Office Outlook

Office Outlook United States | Q1 2015 RENTS Despite slower activity in the first quarter, office markets across the U.S. are on the brink of a tipping point as evidenced by more expansionary leasing activity and consistently- increasing tour velocity. Landlords are responding to this environment by increasing rents aggressively, with first quarter rent growth posting the highest increase of the recovery so far, by a multiple of three. JLL | United States | Office Outlook | Q1 2015 2 Table of contents Executive summary 4 Milwaukee 41 United States office market 5 Minneapolis 42 2015 United States office clock 8 New Jersey 43 United States economy 10 New York 44 United States investment sales 13 Oakland 45 Local U.S. office markets Orange County 46 Atlanta 17 Orlando 47 Austin 18 Philadelphia 48 Baltimore 19 Phoenix 50 Boston 20 Pittsburgh 51 Charlotte 21 Portland 52 Chicago 22 Raleigh-Durham 53 Cincinnati 24 Richmond 54 Cleveland 25 Sacramento 55 Columbus 26 San Antonio 56 Dallas 27 San Diego 57 Denver 28 San Francisco 58 Detroit 29 Seattle-Bellevue 60 East Bay 30 Silicon Valley 61 Fairfield County 31 St. Louis 62 Fort Lauderdale 32 Tampa 63 Hampton Roads 33 Washington, DC 64 Houston 34 Westchester County 65 Indianapolis 35 West Palm Beach 66 Jacksonville 36 Appendix 68 Kansas City 37 Contacts 76 Long Island 38 Los Angeles 39 Miami 40 JLL | United States | Office Outlook | Q1 2015 3 United States office market Executive summary • Several companies transacted leases in multiple markets, further affirming corporate confidence and indicating a return to growth as The U.S. office expansion continued in the beginning of 2015, with some repeat deal-makers included established companies such as Comcast, indicators like absorption and leasing activity slowing, but other elements Morgan Stanley, New York Life, and Fannie Mae. of the market picking up, particularly, development, expansionary leasing activity, touring velocity and rent growth. Ahead, based on the massive We are consistently seeing rent growth, quarter in and quarter out, across uptick in expansionary activity, absorption will return to recent norms, 90 percent of markets JLL tracks with the only markets not consistently translating into further tightening and reason for landlords to continue to participating being the suburbs of NYC, parts of the Great Lakes and push rates. Houston, which recently shifted from a landlord-favorable market to a peaking market with rent declines over the past two quarters. Quarterly occupancy growth totaled 0.2 percent of inventory levels, down • Above-average growth was posted in the CBDs of Austin, NYC, from more recent norms of 0.5 percent, driven by space givebacks in Portland and Charlotte, among other cities. NYC and DC and a significant slowdown in Houston. As a result, vacancy remained unchanged across the U.S. at 15.6 percent, but is • Rent growth in the suburbs was led by select suburban submarkets in anticipated to fall below 15.0 percent by year-end as recent corporate Cambridge, MA, Orange County, and Silicon Valley, but gains will come in at about half of what a tighter and higher-velocity CBD posts ahead. expansions take occupancy over the next several quarters. • Tightening conditions across markets, especially among Trophy space • Central U.S. markets, led by Dallas and Austin, recorded 4.0 million and creative Class B office space, will continue driving rents upward square feet in occupancy gains in the first quarter, but losses throughout 2015 and into 2016, potentially surpassing forecasted anticipated in Houston through an on slot of sublease space will increases following such a strong start in the first quarter temper year-end absorption in the region. • Posting 2.7 million square feet of absorption, the West Coast Delivering 11.0 million square feet in the quarter, U.S. markets are set to anticipates significant absorption through the remainder of the year as deliver the highest amount of new product this cycle by year-end. tech companies such as Amazon, Google, Salesforce, and WeWork take occupancy of hundreds of thousands to millions of square feet in • Speculative development continues to increase, currently comprising markets from Seattle down to San Diego. more than 75.0 percent of all projects. With preleasing rates for speculative product registering just shy of 35.0 percent, tenants will • First quarter losses of over 1.0 million square feet in DC and NYC are likely find some supply relief across the development pipeline, especially now likely a thing of the past. Moving forward, diverse industry niches mid-sized tenants that occupy a floor or two. taking hold in markets like Atlanta as an HQ location and Charlotte as a banking and finance annex, in addition to tech and banking and • Houston, NYC, Dallas and Seattle, led in development underway, and finance growth in Boston and NYC may likely push East Coast aside from Amazon, only 39.0 percent of projects in these markets are markets ahead in occupancy gains. pre-leased, which will create some space relief. • Rents across the construction pipeline are averaging a 22.7 percent Leasing activity increased by 2.0 percent, dominated by expansionary premium to existing Class A rents, signaling a continued rent spike transactions across all markets. ahead over the next 18 months. • Expansionary activity continues to mount among lease transactions • Although currently placing upward pressure on rents, the significant larger than 20,000 square feet reflecting company growth. New York, uptick in development activity will eventually stabilize fundamentals as DC, and Northern Virginia recorded the highest amount of leasing vacant supply is delivered over the next 24 months. activity, which will help to recapture losses incurred in the first quarter, across those markets. As we move through 2015 and into 2016, look for occupancy growth to • Technology, followed by banking and finance, remained the active revert back to recent quarterly averages of 0.4 to 0.5 percent, shifting drivers of leasing activity at 3.0 and 2.0 million square feet, vacancy below 15.0 percent for the first time in a decade, which will create respectively. In fact, STEM-based sectors comprised 35.0 percent of greater challenges for tenants in procuring space and opportunity for leasing volume in the first quarter with 75.0 percent of those leases landlords to continue to aggressively grow rents at double-digit rates over posting occupancy growth. the next 18 months. JLL | United States | Office Outlook | Q1 2015 4 Corporate occupiers committing to new employees and new space Absorption declines, promises to bounce back by year-end While total leasing activity posted minimal gains quarter-over-quarter at Absorption volume posted its lowest quarterly result in more than three 55 million square feet, markets have finally fallen into a steady stride with years, declining by 61.0 percent quarter-over-quarter from 16 million hiring that’s leading corporate occupiers to commit to expansionary square feet down to 6.3 million square feet. While the numbers are leases at a rate not yet seen in this cycle. As a result, 56.0 percent of startling, there’s likely to be a more significant build-up of absorption leases larger than 20,000 square feet will result in net expansion in the through the remainder of the year. Expansionary activity among leases coming quarters as companies from a broad spectrum of industries larger than 100,000 square feet has increased steadily over the past increase headcounts. three quarters with nine occupiers committing to expansion space in the third quarter of 2014, increasing to 25 and 30 transactions in the Technology companies continue to lead in this expansionary activity in following fourth and first quarters. As a result, a spike in net absorption both primary tech hubs as well as emerging secondary (and tertiary) by the end of the year is projected as companies like Apple, Comcast, markets, but financial, and professional and business services are Facebook, Google, Fannie Mae and Indeed take occupancy of new making a comeback in a significant way that’s leading to leasing activity leases across the country. broadly across the country. Nearly 10.0 million square feet of leases larger than 20,000 square feet were signed by these two sectors in the Additionally, the increase in expansionary activity is a pronounced shift first quarter as companies like State Street Bank signed on to open a away from renewal transactions that were heavily favored in the early new location in New Jersey’s suburbs and newcomer WeWork forged part of the recovery. Though leasing activity has registered lower results ahead with its aggressive expansion plans, leasing more space in both in the last two quarters, the number of renewals has consistently New York and San Francisco. Even law firms, which have steadily shed decreased, comprising only 22.0 percent of transactions larger than real estate over the past five years, inked a handful of expansionary 20,000 square feet in the first quarter. As tenants commit to more deals across the country. expansion space, the lag time between a transaction’s close and its physical occupancy will delay occupancy gains. However, absorption is Leasing activity by office-using sector likely to reach the 2014 high watermark of 55 million square feet. Scientific & technical 34.1% Finance 23.2% Rental rates beginning to grow at an accelerated pace Professional and business services 23.2% Consumer-oriented 7.1% As the economy improves and occupiers increase headcounts, landlords Creative 5.6% are feeling much more comfortable pushing rental rates, resulting in the Non-profit 4.9% highest quarterly gain of the cycle at 3.1 percent. At the end of the first Other 1.9% quarter, rental rates in CBDs averaged $40.73 per square foot, versus a *Leasing activity >20,000 s.f.

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