale portfolios that meet the typically higher (+$300.0 million) investment size standards associated with Shift in overall deal size expected throughout 2016 select active cross-border investors. With this in mind, only 2.9 percent 2.7% of deals even exceeded $150.0 million in the first-quarter compared to 5.8% 3.1% 17.7% <$20.0 million the 56.4 percent of total volumes last year. This deal size generally falls $20.0 - $49.9 million below minimum transaction size requirements established by cross- $50.0 - $74.9 million border investors, creating a dilemma for investors looking to expand 2015 $75.0 - $99.9 million industrial exposure. In 2015, the surge of cross-border capital was 26.0% $100.0 - $149.9 million predominantly ushered in by FDI’s ability to gain exposure into the U.S. +$150.0 million 44.7% industrial sector through single acquisitions, with average cross-border 9.0% deal sizes exceeding $2.5 billion. Several investment strategies drove 30.5% 7.2% these massive deals, including: 3.9% 2.9% • The full fee interest of a portfolio or entity (GLP/GIC purchase Q1 2016 of IndCor), • Joint-venture transactions with U.S. sponsors (Norges Bank Investment Management/Prologis purchase of KTR) and 46.6% • Syndications of acquired platforms (China Life’s investment with GLP).
Source: JLL Research, Real Capital Analytics (Transactions larger than $5.0m)
JLL | United States | Investment Outlook | Q1 2016 22 One strategy that has been too costly and complicated for offshore As investors continue to broaden investment strategies and as the capital is the aggregation of single-assets or smaller regional portfolios industrial sector continues to grow in its sophistication, market-specific that fall below $150.0 million. With this in mind, cross-border capital and regional portfolio transactions are one investment strategy investors focused on gaining exposure to the U.S. industrial sector will have to can adopt to gain exposure to an expanding population, growing evolve its approach for successful execution, whether that be through geographic economy or rapidly changing supply chain. However, it does expanding U.S.-focused resources, establishing a domestic partnership not end here, as the investor focus will continue to evolve, exploring or contributing capital to new industrial-focused fund vehicles—to name other untapped areas or subsectors for industrial investment: Urban infill, a few. light industrial and light manufacturing for the “creative economy”; non- credit tenanted facilities; shared industrial space; and cold storage are just some of the various avenues with emerging interest. Market-specific portfolios emerging as effective way 4 to build scale Market-specific portfolios emerging as effective way to build scale Portfolio Single Asset As large-scale portfolio transactions forged the headlines in 2015, a 4.5 Most active Most active visible normalization toward smaller deal sizes, below $150.0 million, primary markets primary markets began to emerge in certain markets. With many domestic industrial 4.0 3.9 investors being outbid by new-to-the-segment institutional capital in 2015 3.6 on large-scale portfolios and thus increased competition, some investors 3.5 increased a focus on regional secondary markets to search for non-fully priced assets. As future economic and demographic shifts elevate the 3.0 prospects of these historically geographically isolated markets, the shift toward building scale through regional and market-specific portfolio 2.5 2.3 2.1 2.2 acquisitions has largely benefited investors seeking less competitive yet fundamentally sound non-core markets. As an example, Seattle- 2.0 Bellevue experienced the highest volume of market-specific portfolio 1.4 Industrial investment sale volumes (in m.s.f.) sale volumes (in Industrial investment 1.5 1.2 investments of any JLL tracked market, with just under $600.0 million in 1.1 the past year alone. Other markets such as South Florida (Miami) and 1.0 1.0 0.9 Washington, DC also continue to attract investors looking to build 0.7 0.5 footprints in regional secondary markets that have diverse and 0.4 0.5 0.5 0.4 0.3 0.4 expanding populations. 0.3 0.2 0.0 Regional portfolios utilized to build scale in secondary markets
$700.0 Q2 2015
Q3 2015 $600.0 Q4 2015 Source: JLL Research (All transactions larger than 200,000 s.f.) $500.0 Q1 2016
$400.0 (in millions $US) $300.0
$200.0 Secondary market, regional portfolio volume
$100.0
$0.0
Source: JLL Research (All portfolio Transactions larger than 200,000 s.f.)
JLL | United States | Investment Outlook | Q1 2016 23 Continuation of cap rate compression throughout markets Class A compression endures in most markets, 5 although select non-core markets soften Compressing Stable Softening
Institutional-grade cap rates sustained a pace of compression or stability throughout most markets with a limited few exceptions where cap rates have softened. Despite recent monetary policy tightening and increased volatility resulting from global economic and financial markets, the trend is indicative of strong U.S. industrial fundamentals and the continued steadfast appetite for institutional-grade industrial assets. As the availability of industrial assets remains very tight, investors are forced to compete for limited supply, particularly for single-assets and market-
specific and regional portfolios. Persistent expected rent growth, fluctuations rate Annual cap tightening tenant demand and the scarcity of available assets will further foster increases in valuations throughout 2016. Looking forward, softening may begin to occur as the Federal Reserve looks to increase short-term rates and record-low cap rate levels begin to draw concern Source: JLL, NCREIF. (Includes 27 major industrial markets; Stable defined as markets from investors. As new product continues to deliver, global trade seeing fluctuations within 15 basis points year-over-year) continues to be a laggard and dialogue on the timing for a recessionary correction become more prevalent, investors may be more cautious continued in Class A assets, the buyer pool in the first-quarter receded a when underwriting acquisitions. However, we have yet to see these shifts modest amount, as buyers were more selective of transactions targets, occur, as moderate rent growth is expected throughout 2016. particularly in secondary/supporting markets. Industrial buyer pools remained robust in the first-quarter of 2016; however, their overall Nationally, in a broader asset context, Class A industrial assets across acquisition velocity declined roughly 30.0 percent from last year in most almost all U.S. markets continued compression, with the notable markets, as buyers avoided the risk spectrum due to heightened secondary market exceptions of Phoenix, Reno and St. Louis, which all concerns about the global economic and financial markets in the first half softened approximately 25 basis points. Although cap rate compression of the quarter.
Class A compression endures in core markets, while limited few supporting markets soften
Seattle 4.00 -WA 5.00%
MT ME Portland ND 5.00 - 6.00% MN VT OR NH ID Minneapolis Boston WI NY SD 6.00 - 6.75% MA 6.25 - 7.00% Reno WY MI Eastern PA New CTJersey RI 5.75– 6.75% Chicago 5.00 - 6.00% 4.50 - 5.25% Sacramento Salt Lake City IA NE 4.75 - 5.75% Columbus Harrisburg Phila.NJ – S. N.J. 5.75 – 6.75% 5.50 – 6.50% 5.75 – 6.50% 5.25 - 6.00% PA Indianapolis OH DE5.50 – 6.00% SF Bay Area NV UT IL IN Cincinnati CA Denver WVBaltimore/DC CO Kansas City 5.50 - 6.50% MD 4.00 - 5.00% Las Vegas 5.50 - 6.50% 5.75 – 6.50% 5.50 - 6.00% 6.00KS – 6.75% Louisville VA 6.00 – 6.75% KY St. Louis 6.00 – 6.50% Southern California Inland Empire 6.50 – 7.25% Nashville NC Charlotte 4.00 - 5.00% 4.50- 5.50% AZ TN Memphis 6.00 – 6.50% 6.00 – 6.50% San Diego Phoenix OK NM 6.00 – 6.50% 5.75 – 6.75% 5.25 - 6.25% SC AR Atlanta 5.00 –GA 5.50% U.S. core Class A Dallas MS AL 4.90- 5.50% Industrial cap rates TX LA 4.00 – 5.00% Houston Orlando 5.00 – 6.00% 5.25 - 6.25% 6.25FL - 7.00% 6.00 – 7.00% Tampa 6.25 – 7.00% Miami 7.00 – 8.00% 4.50 – 5.25% 8.00 – 9.00% 9.00% + Source: JLL Research, April 2016
JLL | United States | Investment Outlook | Q1 2016 24 Notable portfolio transactions, Q1 2016
Market Property Buyer Seller Price ($) Size (units) Price (per unit)
Olympus Ventures / Biynah Transpacific Indianapolis TDC Indianapolis Portfolio $167,000,000 3,858,513 $43 Industrial Partners Development Co.
7-building Ares Distribution Multistate Industrial Property Trust Ares Management $114,500,000 2,558,708 $45 Portfolio Southern Florida Industrial South Florida Portfolio (90% Partial Invesco Easton Group $98,000,000 676,832 $145 Interest) 15-building Brennan Brennan Investment Multistate GFH Capital Ltd. $92,962,000 1,448,215 $64 Investment portfolio Group
2-building Westcore Oakland-East Bay UBS Westcore Properties $60,500,000 419,984 $144 Fremont Portfolio
Denver Dartmouth Industrial Park Cabot Properties TA Realty $53,225,000 663,411 $80
Light Industrial Asset Prologis / Norges South Florida Adler Kawa $38,000,000 352,053 $108 Portfolio Bank
Chicago Yorkbrook Park Venture One TA Realty $36,975,000 736,275 $50
Atlanta Oakbrook North Port. Rothenberg-Rosenfield Inc. Sperry Equities $36,670,000 709,695 $52
BLT Enterprises Industrial Los Angeles Portfolio (Camarillo & ZDI Inc. BLT Enterprises $28,000,000 271,759 $103 Oxnard)
Notable single-asset transactions, Q1 2016
Market Property Buyer Seller Price ($) Size (unit) Price (per unit)
1001 Columbia Ave, Inland Empire GE Asset Management Cole REIT Advisors III $105,000,000 507,000 $207 Riverside
2250 W Lugonia Ave, McShane Inland Empire Ashley Furniture Industries $79,040,000 1,013,331 $78 Redlands Development
Deutsche Asset & Wealth Atlanta 212 Bohannon Rd, Fairburn TPA Group $77,250,000 1,129,750 $68 Management Endurance Real 325 S. Salem Church Rd, Philadelphia-C. PA AEW Capital Management Estate / American $60,000,000 785,400 $76 York Realty Advisors 6200 Gordon Food Service, Charlotte GFS Childress Klein $54,050,000 300,000 $180 Concord
525 Northwest Ave, Prudential Investment Bridge Development Chicago $48,750,000 588,233 $83 Northlake Management, Inc. Partners
32901 32nd Ave S, Weyerhaeuser Seattle-Bellevue Industrial Realty Group $47,737,815 461,673 $103 Federal Way campus
9555 NE Alderwood Rd, Portland Clarion Partners Capstone Partners $46,600,000 491,200 $95 Portland
5202 Exploration Dr, Indianapolis Gramercy Property Trust KTR Capital Partners $37,000,000 225,586 $164 Indianapolis
Central Valley 811 Zephyr Dr, Stockton Industrial Property Trust Ares Management $34,304,000 512,000 $67
JLL | United States | Investment Outlook | Q1 2016 25 Multifamily
JLL | United States | Investment Outlook | Q1 2016 26 MULTIFAMILY Investors broaden attention to well-positioned, suburban Sunbelt product amid sustained strength in absorption and rents
U.S. Multifamily property market U.S. Multifamily investment -10 1.6% $35.4 8.6% 12-month change in total vacancy (bps) 12-month net absorption (as a % of inventory) Investment sales (YTD, billions of $US) YTD investment sale growth (%) 1.8% 4.7% 4.5% -10 12-month completions (as a % of inventory) 12-month rent growth (per unit, %) Average cap rate (%) 12-month change in cap rate (bps)
Barriers to homeownership persist on constrained supply, outsized Sunbelt markets taking the lead on absorption and rent growth price gains. The supply of existing homes available for sale in March indicators. Absorption has maintained its strength with markets in slipped 1.5 percent compared to the March 2015 figure. A tighter supply aggregate absorbing 1.6 percent of inventory. Several Sunbelt markets has contributed to houses staying available for shorter amounts of time, saw notable upticks in absorption year-over-year, ranging from 50 to 110 currently averaging 47 days, down 12 days from February. These basis points, and is now absorbing inventory at a pace of 2.0 percent or tightening conditions have driven the U.S. median sale price for a greater. This is driving rent growth gains above the national average. previously owned home to increase 5.7 percent in March – the 49th consecutive month of year-over-year gains. Multifamily continues to be the straw that stirs the drink. The multifamily asset type saw nearly $35.4 billion of investment sales Signs of a pullback in multifamily construction emerging. The activity during the first-quarter of 2016. This figure represents an 8.6 seasonally adjusted annual rate of multifamily construction for the month percent increase compared to the first-quarter of 2015 and the largest of March was 312,000, essentially matching the rate from one year prior. first-quarter volume on record. Additionally, first-quarter sales volumes This figure reflects a six-month trend of multifamily construction starts represent the second-largest figure of the last 15 quarters, only eclipsed falling at or below the current 12-month rolling average. Multifamily by the unprecedented fourth quarter of 2015. permits, a leading indicator of starts, additionally declined 12.4 percent year-over-year. Private equity investment rising, concentrated in portfolios and garden-style product. With over $8.2 billion of activity this quarter, Despite supply-driven softening in select markets, multifamily private equity investors were a key driver of investment sales. Private vacancy remains low; rent growth high. Vacancy softened from the equity transactions demonstrated a sizable shift toward suburban, current cycle peak by 10 basis points in 2015, finishing the year at 4.4 garden-style product, which has lagged behind the largely urban-centric percent. This represents the fourth year in a row of sub-5.0 percent expansion thus far fueled by investments across acquisitions of existing vacancy nationally. This has yet to impact rent growth, which grew 80 product and new developments. basis points nationally year-over-year to 4.7 percent.
Multifamily investment sales are up 8.6 percent compared to the Despite sustained, historic levels of deal flow and concerns on first-quarter of 2015, the largest first-quarter figure on record recent deliveries in select markets, cap rates remain stable $200.0 Q1 Q2 Q3 Q4 10.0% 10-year Treasury (%) Primary cap rates (%) Secondary cap rates (%) 4.8% $100.0 5.0% volumes
Multifamily 4.3% investment sale (billions of $US) (billions of $0.0 1.8% 0.0%
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2002 2004 2006 2008 2010 2012 2014 2016 Source: JLL Research, Real Capital Analytics (Transactions larger than $5.0m) Source: JLL Research, NCREIF, Board of Governors of Federal Reserve
JLL | United States | Investment Outlook | Q1 2016 27 TOP MULTIFAMILY THEMES
Home sales in the Northeast region saw the greatest gains overall, Structural barriers to homeownership persist on seeing the rate of sales increase 11.1 percent since February and 7.7 1 constrained supply, outsized price gains percent year-over-year. The Case-Shiller Home Price Index additionally has reflected sustained increases in pricing in several metros, concentrated primarily in the Western region and Florida. The eight Consistent job-growth gains have encouraged home buyers, as the markets that compose the Western region have seen growth ranging domestic economy looks to solidify its footing after a rocky start to the from 11.8 percent in Portland to 6.0 percent in Las Vegas over the year. The national unemployment rate was little changed in March, course of the last year, while Tampa and South Florida grew 7.4 percent recorded at 5.0 percent, as employers added 215,000 jobs for the month. and 6.8 percent, respectively. While job-growth gains are translating into More importantly, the U.S. has added 2.8 million jobs in the last year, as steady, incremental gains in homeownership, many renters are still the labor force participation rate grew for the fourth month in a row—the unable to position themselves to successfully exit rental markets. These first time this has occurred since 1992. These improvements in labor outsized gains in house prices will continue to serve as barriers to entry markets have translated to housing, as existing home sales for March for homebuyers who may not otherwise have sufficient ability to make a were reported at a 5.33 million seasonally adjusted annual rate, rising rapidly appreciating capital expenditure. 5.1 percent from the previous month, and the March figure was 1.5 percent higher than the previous year’s rate. Additionally, the supply of existing homes available for sale slipped to 1.98 million, down 1.5 Signs of a pullback in multifamily percent compared to the March 2015 figure. A tighter supply has 2 construction emerging contributed to houses staying available for shorter amounts of time, currently averaging 47 days, down 12 days from February. These tightening conditions have driven the U.S. median sale price for a The seasonally adjusted annual rate of multifamily construction for the previously owned home to increase to $222,700, the 49th consecutive month of March was 312,000, comprising 28.7 percent of total month of year-over-year gains, having increased 5.7 percent in March. construction starts for the month and essentially matching the rate from one year prior. This figure reflects a six-month trend of multifamily Home price values exceed averages in the West, Southeast construction starts falling at or below the current 12-month rolling average of 384,000, reflecting a steady slowing of new starts. The 14.0% Southern region of the country saw the largest amount of multifamily 11.8% 12.0% starts for March at a seasonally adjusted annual rate of approximately 10.8%10.5% 10.2% 146,000. However, the Western region saw the greatest relative increase 10.0% in multifamily starts, increasing in excess of 40.0 percent to a seasonally adjusted annual rate of approximately 84,000. Multifamily construction 8.0% 7.4% 6.9% 6.8% permits, which serve as a leading indicator of starts, also saw declines in 6.0% 5.8% 5.7% 6.0% 4.9% March. The seasonally adjusted annualized rate was recorded at 324,000, down for the third straight month and 12.4 percent 4.0% year-over-year. 2.0% Comparatively, the seasonally adjusted annual rate of single-family 0.0% construction starts was recorded at 764,000 in March. This figure S&P/Case-Shiller HPI, (Y-o-Y % change) % (Y-o-Y S&P/Case-Shiller HPI, comprised 70.2 percent of total construction starts, up from the 65.5 percent average of the last 12 months, with average annual single-family housing starts up 14.5 percent as of March. Single-family construction starts have historically comprised approximately 76.0 percent of total housing starts, representative of a somewhat normalizing housing starts landscape. As housing permitting data and subsequent starts continue to Source: JLL Research, S&P Dow Jones Indices LLC
JLL | United States | Investment Outlook | Q1 2016 28 move toward their respective long-run averages, the multifamily asset Denver and Seattle softened between 60 and 130 basis points. The type stands to benefit, as several markets continue to work through greatest softening occurred in markets that are working to absorb a influxes of recently delivered product in the second half of 2015. While sustained amount of delivered product in 2015. The national percentage near-term softening is anticipated in select markets, an optimistic yet of completions with respect to inventory increased 10 basis points year- more measured approach to units under construction will ensure that over-year to 1.8 percent of inventory, setting a 13-year peak. In the case adequate demand will meet newly delivered product and ultimately of Portland and Denver, the respective 80 and 40 basis point gains in support continued strength in leasing fundamentals. completion percentages over the course of the past year have resulted in new deliveries making up approximately 4.0 percent of each market’s Multifamily construction starts steady and slowing inventory, more than double the national rate. Comparatively, Seattle 250.0% and Silicon Valley have maintained a steady, heightened pace of Total Single-family Multifamily deliveries since 2013 and currently have seen the pace of deliveries at 3.5 percent and 2.3 percent of their respective markets. It is imperative to 200.0% note that even with the sustained influx of deliveries, these markets are still below or now only approaching their long-run vacancy rate averages. 150.0% In spite of the sustained level of deliveries now spurring at least near- 100.0% term softening in leasing fundamentals, this has yet to impact rent growth, which grew 80 basis points nationally year-over-year to 4.7 50.0% percent. Despite supply concerns in select markets, Western region
Housing starts, (Y-o-Y % % change) Housing starts, (Y-o-Y markets made their presence felt here as well, as Seattle and Portland 0.0% each sustained 200 basis point gains in annual rent growth, currently at 8.3 percent and 7.5 percent, respectively, alongside outsized gains in -50.0% both Western region primary markets (San Francisco, Los Angeles) and Western region secondary markets (Phoenix and Sacramento). The current strength in leasing fundamentals in the Western region serves as Jul-13 Apr-12 Oct-14 Jan-11 Jun-11 Jan-16 Feb-13 Mar-15 Nov-11 Dec-13 Sep-12 Aug-15 May-14 a microcosm for national trends and indicates that there will be a long Source: JLL Research, U.S. Census Bureau runway and a strong potential for muted softening to an unparalleled new leasing market equilibrium. Despite supply-driven softening in select West Coast markets, vacancy remains low and rent 3 growth high Sunbelt markets taking the lead on absorption and 4 rent growth indicators Multifamily leasing fundamentals have held their overall positions of strength heading into 2016. Vacancy softened from the current cycle Multifamily absorption has maintained its strength with markets in peak of 10 basis points in 2015, finishing the year at 4.4 percent. This aggregate absorbing 1.6 percent of inventory. National absorption has represents the fourth year in a row of sub-5.0 percent vacancy nationally remained in the range of 1.6 percent to 1.7 percent of inventory dating and a new equilibrium from the previous cycle peak of 5.7 percent set in back to the fourth quarter of 2013, and this consistency is more 2005 and 2007. Western region markets saw the greatest vacancy impressive when considering the simultaneous heightened pace of increases over the course of the past year, as Portland, Silicon Valley, deliveries. Absorption remains positive across the 40 tracked markets,
Despite vacancy losses, West Coast markets outperforming U.S.
8.0% 7.0% 6.0% 5.0% U.S. vacancy: 4.4% 4.0% 3.0% 2.0% 1.0%
Vacancy (%) 0.0% Miami Austin Boston Atlanta Tampa Denver Orlando Phoenix Chicago Portland Houston Nashville Charlotte Baltimore New York New Pittsburgh San Diego Milwaukee Las Vegas Minneapolis Palm Beach Palm Jacksonville Sacramento Philadelphia Los Angeles Silicon Valley Inland Empire Salt Lake City San Francisco Orange County Fort Lauderdale Dallas-Ft. Worth Seattle-Bellevue Washington, DC Raleigh-Durham Oakland-East Bay Northern New Jersey Source: JLL Research, Reis
JLL | United States | Investment Outlook | Q1 2016 29 with particular strength in the Sunbelt. Miami, Atlanta, Charlotte and Ft. Pricing has remained strong across individual markets according to Lauderdale each saw notable upticks in absorption year-over-year, RCA’s Commercial Property Price Index, with positive year-over-year ranging from 110 basis points to 50 basis points and now absorbing growth across essentially every market, excluding Chicago, Philadelphia inventory at a pace of 2.0 percent or greater. As a result of this sustained and Baltimore, which saw modest declines. Washington, DC led all strength, Atlanta, Charlotte and Ft. Lauderdale each saw annual rent tracked markets in pricing growth, of approximately 43.0 percent. The growth gains of 90 or more basis points. This trio of markets are now sustained strength in leasing market fundamentals for the markets of the demonstrating annual rent growth in the mid-5.0 percent range. Western region and Sunbelt have translated into asset pricing as well, Comparatively, the annual rent growth gains of Raleigh-Durham and with each region represented twice in the top five year-over-year price Miami, respectively at 4.4 percent and 4.2 percent, may be “below gainers by market: Orlando saw pricing growth in excess of 40.0 percent, average” for the current environment, yet both figures would be strong in while Miami saw a 25.0 percent pricing gain. Unsurprisingly, the San essentially any other context. Both figures additionally outpace figures Francisco Bay Area and Denver each saw investment sale pricing gains the BLS released on year-over-year growth of average weekly wages, as in excess of 25.0 percent over the past year as well. Cap rates remain Miami-Dade County has seen 3.9 percent annual growth, while Wake largely unchanged across primary and secondary markets in the quarter. and Durham counties have grown at the respective paces of 2.5 percent Continued robust levels of multifamily-focused capital, a diversification and 2.9 percent. The Sunbelt’s delayed path to economic recovery from into garden-style product—a play for yield—and expanding dispositions the previous decade’s recession has it currently positioned to exhibit the of new developments will be key drivers of growth in 2016. resilient strength of leasing market fundamentals, proving that these peaks are not purely a Western region phenomenon but are now diversifying across absorption and rent figures. Continued national pricing momentum, driven by regional strength
Markets in the Southeastern region driving recent absorption gains, 50.0% accounting for five of the top 10 markets 45.0% 43.0% 41.0% 4.0% 40.0% 60 bps 3.5% 50 bps 20 bps 35.0% 3.0% 29.0% 30 bps 30.0% 100 bps 26.0% 25.0% 2.5% 25.0% 24.0% 110 bps 100 bps 25.0% 22.0% 50 bps 21.0% 20.0% 2.0% 20 bps 20.0% 20 bps 0 bps 20.0% 1.5% Q4 2014 15.0% 12.6% 1.0% Q4 2015 10.0%
0.5% growth (%) RCA CPPI Index, year-over-year 5.0%
Absorption (as a percentage of inventory) 0.0% 0.0% Miami Boston Atlanta Denver Houston Charlotte Minneapolis Jacksonville United States Fort Lauderdale
Northern New Jersey Source: JLL Research, Real Capital Analytics Source: JLL Research, Reis
Multifamily continues to be the straw that stirs Private equity investment rising, concentrated in 5 the drink 6 portfolios and garden-style product
The multifamily asset type saw nearly $35.4 billion of investment sales activity for the first-quarter of 2016. This figure represents an 8.6 percent Private equity investors were a key driver of investment sales in the first- increase compared to the first-quarter of 2015 and represents the largest quarter of 2016. With over $8.2 billion in activity in the quarter, this figure first-quarter volume on record. Additionally, the first-quarter sales volume more than doubled comparable activity from the first half of 2015. figure represents the second-largest figure of the last 15 quarters, only Starwood Capital Group–related acquisitions drove overall activity, eclipsed by the unprecedented fourth-quarter 2015 volume of comprising 87.2 percent of total equity fund acquisitions this quarter. Two $49.2 billion. significant portfolio transactions drove this activity: the nearly $5.4 billion, 69-property portfolio of 23,262 units from Equity Residential, and the nearly $1.4 billion dollar, 19,614-unit, entity-level acquisition of Landmark Apartment Trust. The acquisition of Landmark’s 71 property holdings is JLL | United States | Investment Outlook | Q1 2016 30 concentrated in the Southern United States, with high concentrations in Equity fund activity driven by portfolio acquisitions Atlanta, Charlotte, Nashville, Orlando, Raleigh and Tampa in addition to notable holdings in Dallas–Ft. Worth and Austin. Portfolios Single assets Private equity transactions additionally demonstrate a sizable shift 100.0% toward suburban, garden-style product, having lagged behind the largely 13.5% urban-focused expansion thus far with investments across acquisitions of 90.0% existing product and new developments. The shift toward suburban 80.0% 39.2% product has been focused on higher-quality assets, being those that 49.0% 52.2% either delivered during the previous cycle or were renovated in the last 70.0% decade. As a result, given the thus far controlled development cycle in the suburban multifamily markets, these are well positioned to sustain 60.0% 78.8% stronger levels of renter demand relative to older vintage product. The Praedium Group’s acquisition of Villas at Towngate in the Inland Empire 50.0% 86.5% market serves as an example of this shift. The 394-unit asset, which 40.0% delivered in 2006, was acquired for $68.5 million and is positioned to benefit from tight multifamily fundamentals and earn a higher yield than 30.0% 61.8% similarly positioned stock in primary markets, such as Los Angeles. The Equity fund acquisition by transaction type 51.0% 47.8% shift toward suburban product has been enabled for larger groups by 20.0% portfolio activity, which has increased 8.3 percent year-over-year. With 21.2% underlying confidence in the multifamily sector and compressed yields 10.0% for CBD product, investors will continue to look to new strategies to place 0.0% capital and earn higher yields—garden-style assets and portfolios being Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 two recent examples of these. JLL Research, Real Capital Analytics (Transactions larger than $5.0m; Assets over 50 units)
Primary markets compress 20 basis points; overall cap rates tighten 10 basis points year-over-year
Seattle-Bellevue 4.0 WA– 4.5%
MT ME Portland ND 4.3 – 4.8% MN VT ID OR NH Minneapolis Boston WI NY SD 4.5 – 5.5% MA 3.8 – 5.0% WY New Jersey CTNew York MI RI Chicago 4.3 – 5.0% 3.3 – 4.1% Northern California IA 4.0 – 5.0% Columbus Pittsburgh NJPhiladelphia 3.6 – 4.3% NE 6.0 – 7.0% 5.8 – 6.5% 4.8 – 5.5% IN OH PA NV UT Denver IL Cincinnati Washington, DC CA Las Vegas WV CO4.5 – 5.5% MD 5.0 – 5.3% 5.8 - 6.5% 4.5 – 5.5% KS MO VA KY Raleigh Los Angeles 4.8 – 5.3% 3.6 – 4.3% AZ Nashville CharlotteNC Inland Empire TN 4.5 – 5.0% 4.8 - 5.3% 4.5 – 5.3% Phoenix OK NM AR 4.9 – 5.3% Albuquerque SC San Diego Atlanta 4.0 – 4.5% 5.8 – 6.3% Dallas-Fort Worth 4.3 –GA 5.3% MS AL 4.0 – 5.5% U.S. core Class A AustinTX Multifamily cap rates 4.0 – 5.5% Houston LA Central-North Florida 5.0 - 6.0% 4.00 – 5.00% 5.2 FL– 5.5% 5.00 – 6.00% San Antonio 5.0 – 6.0% South Florida 6.00 – 7.00% 4.0 – 5.0% 7.00 – 8.00% 8.00 – 9.00% 9.00% + Source: JLL Research, April 2016
JLL | United States | Investment Outlook | Q1 2016 31 Notable portfolio transactions, Q1 2016
Market Property Buyer Seller Price ($) Size (units) Price (per unit)
Equity Residential Portfolio National Starwood Capital Group Equity Residential $5,793,436,158 23,262 $249,052 (69 properties) Landmark Apartment REIT Landmark Apartment Southeastern region; Texas Buyout (Entity-level; 71 Starwood Capital Group $1,219,433,998 19,614 $62,172 REIT properties) Landmark Apartment Landmark Apartment Southeastern region; Texas Milestone Apartments REIT $467,276,761 4,172 $112,003 Portfolio (15 properties) REIT Equity Residential Silicon Valley California Portfolio (51 Sand Hill Property Co / ADIA Equity Residential $348,388,745 1,813 $192,161 properties) Elghanayan NY Portfolio New York SW Wasserman Liora Elghanayan $310,000,000 330 $939,394 (2 properties)
Crecent Communities Crescent Southeastern region UBS / Berkshire Group $238,900,000 1,064 $224,530 Portfolio (5 properties) Communities
Wilson Company Florida Florida Starwood Property Trust The Wilson Company $127,542,902 1,602 $79,615 Portfolio (6 properties)
Prometheus Real Estate Promethes Real Los Angeles Decron Management Corp $126,500,000 390 $324,359 CA Portfolio (2 properties) Estate
Western Rim Properties Western Rim San Antonio Pure Multi-Family REIT $117,500,000 760 $154,605 Portfolio (2 properties) Properties
Blackstone Carolinas Raleigh-Durham CWS Capital Partners Blackstone $115,600,000 740 $156,216 Portfolio (2 properties)
Notable single-asset transactions, Q1 2016
Market Property Buyer Seller Price ($) Size (unit) Price (per unit)
New York Rivertower at Sutton GreenOak / Slate Property Group Equity Residential $390,000,000 323 $1,207,430
Madison Realty Capital / USAA David Tausik / New York The Buchanan $270,000,000 289 $934,256 Real Estate Cotswold Group
Chicago North Water Residences Invesco DRW Trading $240,312,000 398 $603,799
LaSalle Investment New York The Chelsea Greystar $211,250,000 204 $1,035,539 Management
A&E Real Estate / Harvard New York Riverton Houses CWCapital $201,000,000 1,228 $163,681 Management Co
Northern New Jersey Oakwood Village AION Partners AIG $183,371,173 1,224 $149,813
New York Avalon Kips Bay Dermot Co / SPI Holdings AvalonBay $173,000,000 209 $827,751
San Diego Eaves Rancho San Diego R&V Management Corp AvalonBay $158,000,000 676 $233,728
Northern New Jersey Halstead 800 Madison AvalonBay DSF Advisors $129,700,000 214 $606,075
th New York Boroughs 248 N 8 Street Greystar Adam America RE $125,000,000 169 $739,645
JLL | United States | Investment Outlook | Q1 2016 32 Retail
JLL | United States | Investment Outlook | Q1 2016 33 RETAIL With increased asking rents and heightened investor sensitivity to pricing, retail investment diversifying into secondary markets
U.S. Retail property market U.S. Retail investment -36 0.8% $17.4 -25.8% 12-month change in total vacancy (bp) 12-month net absorption (as a % of inventory) Investment sales (YTD, billions of $US) YTD investment sale growth (%) 0.6% 2.6% 4.7% -42 12-month completions (as a % of inventory) 12-month rent growth (p.s.f., %) Average cap rate (%) 12-month change in cap rate (bp)
Though retail had a slow first-quarter, retail likely to pick up High asking rents and shifts in luxury shopping patterns drive throughout 2016. This quarter saw a divergence between active capital investments from urban retail assets in primary to secondary and opportunities throughout the country for retail located in markets and markets. While primary markets experienced a decline in urban submarkets of focus. The early downward trend in retail investment sales investment by 68.6 percent due in part to investor sensitivity to pricing, is consistent with overall U.S. declines in the early months of the year, secondary market urban investment increased by 186.7 percent. Pricing with real estate markets reacting to global economic factors. divergence is evident throughout primary and secondary markets, making urban property more affordable to those investors seeking assets Secondary markets are experiencing increased growth in retail in the growing secondary markets. volumes, while oversaturated primary markets see decline. Those secondary markets characterized by population growth and expanding Grocery-anchored assets remain in high demand, despite a slow employment opportunities saw an influx of investment this quarter, first-quarter. Although investment volumes decreased by 27.6 percent, focused on lifestyle centers and malls. all investor types have seen steady relative growth in grocery assets year-over-year with private investors acquiring most aggressively With an increase in asking rents and historic low cap rates, New this quarter. York retail investment activity lags in the first-quarter. New York retail volume has decreased by 80.8 percent year-over-year due to a lack of Trophy product on the market and the long-term hold strategies required for investment. Though there is considerable demand for Trophy retail assets, owners of such assets are waiting for optimal timing to place such investments on the market.
Overall U.S. retail volumes decline 25.8 percent in first-quarter Retail yields continue to decline in the first-quarter of 2016 with $100.0 historic low cap rates in primary and secondary markets Q1 Q2 Q3 Q4 10.0% 10-year Treasury yield (%) $75.0 Average primary market retail cap rate (%) Average secondary market retail cap rate (%) 4.9% $50.0 4.6% $25.0 1.8% Retail investment sale
volumes (billions of $US) volumes (billions of $0.0 0.0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: JLL Research, Real Capital Analytics (transactions larger than $5.0m) Source: JLL Research, NCREIF, Board of Governors of Federal Reserve System
JLL | United States | Investment Outlook | Q1 2016 34 TOP RETAIL THEMES
Though retail had a slow first-quarter, recent activity Secondary markets see increased activity this 1 not indicative of full-year sentiment 2 quarter, while oversaturated primary markets lag
After two consecutive years of elevated U.S. retail volumes, retail activity Across U.S. retail, leading gateway markets such as Miami and New decreased by 25.8 percent during the first-quarter of 2016 year-over- York are experiencing declined activity. However, other primary markets year, falling short of expectations. The early downward trend in retail are experiencing continued retail growth, benefitting from the investment sales is consistent with overall U.S. declines in the early oversaturation of those declining markets. Of note, Los Angeles and months of the year, with real estate markets reacting to increased Chicago were the first and third most active retail investment markets macroeconomic volatility, resulting from declining emerging market this quarter, respectively. Both cities have remained active over the past growth, decreased oil pricing and evolving Federal Reserve policy, to five years with steady growth compared to those markets that name a few. However, this slow start is not indicative of full-year 2016 experienced spikes in retail in recent years. For example, Miami’s overall sentiment. This quarter, the retail market saw a divergence between retail volume rapidly grew to over $1.3 billion in 2014 and $1.4 billion in active capital and opportunities throughout the country for retail located 2015, from $412.5 million in 2013, and experienced a 17.0 percent in markets and submarkets of focus. This discrepancy is especially decline in overall retail volume this quarter. Both Chicago and Los apparent in the lack of desirable assets in historically strong retail Angeles vacancy is down 10 basis points quarter-over-quarter since markets like New York and Miami. Despite a slow first-quarter in retail, year-end, and both saw a continued increase in overall retail rents, we anticipate strengthened activity in the remainder of the year based on supporting the increase in retail investment and development. the current pipeline with elevated interest from buyers who appeared inactive in this first-quarter. This will further benefit from increasing Population and job growth boosting secondary market activity development activity, up 18.1 percent to 29.4 million square feet from $1.0 last quarter. $0.9 $0.9 Primary Secondary / Quarter-over-quarter U.S. retail volume by asset type markets Tertiary markets $0.8 Urban $0.7 $0.7 Freestanding $0.7 $0.6 $20.0 Strip center $0.6 Mall $0.6 Specialty center $0.5 Community/neighborhood center $15.0 $0.4 $0.3 $2.8 $0.3 $0.3 $0.3 $0.3 $0.3 $0.2 $4.2 $0.2
(billions of $US) (billions of $10.0 $0.3 $7.3 $0.1
Retail investment sale volumes Retail $5.0 $1.7 $0.0 $5.0 $0.2 $2.0 $0.8 $1.6
$2.9 $US) (billions of 2016 investment sale volumes, Q1 Retail $0.7 $1.7 $2.7 $1.5 $1.4 $1.4 $0.0 $0.6 $1.1 Q1 2013 Q1 2014 Q1 2015 Q1 2016 Sourcd: JLL Research, Real Capital Analytics (Transactions over $5.0m, including Source: JLL Research, Real Capital Analytics (Transactions over $5.0m, including shopping shopping centers over 125,000 s.f. and all urban) centers over 125,000 s.f. and all urban)
JLL | United States | Investment Outlook | Q1 2016 35 Meanwhile, secondary markets characterized by growing populations Overall retail investment volume in New York has decreased by almost and employment are also seeing increased retail volumes, concentrated $2.4 billion, or 80.8 percent, year-over-year. High barriers to entry and in lifestyle centers and malls. Kansas City, having the second highest typical long-term investment strategies for Manhattan retail product kept investment volumes for the quarter, increased in volume by 192.0 the number of active deals low and thus retail volumes down in the first- percent from the first-quarter of 2015 and had total retail volumes of quarter compared to prior years. Although transaction volume has $723.4 million. This large increase in Kansas City retail investment sales decreased, it is not due to a lack of investor appetite in the New York included the acquisition of Country Club Plaza, the first ever developed retail market. Rather, there is a mismatch between investor supply and lifestyle center in the U.S., for $512.4 million by Taubman and Macerich demand, with considerable demand for Trophy product but a lack of in a joint venture. Kansas City, as an emerging retail market for availability of such assets. Long-term owners of Trophy assets are investors, is the first city to implement Google Fiber and has a population waiting for optimal timing to place such investments on the market, and growing at a rate of 3.1 percent, making it a prime candidate for retail when these assets are placed on the market, they are fetching premium expansion moving forward. In a similar vein, Denver retail volume buyers at premium prices. For example, the highest priced transaction in increased by an overwhelming 881.0 percent quarter-over-quarter. Like the first-quarter was the 4,500-square-foot Chanel storefront located in Kansas City, Denver too is set for growth, with one of the fastest growing the heart of SoHo, purchased by Invesco for $115.4 million, setting a populations in the country and a job growth rate of 2.7 percent. In the storefront per-square-foot pricing record. The overall decline in premier future, we will likely see an increase in retail activity in those markets New York retail has paralleled a decline in foreign investment in New experiencing population and job growth, mainly from domestic investors York this quarter, down 65.6 percent after a rise in recent years. Though comfortable with the markets. New York retail investment is starting to slow in 2016, we have yet to see whether this trend will persist or if resilient pricing in the market will begin to soften. The present owners of Trophy assets in New York are in it for New York’s high rents and low cap rates lead to the long haul, holding barriers to entry high for the most desirable 3 delay in retail investment sales in the first-quarter retail product.
Amid a historically atypical high rent environment, New York occupancy For urban product, macro shifts and high prices lagged this quarter, which may contribute to perceived uncertainty in the 4 driving a shift from primary to secondary markets leasing markets and thus underwriting in select corridors. Because rents are much higher in New York, tenants are hesitant to expand into prime neighborhoods, leading to a delay in retail investment sales. Year-over- Primary markets across the U.S. experienced a drop in urban retail year, New York City has seen a 2.3 percent rent increase with an transactions in the first-quarter of 2016. The global economy is seeing a extremely low average cap rate of 4.1 percent, a nearly 50 basis point decline in luxury shopping sales, impacting the desirability of select premium to overall primary retail markets. New York City is seeing by far urban product in primary markets and persuading concerned investors to the highest rents in the country, averaging $86 per square foot and look elsewhere. Upscale brands are having more difficulty maintaining reaching as high as $4,000 per square foot in certain prime urban retail storefront properties in prime urban retail corridors due to new shopping corridors. Miami and San Francisco follow New York with the second patterns of today’s consumer. A major facet of luxury shopping, travel and third highest rents in the country at $38 and $33 per square foot, and tourism expenditures, decelerated at an annual rate of 1.7 percent in respectively—nearly 44.0 percent less than New York City. the fourth quarter of 2015 after increasing by 4.5 percent in the third quarter of 2015 and 8.4 percent in the second quarter of 2015. With New York retail capital markets slowing in early 2016 tourist spending down, changing luxury shopping patterns and typically strong designer brands issuing forthcoming sales warnings, select urban $100 6.0% Average asking rents, Q1 2016 ($ p.s.f.) assets are seeing a resulting decline. For example, at the beginning of $86 $90 Average cap rate (%) the second quarter, Burberry announced a 3.0 percent sales decline in $80 5.0% the Americas, and Prada, which opened 21 new stores between 2013 $70 and 2015, announced that it would offset these new openings with store 4.0% closures in response to recent underperformance. $60 $50 3.0% Urban retail volume decreased by 60.4 percent this quarter $38 $40 $33 $28 $6.0 Primary markets $30 $26 2.0% $19 Secondary markets $20 $16 $15 $15 $12 $4.0 1.0% $4.0 $10 $2.7 $0 0.0% $2.0 $1.3 $0.8 $0.4 $0.0 $0.1 $0.1 $0.0 Retail investment sale volumes (billions of $US) volumes (billions of Q1 2013 Q1 2014 Q1 2015 Q1 2016 Source: JLL Research, PPR, NCREIF Source: JLL Research, Real Capital Analytics (Transactions over $5.0m, including shopping centers over 125,000 s.f. and all urban)
JLL | United States | Investment Outlook | Q1 2016 36 Amid ongoing changes in urban leasing markets, urban retail investment Despite first-quarter decline, grocery assets remain in demand volumes in primary markets totaled $1.3 billion in the first-quarter of 2016, declining by 68.6 percent from the first-quarter of 2015. However, urban volumes reached $388.7 million in secondary markets, increasing $7.0 186.7 percent. This activity paralleled the recently large price disparity between the market groups. As an example, when looking at major primary and secondary markets on the West Coast, the average price for $6.0 a San Francisco urban property in the first-quarter of 2016 was $17.5 million compared to $9.1 million in San Diego, nearly half the transaction size. This price differential is prevalent throughout primary and $5.0 secondary markets, making urban property more affordable to those $1.9 investors seeking such assets in the growing secondary markets. As such, investors, specifically private investors and REITs who have $4.0 $1.4 favored primary market urban assets throughout the cycle, are venturing into comparable product in secondary markets. Foreign investors, which largely remain focused on primary urban product, are increasing activity $3.0 in secondary markets as well, up 86.1 percent to a still minor $172.5 $1.3 million. Lagging urban acquisition activity in these markets will continue $0.9 $2.4 to provide opportunities to both domestic and foreign buyers with local $2.1 sponsors key to both buyer segments. $2.0 $1.3 $1.5
Despite low volume in first-quarter, grocery- sales (billions $US) retail investment of Grocery-anchored $1.0 $1.0 $0.2 5 anchored assets remain in high demand $0.6 $0.9 $0.3 $0.4 $0.3 $0.3 $0.3 $0.4 $0.0 Though grocery-anchored investment sale volumes were down quarter- 2012 2013 2014 2015 2016 over-quarter by 27.6 percent, grocery volumes have been on a steady YTD incline since 2012. Last year, grocery-anchored investment volumes hit a Equity Fund Institution/Advisor Private peak for this cycle, reaching $5.9 billion, an annual increase of 20.9 REIT/REOC User/Other percent. Since 2008, we have seen a pattern of growth in grocery assets with investors holding properties for longer terms. Throughout this cycle, REITs and private investors have invested the most aggressively in Source: JLL Research, Real Capital Analytics (Transactions over $5.0m, including shopping grocery, with steady growth from both since 2013. REIT acquisition centers over 125,000 s.f. and all urban) activity in retail has been in decline and volatile since 2014, with a recent volume decline of nearly $6.7 billion from the first-quarter of 2015, having the majority of investments in lifestyle centers and anchored shopping centers. Private investment in retail, on the other hand, has steadily increased since 2009 with sustained interest in grocery. Similar to private investors, institutional investors have also increased overall retail investments throughout the cycle and increased grocery investment since 2013. There is and will continue to be high demand for grocery- anchored deals throughout the country, with investors seeking solid returns on investment, finding the subtype low-risk and attractive. Of note this quarter, grocery-anchored volumes were bolstered by the acquisition of Inland Real Estate Corporation, concentrated in the Midwest, by DRA Advisors for approximately $2.3 billion. Moving forward, private investors with long-term hold strategies will likely remain active in this segment with hopes of supplementing other real estate holdings that prove more volatile.
JLL | United States | Investment Outlook | Q1 2016 37 New York and San Francisco lead primary markets to sub-5.0 percent cap rate levels
Seattle 5.5-6.5%WA
MT ND ME
MN VT ID OR Minneapolis NH Boston WI NY SD 7.0-8.0% Detroit MA 5.5-6.5% WY 6.5-7.0% Pittsburgh CT MI NYC -RI Manhattan Sacramento Chicago Cleveland 6.0-7.0% IA 6.0-7.5% 4.0-5.0% 6.0-6.8% NE 6.0-7.0% PhiladelphiaNJ Indianapolis Columbus 5.5-6.5% San Francisco OH PA DE 4.5-5.8% NV UT IL 7.0-8.0%IN 6.0-7.0% Washington, DC CA Denver Cincinnati WV CO 5.5-6.5%MD 6.0-7.0% 6.5-7.5% KS MO VA KY Los Angeles Raleigh Charlotte 7.0-8.0% 5.0-6.0% PhoenixAZ NC TN 7.0-8.0% San Diego 6.2-7.2% OK 5.0-6.0% NM AR Atlanta SC 5.8-7.0%GA Dallas MS AL 6.1-7.3% AustinTX Houston LA U.S. core Class A 6.0-7.0 % Orlando 6.0-7.0% Tampa FL 6.5-7.0% Retail cap rates 6.0-7.5% 4.00 – 5.00% 5.00 – 6.00% Miami 5.5-6.5% 6.00 – 7.00% 7.00 – 8.00% 8.00 – 9.00% 9.00% +
Source: JLL Research, Real Capital Analytics, April 2016
JLL | United States | Investment Outlook | Q1 2016 38 Notable primary market transactions, Q1 2016
Market Property Buyer Seller Price ($) Size (units) Price (per unit)
Inland Real Estate Chicago Midwest Acquisition DRA Advisors $2,300,000,000 9,333,689 (retail) N / A Corp. Lincoln Property Runway at Playa Vista 217,000 Los Angeles Invesco, RE Company/ Phoenix $269,329,990 $1,221 (Mixed-use) (retail) Property Pacific Retail Capital Parners / Silicon Valley Eastridge Mall GGP $225,000,000 785,804 $286 Silverpeak Real Estate Partners
One Colorado Shopping Los Angeles Blackstone Trident Capital Group $200,999,000 260,699 $771 Center
Los Angeles Paseo Colorado Cypress Equities DDR $135,000,000 556,271 $243
Spring & Wooster, New York Chanel Invesco, RE $115,388,000 4,500 $25,641 LLC
Washington, D.C. Ballston Quarter QIC Forest City $94,300,000 310,704 $303
El Monte Shoppng and Los Angeles Merlone Geier Partners Decron Properties $84,500,000 473,347 $179 Automotive Center
Robert Aldrich New York 775 Washington St. The Harch Group/ Toms Capital $71,000,000 21,169 $3,354 (Zegna)
Seattle 2200 Westlake Ave (Retail) Weingarten Realty/ Bouwinvest Vulcan Inc. $66,210,046 73,800 $897
Notable secondary / tertiary market transactions, Q1 2016
Market Property Buyer Seller Price ($) Size (unit) Price (per unit)
Kansas City Country Club Plaza - Retail Taubman/Macerich Highwoods Properties $ 518,800,000 804,000 $645
Denver FlatIron Crossing Heitman Macerich $ 427,100,000 722,855 $591
Westchester County Ridge Hill QIC Forest City $ 364,100,000 1,300,000 $281
Denver Twenty Ninth Street Retail Heitman Macerich $ 350,000,000 704,713 $497
Northern New Jersey Quaker Bridge Mall Miller Capital Advisory/CalPERS Deutsche AWM $ 337,500,000 357,221 $945
National Real Estate Oakland-East Bay Jack London Square CIM Group Advisors/Ellis $ 250,000,000 434,000 $576 Partners Global Fund Investments/Migdal All Others - OK,TX Texas Retail Portfolio TIAA CREF $ 247,500,000 N/A N/A Insurance
Berger Company, New Orleans The Shops at Canal Place O'Connor Capital Partners $ 199,075,000 217,092 $917 Inc./Robert Ogden
Legends Outlets Kansas Walton Street Capital/Legacy Kansas City KKR/RED Legacy $ 193,500,000 658,453 $294 City Development
Cherry Creek Shopping AmCap Inc./Hart Denver Invesco RE/ Oliver McMillan $ 169,600,000 335,000 $506 Center Realty Advisors
JLL | United States | Investment Outlook | Q1 2016 39 Lodging
JLL | United States | Investment Outlook | Q1 2016 40 LODGING Transaction activity and RevPAR growth soften following an extraordinary 2015, but underlying fundamentals remain strong
U.S. Lodging property market U.S. Lodging investment -30 2.7% $5.2 -62.9% 12-month change in total occupancy (bp) Year-to-date RevPAR growth Investment sales (YTD, billions of $US) YTD investment sale growth (%) 1.3% 3.2% 7.8% 4 12-month supply growth (as a % of inventory) Year-to-date ADR growth Average cap rate (%) 12-month change in cap rate (bp)
While key indicators show that the U.S. hotel industry remains strong, the • Historically, supply growth has not been highly correlated with sector experienced some softening in Q1 2016 relative to its RevPAR growth in the top-25 U.S. lodging markets in either the extraordinary performance in 2015. RevPAR growth slowed from 6.3 short term or long term. In the long term, supply and demand growth percent in 2015 to an inflationary rate in Q1 2016, while hotel transaction have borne a strong relationship, but in the short term, this activity declined more than 60.0 percent relative to the level of deal relationship breaks down as well. Therefore, while substantial supply volume recorded in Q4 2015. However, recalling that hotel occupancy growth in select markets will likely be well absorbed in the long term, climbed to a historic high and annual deal volume soared to the second- the short-term outlook is more uncertain. highest level on record in 2015, RevPAR growth and deal volume in Q1 • U.S. hotel transaction volume declined significantly from $13.4 2016 represent a return to normalized levels. Accordingly, given a strong billion in Q4 2015 to $5.2 billion in Q1 2016. While the level of deal outlook for lodging demand in the context of robust economic growth in volume in Q4 2015 was extraordinary, transaction activity in Q1 2016 the U.S., we maintain a positive outlook for the sector in 2016. was approximately in line with average quarterly volume in the current cycle. • RevPAR growth for U.S. hotels softened noticeably in the first- quarter of 2016, rising only 2.7 percent from the amount recorded • Share prices for publicly traded lodging REITs finally began to for the first-quarter of 2015. Peaking hotel occupancy is largely to show signs of recovery in Q1 2016, following a year of consistently blame for the deceleration in national RevPAR growth. downward-trending performance. As of mid-April, the Dow Jones U.S. Hotel & Lodging REITs Index was up approximately 23 percent • National lodging supply growth is expected to remain moderate. from its mid-January trough. However, the outlook for individual markets varies widely. Among major hotel markets, New York, Miami and Denver face relatively • Cap rates for hotel assets generally increased only marginally in high near-term supply growth, while Orlando, San Francisco and Q1 2016. Recent market surveys suggest that cap rates increased Atlanta have relatively constrained pipelines. between 10 and 20 basis points during the last six months for most hotel asset types, while cap rates for select segments actually declined marginally or held steady.
Hotel cap rates remain near historic lows Overall U.S. hotel transaction volume by quarter 20% Yield on 10-year Treasuries $60 Avg. target hotel cap rate, primary markets Q1 Q2 Avg. target hotel cap rate, secondary markets $40 Q3 Q4
$20 0% (billions of $US) (billions of $- Hotel investment sale volume Hotel H1 2001 H1 2002 H1 2003 H1 2004 H1 2005 H1 2006 H1 2007 H1 2008 H1 2009 H1 2010 H1 2011 H1 2012 H1 2013 H1 2014 H1 2015 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: JLL Research Source: JLL Research
JLL | United States | Investment Outlook | Q1 2016 41 TOP LODGING THEMES
same time, a tight supply profile in Los Angeles and San Francisco is RevPAR growth varied widely among the top-25 U.S. allowing for double-digit rate growth in these markets, and after lagging 1 lodging markets in Q1 2016 behind the nation for years, the Norfolk lodging market appears to be finally breaking out with 11.2 percent year-to-date RevPAR growth, driven by sizeable occupancy and rate gains. RevPAR growth for U.S. hotels softened noticeably in the first-quarter of 2016, rising only 2.7 percent from the amount recorded for the first- quarter of 2015. This growth rate represents a meaningful deceleration Supply growth ticks up but remains moderate at the following annual RevPAR growth of 8.0 percent in 2014 and 6.3 percent 2 national level in 2015, and peaking hotel occupancy is largely to blame for the phenomenon. Having eclipsed the prior historical record in 2015, occupancy at the national level likely has little room left for further As of March 2016, the number of hotel rooms under construction growth, especially considering that supply growth has begun to gradually amounted to 3.0 percent of the existing rooms supply in the U.S., drift higher. As a result, whereas in recent years both occupancy and marking a slight increase from the new supply pipeline as of year-end ADR have contributed to material RevPAR growth, ADR gains are likely 2015, when the number of hotel rooms under construction equated to 2.8 to be the sole driver of RevPAR gains at this point in the cycle. As of Q1 percent of the nation’s existing hotel rooms inventory. Historically, actual 2016, these dynamics have certainly begun to take effect, with year-to- supply growth in the year ahead has equaled approximately half of the date occupancy declining 0.5 percent and ADR increasing 3.2 percent active construction pipeline, expressed as a share of the existing lodging compared to Q1 2015. stock, suggesting that supply growth over the next 12-month period is likely to remain below the long-term average of approximately 2.0 RevPAR growth varied widely by market in Q1 2016 percent at the national level. 20.0% While national supply growth is expected to remain moderate, the 15.0% pipeline of rooms under construction is generally larger in the top-25 10.0% U.S. markets, several of which are poised to absorb large supply 5.0% increases in the next few years. New York and Miami are facing the most 0.0% significant near-term growth in supply, with hotel rooms under construction representing 13.7 percent and 8.2 percent, respectively, of -5.0% existing rooms supply. Denver, Houston, and Seattle also face large -10.0% supply increases, with rooms under construction ranging from approximately 6 to 7 percent of existing rooms supply. At the other end Q1 2016 YTD RevPAR Growth Q1 -15.0% of the spectrum, new supply remains limited in a number of large hotel Oahu Miami Dallas Detroit Boston Atlanta Tampa Seattle Norfolk Denver Orlando Phoenix St Louis Chicago Houston Anaheim Nashville markets; hotel rooms under construction amount to less than 2 percent New York Total U.S. San Diego Minneapolis Philadelphia Los Angeles New Orleans of existing supply in seven of the top-25 U.S. markets, including San Francisco Washington DC Source: Smith Travel Research Atlanta, Orlando, New Orleans, San Francisco, Norfolk, St. Louis and Oahu Island. The performance of the top-25 U.S. lodging markets now varies widely. Whereas 23 of the top-25 markets sustained positive RevPAR growth in 2015, a total of nine markets are currently experiencing year-over-year RevPAR declines as of Q1 2016. A number of the markets experiencing RevPAR declines have absorbed outsized supply increases in the last year; New York, Houston and Miami absorbed the largest supply increases, ranging from approximately 5 to 6 percent of existing supply in the past year, and Denver and Boston also sustained moderate supply increases that have likely contributed to negative RevPAR growth. At the
JLL | United States | Investment Outlook | Q1 2016 42 Since year-end 2015, the new supply pipeline has ticked up noticeably in The relationship between long-term supply growth and RevPAR a number of markets but abated in others. Most notably, the number of growth has been weak hotel rooms under construction in Denver jumped from 4.1 to 6.5 percent of existing supply, leaving it third in the nation in terms of the scale of its 6.0% Supply Growth (1991-2015 CAGR) prospective near-term supply growth. At the same time, supply growth in RevPAR Growth (1991-2015 CAGR) Houston has abated somewhat, with the number of hotel rooms under 5.0% construction declining from 7.1 to 6.5 percent of existing supply; hotel developers are increasingly reticent to start new projects in the market 4.0% given RevPAR declines in the wake of recent supply growth and waning demand in its energy-sensitive economy. 3.0%
National supply growth is expected to be moderate but the outlook 2.0% varies considerably by market 1.0% 16.0% 0.0% 14.0% Oahu Miami Dallas Detroit Atlanta Seattle Tampa Boston Norfolk Denver Orlando Phoenix Chicago Houston
12.0% Louis St. Nashville New York Anaheim* San Diego Minneapolis Philadelphia Los Angeles Los New Orleans
10.0% San Francisco Washington DC Washington 8.0% *Supply and RevPAR CAGR reflects the 2001-2015 period; data prior to 2001 not available for Anaheim. 6.0% Source: JLL Research, Smith Travel Research 4.0% With respect to long-term growth prospects, the lack of a relationship 2.0% between supply growth and RevPAR growth appears to stem from a 0.0% strong correlation between supply growth and demand growth. Demand growth over the last 25 years appears to explain approximately 75 Dallas Detroit Seattle Tampa Atlanta Norfolk Denver Orlando Chicago Anaheim percent of the variation in supply growth during that time among the top- New York Philadelphia New Orleans 25 U.S. markets, as hotel developers respond well to demand indicators Top-25 Markets Hotel rmsHotel (% of existing construction supply) under in the long term. However, the relationship breaks down significantly in Source: JLL Research, Smith Travel Research the short term, with the correlation between supply growth and demand Historically, supply growth has not been highly growth in a given year essentially nonexistent. Therefore, while correlated with RevPAR growth in the top-25 substantial supply growth in select markets such as New York and Miami 3 U.S. markets will likely be well absorbed in the long term, the short-term outlook is more uncertain.
Given that supply growth in select markets has begun to generate a degree of investor angst, a review of the historical relationship between supply growth and RevPAR growth in the top-25 U.S. lodging markets is Transaction activity returns to a more “normalized” warranted. Intuitively, all else being equal, markets with significant 4 level in Q1 2016 following a blockbuster 2015 supply growth can be expected to experience less RevPAR growth than markets with constrained supply growth. Of course, all else is hardly ever equal, and as a result, the correlation between supply growth and U.S. hotel transaction volume declined significantly from $13.4 billion in RevPAR growth for a given market in a given year is fairly weak. Q4 2015—and $14.1 billion in Q1 2015—to $5.2 billion in Q1 2016, representing a reduction in sales activity of more than 60 percent. While JLL compared annual RevPAR growth to annual supply growth during a decline of this magnitude certainly sounds alarming, a historical review the period from 1991 through 2015 for each of the top-25 U.S. lodging of hotel transaction activity suggests that the current level of deal markets and found that the two variables have a correlation of -0.28, volume represents a return to normality. which implies that annual supply growth explains less than 8% of the variation in annual RevPAR growth for the top-25 U.S. lodging markets Hotel acquisitions activity soared to near-record levels in 2015. In fact, over the last twenty-five years. The correlation between long-term supply the first, fourth, and second quarters of 2015 achieved the second, third, growth and long-term RevPAR growth is hardly any better, as average and fourth highest levels of quarterly transaction volume, respectively, annual supply growth between 1991 and 2015 explains only about 10% since JLL began tracking hotel sales activity more than 15 years ago. of the variation in average annual RevPAR growth during the same Additionally, deal volume has historically been lowest in the first and third period among the top-25 U.S. lodging markets. The implication is that the quarters of the year, presumably due to the tendency for a lull following a current new supply pipeline does not necessarily tell us a great deal high level of activity at year-end as well as during the summer months. about either the short-term or long-term prospects for RevPAR growth in Therefore, while the level of deal volume in Q1 2016 amounts to a individual markets. sizeable decline in comparison to the prior quarter, it is approximately in
JLL | United States | Investment Outlook | Q1 2016 43 line with average quarterly transaction volume in the current cycle. Since However, as of mid-April 2016, REIT share prices have trended in an 2010, transaction volume for all quarters averaged $5.7 billion per upward direction once again. The Dow Jones U.S. Hotel & Lodging quarter, and acquisitions activity in the first-quarter averaged $5.3 billion. REITs Index rose approximately 23 percent from its mid-January trough, In fact, with the exception of Q1 2015, transaction activity in Q1 2016 leaving the index 30 percent below its early 2015 peak. While share was higher than the first-quarter’s level of deal volume for every year of prices remain depressed and new asset acquisitions are generally still the current cycle, including 2014. not accretive, the improvement in sentiment is encouraging and hardly limited to the hotel sector’s segment of the financial markets. The S&P Transaction activity returns to the current cycle average in Q1 2016 500 is now up nearly 15 percent from its mid-February low; the price of U.S. crude oil increased from less than $30 per barrel in mid-February to approximately $41 per barrel at present; and 10-year fixed-rate AAA $16.0 Quarterly Hotel Transactions Volume CMBS spreads have narrowed back to 135 basis points in March after $14.0 Average Q1 Hotel Transactions having peaked at 168 basis points in February. As volatility in the Volume, 2010-2016 financial markets appears to have abated, investors’ confidence in $12.0 pursuing new hotel acquisitions is expected to improve as well. $10.0
$8.0 Cap rates increased only marginally in Q1 2016
Billions 6 $6.0
$4.0 Per our most recent Hotel Investor Sentiment Survey in October 2015, investors’ targeted capitalization rates declined to 6.5 percent for full- $2.0 service hotels in primary markets compared to 6.8 percent a year prior. $0.0 Targeted capitalization rates for full service hotels in secondary markets Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 averaged 7.6 percent, amounting to a decline of about 20 basis points from 7.8 percent a year prior. Cap rates in both primary and secondary 2010 2011 2012 2013 2014 2015 2016 markets were at their lowest level since we introduced the Hotel Investor Source: JLL Research Sentiment Survey in 2000.
Hotel cap rates remain near historic lows Nascent recovery in share prices for hotel REITs 5 appears to be taking shape 13.0%
Following a year of consistently downward-trending performance, share 12.0% prices for publicly traded lodging REITs finally began to show signs of recovery in Q1 2016. The Dow Jones U.S. Hotel & Lodging REITs Index 11.0% declined approximately 43 percent between its late January 2015 peak and its mid-January 2016 trough, exerting a palpable drag on publicly 10.0% traded hotel REITs acquisitions activity. Average target hotel cap rates Dow Jones U.S. Hotel & Lodging REITs Index 9.0%
160 January 26, 8.0% 2015: 150 146.96 7.0% 140 130 April 18, 6.0% 120 2016:
Index 103.49 110 5.0% 100 January 19, 90 2016: H2 2008 H1 2009 H2 2009 H1 2010 H2 2010 H1 2011 H2 2011 H1 2012 H2 2012 H1 2013 H2 2013 H1 2014 H2 2014 H1 2015 H2 2015 $84.44 80 Full service hotels, primary markets Jul Apr Oct Apr Jan Jun Jan Mar Mar Feb Feb Full service hotels, secondary markets Aug Sep Nov Dec May 2015 2016 Select service hotels, all markets Source: Bloomberg Source: JLL Research
JLL | United States | Investment Outlook | Q1 2016 44 Target hotel cap rates in select primary and secondary U.S. markets
Seattle 7.1%WA
MT ND ME
MN VT ID OR NH Boston WI NY 6.5% SD MA WY Philadelphia CT MI RI Chicago 7.9% New York San Francisco IA 7.1% NJ 6.0% 5.9% NE OH PA DE NV UT Denver IL IN CA WV Washington, DC CO7.7% 6.8%MD KS MO VA Los Angeles KY 6.6% NC AZ TN Phoenix OK San Diego NM AR Hawaii 7.8% SC 6.9% Atlanta 6.4% Dallas 7.6% AL GA 7.5% MS
TX Houston LA Orlando 8.3% FL 8.1%
Primary hotel markets Miami 6.5% Secondary hotel markets
Source: JLL Research, Hotel Investor Sentiment Survey
Notable single-asset transactions, Q1 2016 Price (per Market(s) Property Buyer Seller Price Rooms key) Seattle-Bellevue Seattle Marriott Bellevue (95% Stake) Carey Watermark Investors HEI Hotels & Resorts $186,900,000 384 $510,000 New York Sheraton Hotel Tribeca New York Ascott Residence Trust Magna Hospitality Group $158,000,000 369 $428,000 Various Garrison 10-Hotel Portfolio Gatehouse Capital Garrison Investment Group $137,000,000 1,103 $124,000 Boston Hotel Commonwealth Boston Xenia Hotels & Resorts, Inc. Fundamental Advisors LP $125,100,000 245 $511,000 Hyatt Regency Clearwater Beach Tampa Westmont Hospitality Group Convergent Capital Partners $120,500,000 250 $482,000 Resort & Spa Kimpton Hotel Monaco Portland Portland Hospitality Properties Trust KHP Capital Partners $114,000,000 221 $516,000 Portland Atlanta, Nashville Noble 2-Hotel Portfolio Summit Hotel Properties, Inc. Noble Investment Group LLC $109,000,000 386 $282,000 Various Summit 6-Hotel Portfolio Arc Hospitality Trust Summit Hotel Properties, Inc. $108,300,000 707 $153,000 Hilton Garden Inn Washington DC Washington, DC Hersha Hospitality Trust Perseus Realty Partners $106,500,000 238 $447,000 Georgetown Area Colorado Area Vail Cascade Resort Laurus Corporation Lowe Enterprises Investors $90,000,000 292 $308,000 Brookfield Hotel Properties, San Diego Marriott San Diego Del Mar Southwest Value Partners $80,500,000 284 $283,000 Thayer Lodging Group San Diego Marriott San Diego Mission Valley Wheelock Street Capital Host Hotels & Resorts $76,000,000 350 $217,000 Minneapolis Hilton The Marquette Hotel Minneapolis JMI Realty Cornerstone Real Estate Advisers $74,500,000 281 $265,000 Springhill Suites Seattle Downtown Seattle Moody National Companies Moody National Companies $74,100,000 234 $317,000 South Lake Union Chicago Hotel Lincoln Chicago Nakash Holdings Walton Street Capital $73,000,000 184 $397,000
Note: For part equity sales, the price per room pertains to the full implied value
Source: JLL Research
JLL | United States | Investment Outlook | Q1 2016 45 Net Lease
JLL | United States | Investment Outlook | Q1 2016 46 NET LEASE With non-traded REIT fundraising and volumes down, emerging buyer segments filling the gap
U.S. Net Lease investment U.S. Office Net Lease investment $8.8 6.1% $3.9 6.3% Investment sales (YTD, billions of $US) Average cap rate (%) Investment sales (YTD, billions of $US) Average cap rate (%)
U.S. Industrial Net Lease investment U.S. Retail Net Lease investment $2.9 6.8% $2.0 5.3% Investment sales (YTD, billions of $US) Average cap rate (%) Investment sales (YTD, billions of $US) Average cap rate (%)
Amid U.S. economic volatility, sales volume saw a general decline Appetite for net lease product expands for institutional and foreign across all net lease sectors in the first-quarter, down 44.1 percent. buyers. A shift in buyer type is enabling deeper sector penetration as Foreign investment, sale leaseback volumes and portfolio transactions institutional and foreign investors are increasingly showing a preference dropped to the lowest comparable quarterly levels in the cycle to-date for net lease assets—specifically with strong credit and long-term leases. following a peak year of activity in 2015. A decline in non-traded REIT fundraising decreased acquisition activity further across the U.S. Pricing remains competitive as office product leads cap rate compression with a 70-basis-point decrease year-over-year. As Sale leaseback transaction volumes declined 56.1 percent after net lease industrial cap rates are plateauing, office and retail cap three years of expanding activity. While early 2016 saw an increase in rates continue to compress, with notable diversification into industrial sale leasebacks, the office sector continues to drive activity. secondary markets. Additional built-to-suit deliveries and a strong pipeline of transactions will drive activity gains through the remainder of the year. Cap rates demonstrate moderate compression across sectors, averaging 30 basis points since year-end Non-traded REIT acquisitions decrease 48.9 percent, coinciding with equity funding decline of 57.1 percent year-over-year. 9.0% Regulatory changes and rockiness in the CMBS markets shifted non- 8.0% 6.8% traded REITs out of the top buyer position, creating opportunities for 7.0% other active buyers attracted to net lease yields. 6.0% 6.3% 5.0% 5.3% 4.0% Net lease investment down 44.1 percent year-over-year 3.0% 2.0% 1.8% $60.0 Q1 Q2 Q3 Q4 1.0% $40.0 0.0%
$20.0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 10-Year Treasury (%) Q1 2016
sale volumes Office net lease cap rate (%) (billions of $US) $0.0
Net lease investment Industrial net lease cap rate (%) Retail net lease cap rate (%) 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: JLL Research, Real Capital Analytics (Transactions larger than $5.0m) Source: JLL Research, Real Capital Analytics (Transactions larger than $5.0m), NCREIF
JLL | United States | Investment Outlook | Q1 2016 47 TOP NET LEASE THEMES
volume closer to historic norms, dropping from 40.5 to 36.3 percent Declining activity in early 2016 not indicative of full- year-over-year. Only two portfolio transactions over $1.0 billion closed 1 year sales potential in the first-quarter, compared to 12 in the first-quarter of 2015. Activity is expected to pick up through the remainder of the year as a result of an adequate pipeline. While investor demand is rising and diversifying for the net lease sector, a heightened sensitivity to perceived risk resulting from recent volatility The most notable transactions in the first-quarter were in primary has narrowed the profile of “desirable product” in early 2016, resulting in markets across all sectors. New York, Los Angeles and Chicago presently constrained opportunities for this capital. Sales volume saw a accounted for 28.0 percent of sales volume in the retail sector, while the general decline across all net lease sectors in the first-quarter, as foreign industrial sector was driven by sales in Chicago, Philadelphia and the investment, sale leaseback volumes and portfolio transactions dropped Inland Empire with a combined $2.7 billion of activity. Boston, to the lowest comparable quarterly levels in the cycle to-date following a Washington, DC and San Diego led the office sector with a combined peak year of activity in 2015. This additionally was spurred by a decline $2.0 billion in net lease sales volumes. in non-traded REIT fundraising and thus decreased activity in acquisitions across the U.S.: A decrease in real estate equity raises and a lack of preferred • Despite remaining active, foreign net lease investments decreased opportunities have been accompanied by volatility in the global financial 69.9 percent year-over-year. Interest from foreign capital sources has and CMBS markets, resulting in a regression of sales volumes for the remained strong, with transactions expected to normalize as quarter. Numbers are expected to stabilize in the months to come, as the speculative fears decline. market finds equilibrium from recent volatility, notably in the debt • Sale leaseback transactions decreased 56.1 percent across all markets and energy sector. While non-traded REITs once drove pricing sectors, with retail leading the decline. compression, decreased fundraising from this buyer segment will • Portfolio activity has normalized after an increase in industrial continue to compress the competitive landscape of future pricing for portfolios in 2015, bringing portfolios as a percentage of total net lease alternate buyer types, specifically private buyers and 1031 investors who are less affected by volatility in the financing markets. Secondary market deal flow concentration picks up in early 2016 Portfolio concentration normalizes to 36.3 percent after peak year 100% 6% 3% 9% 8% 11% 7% 8% 7% 12% 9% 10% 90% 100% 67% 65% 75% 71% 71% 74% 72% 62% 72% 60% 64% 80% 90% 37% 40% 38% 50% 70% 43% 46% 46% 40% 40% 44% 80% 51% 60% 70% 10-year 50% 60% average 40% 50%
30% 57% 53% 40% 47% 52% 47% 47% 48% 51% 47% 47% 20% 38% 30% 10% 20%
0% Net lease investment sale volumes 10% 33% 35% 25% 29% 29% 26% 28% 38% 28% 40% 36% 0% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Q1 2016 Primary market sales Secondary market sales 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Tertiary market sales Total portfolio sales Total single-asset sales Q1 2016
Source: JLL Research, Real Capital Analytics (Transactions larger than $5.0m) Source: JLL Research, Real Capital Analytics (Transactions larger than $5.0m)
JLL | United States | Investment Outlook | Q1 2016 48 Increased built-to-suit deliveries and strong Drop-off in non-traded REIT fundraising impacting transaction pipeline to drive quarterly sale competitive net lease acquisition landscape 2 leaseback activity gains in 2016 3
Sale leaseback transaction volumes declined after three years of Non-traded REITs are facing more hurdles than ever before with expanding activity—down more than 50.0 percent in the first-quarter. increasing scrutiny and new rulings from security regulators and changes While early 2016 saw an increase in industrial sale leasebacks, the office in fiduciary standards. Consequently, non-traded REIT fundraising has sector continues to drive activity. Four of the eight largest sale leaseback decreased 57.1 percent year-over-year, suggesting further acquisition transactions were in the office sector, three of which were in primary activity throughout the first half of 2016 will remain compressed. As a markets. The three largest office sale leasebacks in the first-quarter were result of decreasing active capital, non-traded REIT acquisitions declined notably headquarters, including Macy’s office sale leaseback in New by 48.9 percent year-over-year. This has driven REIT participation rates York for $170.0 million, CNA headquarters’ for $108.0 million in Chicago in the sector to rapidly shift from the most to least active buyer group and Weyerhaeuser’s in Seattle for $70.5 million. In a period of increasing over a six-month period. The buyer segment led acquisition market office rent growth and diversifying investor demand, net lease office share with penetration rates of 39.8 and 48.4 percent in 2014 and 2015, pricing is compressing, down 70 basis points over the last 12 months. respectively, but declined to 8.2 percent in first-quarter 2016. These This is happening regardless of sale leaseback volume declines in the shifts are also impacting the typical profile of non-traded REIT assets, year. Credit and leasehold remain key components of valuations, with most of the first-quarter’s acquisitions being industrial assets in notably for assets with investment-grade tenancies and leaseholds with secondary markets as opposed to office assets in primary markets. 10 or more remaining years of term, commanding a 14 basis point However, in the largest acquisition of the quarter, Griffin Capital’s premium over average office net lease product. Essential Asset REIT II acquired a $35.8 million, Toshiba Tech–leased asset in Raleigh-Durham in a sale leaseback transaction, which traded Overall sale leaseback transactions decreased 56.1 percent at a 6.1 percent cap rate with slightly more than 12 years of remaining lease term. $60.0 Single tenant Sale leaseback Non-traded REIT fundraising declines impacting buyer landscape
$25.0 $50.0 Nontraded REIT fundraising Nontraded REIT sales volumes $20.0 $40.0 $15.0
$30.0 $10.0 Billions of $US Billions of $5.0 $20.0
$0.0 $10.0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Net lease Investment sale volumes (billions of $US)
Source: JLL Research, Real Capital Analytics (Transactions larger than $5.0m), Q1 2016 Robert A. Stanger & Co. $0.0 Regulatory challenges and rockiness in the CMBS markets have put a
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 significant strain on equity raises for non-traded REITs. As cap rates
Q1 2016 continue to compress and interest rates continue to be the cause of Source: JLL Research, Real Capital Analytics (Transactions larger than $5.0m) speculation, investors are losing confidence in REITs’ abilities to acquire accretive assets, impacting overall net lease sales activity. While non- While activity declined this quarter, volume is expected to increase in the traded REITs once drove pricing compression, decreased activity could months to come yet likely will decline year-over-year. This will be lessen the competitive landscape of future pricing. This will provide supported by an expanding net lease office inventory amid rising build- opportunities for other active buyers attracted to current net lease yields, to-suit deliveries—with an additional 13.0 million square feet of assets seeking diversification and favoring the less-capital-intensive nature of expected to deliver over the next nine months, with highest the sector. concentrations in Salt Lake City, Boston and Columbus—and a strong pipeline of sale leaseback transactions entering the market for sale. These notably will be driven by the office sector in secondary markets.
JLL | United States | Investment Outlook | Q1 2016 49 Pricing environment remains competitive, with net Emerging focus from domestic institutions and lease office product leading cap rate compression cross-border capital for net lease product 4 5 in early 2016
Despite overall net lease sales volume declines, single-tenant Overall net lease cap rates continued to compress with a 46 basis point acquisitions by institutional buyers increased 9.0 percent year-over-year, reduction year-over-year. As net lease industrial cap rates are a result of the ongoing focus on diversification and yield in the latter plateauing, office and retail cap rates continue to compress across stages of the cycle. The impact of these buyers relative to overall activity primary and secondary markets. This is driving overall cap rates to has thus increased 58.2 percent year-over-year. The largest transaction decline. Net lease retail product led cap rate compression earlier in the of the quarter was Cira Square in Philadelphia, a redeveloped CBD asset cycle with peak compression of 70 basis points in 2015, but office has leased by the Internal Revenue Service (IRS) with 14 years of remaining since caught up. Office cap rate compression was the highest seen for lease term. The property was acquired by South Korea–based Korea the sector in this cycle—70 basis points over the last 12 months. Office Investment Management (KIM) for $354 million, or $410 per square foot. assets with 10 or more years of remaining lease term outperformed the Overall, the largest institutional transactions of the quarter closed in overall sector by a multiple of 3.0 on the metric with a 215 basis point Philadelphia, Atlanta and New York and varied across the office, decrease in cap rates during this period, reinforcing the impact of industrial and retail sectors. increasing competition from new players in the sector. On the market level for the office sector, on the heels of increased competition and After peak levels in 2014 and 2015, REIT participation rates are resulting primary market compression in recent years, secondary declining as institutional and equity fund buyers emerge markets have picked up steam, with Phoenix, San Diego, Dallas and Fort Lauderdale leading compression. 2014 2015 Q1 2016 100% Competitive pricing in primary markets in 2015 led investors to shift their focus into secondary markets, creating broader competition for 2016. 80% Investor selectivity across markets and sectors continues to drive pricing activity. The office sector presents the greatest challenges with 60% accelerated cap rate compression and continued investor preference.
40% Primary and secondary markets leading office net lease cap rate compression, down 70 basis points since year-end 20% 10.0% 0% Primary Secondary Primary Secondary Primary Secondary Institution / Advisor Equity fund Developer / Property company Corporate / User 5.0% Primary office markets (%) High Net Worth REIT#REF! / REOC Secondary office markets (%) Tertiary office markets (%) Source: JLL Research, Real Capital Analytics (Transactions larger than $5.0m) Overall net lease (%) The Philadelphia transaction as well as others in active markets additionally 0.0% Net lease office cap rates (%) reflect an expanding appetite for net lease product with term from cross- border investors. While down on a relative basis year-over-year, foreign 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 investors made up 9.2 percent of all net lease sales in the first-quarter, down Source: JLL Research, Real Capital Analytics (Transactions larger than $5.0m) Q1 2016 from 17.2 percent in the first-quarter of 2015. In relative terms, this remains slightly lower than average levels of foreign investment into the net lease Office cap rates on average 180 basis points lower than net lease sector over the last 10years, having averaged 12.6 percent of overall activity. 10.0% While foreign capital at-large has been focused on primary markets, net lease product is proving to be a key gateway for these users into secondary markets, having accounted for 18.8 percent of all cross-border, secondary market investments since 2014. Buyers out of South Korea and the United 5.0% Kingdom are driving 93.0 percent of 2016 deal flow. Overall Office
Cap rate (%) Cap rate All Single Tenant Office A shift in buyer type is enabling deeper sector penetration for buyers where Less than 10 years remaining lease term non-traded REITs once reigned. Institutional and foreign investors are Greater than 10 years remaining lease term expected to remain active through the remainder of the year, bringing 0.0% opportunity to owner-users looking at sale leaseback opportunities as well as 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 net lease owners looking at monetizing assets across primary and secondary Source: JLL Research, CoStar, Real Capital Analytics Q1 2016 markets. Assets with strong credit and term will remain key for these buyers. (Transactions larger than $25.0m and over 100,000 square feet)
JLL | United States | Investment Outlook | Q1 2016 50 Notable primary market transactions, Q1 2016
Tenant Sector Market Property Buyer Seller Price ($) Size (s.f.)
Facebook HQ, 1601 Deutsche Asset & Facebook Office San Francisco Facebook $202,358,000 1,024,090 Willow Rd Wealth Management
Macy's Office New York 422 Fulton St Tishman Speyer Macy's $170,000,000 378,000
McKinley & Pierce Dividend Cap Northrop Grumman Office Washington, DC Bldgs, 7555 Colshire Northrop Grumman Diversified Prop $158,400,000 574,558 Dr Fund Palantir Office New York 430 W 15th St TIAA Atlas Capital Group $117,000,000 98,087 Technologies Fairburn Logistics Deutsche Asset & Google Fiber Industrial Atlanta Center, Bohannon TPA Group $120,000,000 1,129,750 Wealth Management Rd Restoration 1303 W Pioneer CBRE Global Deutsche Asset & Industrial Dallas-Fort Worth $75,000,000 860,445 Hardware Pkwy Investors Wealth Management Federal Supply STAG Industrial Industrial Philadelphia 1900 River Rd UrbanAmerica $61,500,000 1,048,631 Service (GS) Management
Chanel Retail New York 139 Spring St Invesco Lisa Fromartz $115,388,000 4,500
B&B Italia Retail New York 138 Greene St Ascot Properties Thor Equities $38,500,000 55,000
Off Broadway Shoe 6263 Topanga Paragon Retail Los Angeles CA Home Builders $27,000,000 28,433 Warehouse Canyon Blvd Commercial Grp
Notable secondary market transactions, Q1 2016
Tenant) Sector Market Property Buyer Seller Price ($) Size (s.f.)
Coretrust Capital Internal Revenue Partners / Korea Brandywine Realty Office Philadelphia Cira Square, 2970 Market St $354,000,000 862,692 Service (GSA) Investment Trust Management Santa Fe Summit, 7525-7555 Intuit Office San Diego Intuit Kilroy Realty Corp $262,300,000 465,812 Torrey Santa Fe Rd Saint-Gobain HQ, 20 Moores 90 North RE E Kahn Saint-Gobain Office Philadelphia $123,182,736 320,000 Rd Partners Development Quintiles Plaza, 4820 Emperor Franklin Street Quintiles Office Raleigh-Durham N/ A $86,025,000 259,531 Blvd Properties AmeriPlex Bakery, 5202 Gramercy Property AmeriPlex Bakery Industrial Indianapolis Prologis $37,000,000 225,586 Exploration Dr Trust Affordable Interior Industrial Boston 25 Tucker Rd James R Wiersma Calare Properties $31,485,000 588,868 Systems, Inc.
Boston Scientific Industrial Boston 500 Commander Shea Blvd FedEx Boston Scientific $31,000,000 378,248
Grocery Outlet Retail San Diego 1002 Market St Zephyr Partners Bosa Properties $27,000,000 18,056
Walmart Gatlin Development Retail Fort Lauderdale 2500 W Broward Blvd Steve Rhodes $26,060,000 189,543 Supercenter Co BJ's Wholesale Inland Real Estate Skylar Development Retail Baltimore 4701 O'Donnell St $23,500,000 89,000 Club, Inc. Group LLC
JLL | United States | Investment Outlook | Q1 2016 51 For more information, please contact:
Investor Hotels Multifamily Retail Sean Coghlan Kent Michels Michael Morrone Arielle Einhorn Director, Investor Research Director, Hotels Research Analyst, Multifamily Research Analyst, Retail Research +1 215 988 5556 +1 312 228 2927 +1 312 228 2304 +1 312 228 3466 [email protected] [email protected] [email protected] [email protected]
Debt & Equity Industrial Office Net Lease Ronak Sheth Peter Kroner Rachel Johnson Sarah Henry Research Analyst Sr. Analyst, Industrial Research Analyst, Office Research Sr. Analyst, Net Lease Research +1 312 228 3471 +1 312 228 2744 +1 312 228 3017 +1 312 702 4248 [email protected] [email protected] [email protected] [email protected]
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