Office Outlook United States | Q3 2016 Stable and growing U.S. office markets continue to benefit from economic expansion What’s inside: “The U.S. economy remains a bright spot in an increasingly uncertain global picture, and although growth has become more volatile and less predictable during 2016, fundamentals remain relatively sound.” JLL | United States | Office Outlook | Q3 2016 2 Table of Contents 5 metrics to watch 4 Napa-Solano 39 United States office market 5 Nashville 40 United States office clock 8 New Jersey 41 Local U.S. office markets New York 42 Atlanta 11 Northern Virginia 43 Austin 12 Oakland 44 Baltimore 13 Orange County 45 Boston 14 Orlando 46 Charlotte 15 Philadelphia (CBD) 47 Chicago (CBD) 16 Philadelphia (Suburban) 48 Chicago (Suburban) 17 Phoenix 49 Cincinnati 18 Pittsburgh 50 Cleveland 19 Portland 51 Columbus 20 Raleigh-Durham 52 Dallas 21 Richmond 53 Denver 22 Sacramento 54 Detroit 23 Salt Lake City 55 East Bay 24 San Antonio 56 Fairfield County 25 San Diego 57 Fort Lauderdale 26 San Francisco 58 Fort Worth 27 San Francisco (Mid-Peninsula) 59 Hampton Roads 28 Seattle-Bellevue 60 Houston 29 Silicon Valley 61 Indianapolis 30 St. Louis 62 Jacksonville 31 Suburban Maryland 63 Long Island 32 Tampa 64 Los Angeles 33 Washington, DC 65 Louisville 34 West Palm Beach 66 Marin-Sonoma 35 Westchester County 67 Miami 36 Appendix 68 Milwaukee 37 Contacts 78 Minneapolis 38 JLL | United States | Office Outlook | Q3 2016 3 5 Key metrics to watch Neither Brexit nor summer vacation were able to slow the office leasing market during the third quarter and by the end of September, U.S. leasing volume totaled nearly 60 million square feet—4.4 percent higher than the fourth-quarter trailing average—and expansionary leases comprised the largest share of 20,000-square-foot-and-larger leases at 47.1 percent. While labor market volatility has increased over the past six months, employment has continued to grow with with more than 2.4 million jobs added over the past 12 months. Even the price of oil and its supply have shown signs of improvement—welcome news for Houston and other energy markets. While all indicators point to a stable economy, uncertainties surrounding the election, interest rates and geopolitical conditions have certainly been fodder for the discussion about the commercial real estate market’s outlook. Though no immediate impact on the economy is anticipated, it is certain to create additional excitement going into the fourth quarter. Job openings: Broad-based economic growth pushed job openings up by 3.9 percent in September, while labor force participation increased by 10 bps. Positive signs, for sure, but with limited slack in the labor market, employers may still have Our view 1 a hard time finding the talent required to fill job postings. As a result, expansionary leasing will taper with the limited supply of talent. Slow and steady economic growth has led the U.S. office market’s trajectory Sublease space: Increasing by 20 bps during the third quarter, large development over the last several years, markets like New York, Dallas and Washington, DC will be on the lookout for and that trend isn’t changes in sublease vacancy, while Houston and less so the San Francisco Bay expected to change over 2 Area monitor existing sublease supply levels. While we don’t expect sublease the near term. As long as space to emerge from faltering economic conditions, but rather relocations into employment continues to new developments, it will place pressure on peaking markets. grow, occupancy in the office market should Peaking markets: Both high tenant demand and high development markets are continue to expand. That nearing their peak in rental rates, with limited rent growth expected over the next said, primary markets 12 months, except where new, premium-priced supply is expected to deliver or welcoming new supply are 3 where supply constraints persist. Based on Denver’s position at 12 o’clock, it could nearing an inflection point be the next market after Houston to see rents decline. as supply begins to catch up to demand. With more than 60 percent of the 105 million-square-foot Tech: Consistently driving the largest portion of leasing activity—and development pipeline expansionary leasing activity for that matter—the technology industry has been expected to deliver by the spurring growth in markets large and small. However, with talent shortages end of 2017, leasing plaguing all industries, especially for skilled tech talent, adding headcount will 4 conditions will become become more challenging just as the bulk of new supply starts to come online much more balanced by in 2017. 2018, with a large shift to more tenant-favorable Headquarters: In an effort to attract what is becoming elusive talent, corporate conditions by 2019. occupiers are thinking critically about their headquarters locations and relocating where opportunity presents itself. Watch for preleasing activity to take on more 5 headquarters tenants over the next 12 months—especially where supply is most constrained. United Airlines’ new, 237,000-square-foot lease at 609 Main Street in Houston is a recent example of this. JLL | United States | Office Outlook | Q3 2016 4 United States Office market Slow and steady growth drives U.S. economy As the workforce grew faster than employment, unemployment increased by 10bps to 5.0 percent The U.S. economy remains a bright spot in an increasingly uncertain global picture, and although growth has become more volatile and less Monthly employment change predictable during 2016, fundamentals remain relatively sound. Over the Unemployment rate course of the year, the labor market has added 1.4 million jobs at varying 600.0 12.0% rates ranging from 24,000 to 271,000 new jobs per month, driven by continued increases in professional services, health, leisure, retail and 400.0 construction. The wobbling rate of monthly gains has its roots in an 10.0% increasingly visible talent shortage, with unemployment nationally at 5.0 200.0 percent and falling below 4.0 percent in numerous primary and 8.0% secondary geographies, boosting wage growth to 2.6 percent annually 0.0 and above 3.0 percent in many high-demand industries. Tech in particular has slowed to 4.5 percent growth over the year because of -200.0 6.0% this, compared to the 6.0+ percent recorded earlier in the cycle. -400.0 However, as participation rises and workforce expansion remains steady, 4.0% employers will still be able to add to headcounts, while the desire to Unemployment rate (%) month net change (thousands) change net month - -600.0 recruit new talent has resulted in job openings across sectors that’s, 1 2.0% which are growing faster than employment. These factors are all -800.0 boosting external indicators, particularly consumer confidence, which is keeping spending and overall economic growth up. -1,000.0 0.0% September 2016 U.S. labor market at a glance Source: JLL Research, Bureau of Labor Statistics +156,000 5,871,000 On the other hand, GDP has been underperforming compared to 2014 (72 consecutive 5.0% and 2015 growth, as well as coming in below consensus in many (+3.9% YOY) months instances. Real GDP is up just 1.3 percent as of Q2 2016 compared to Unemployment rate nearly 3.0 percent one year ago. Keeping growth on an upward trend has of growth) Job openings 1-month net change been personal consumption expenditures, which was responsible for all net GDP growth in real terms over the past year. Business investment, a smaller but critical barometer of economic headwinds, has contracted in recent quarters and is down 2.9 percent over the year, mirroring the +2,447,000 -10 bps 5,227,000 wobbling in corporate profits of late. However, there are bright spots (+1.7% YOY) (+3.6% YOY) within investment, particularly research and development (+7.1 percent), 12-month change software (+3.6 percent) and industrial equipment (+2.5 percent), which 12-month change in unemployment Hires have been critical sectors throughout the current cycle. On the back of a strengthening dollar, imports are rising faster than exports, while government expenditures remain flat. That said, the strength in consumer spending and demand due to a meaningful wage growth in a low-inflation environment has helped other indicators, notably home +782,000 62.9% 2,980,000 sales (+20.6 percent) and housing starts (+8.3 percent YTD), which had (+2.1% YOY) previously been struggling. Overall, the economy remains steady and is 10-year average Labor force weathering Brexit, slowdowns in resource-based economies and annual growth participation rate Quits continued economic troubles within the Eurozone well, and we expect that 2017 will continue to show steady, albeit somewhat slower, growth. Source: JLL Research, Bureau of Labor Statistics JLL | United States | Office Outlook | Q3 2016 5 No slowdown for leasing activity during the quarter At the industry level, creative and digital content and services remain the leaders in growth, having overtaken technology due to talent shortages Counter to less predictable monthly employment gains and below- and an earlier wave of leasing activity compared to the rest of the expectations GDP growth, leasing activity grew once again during the economy and office market, although technology remains the largest third quarter, with 59.9 million square feet recorded over the past three single industry for leasing nationally. Expansionary activity from months. As a result of more broad-based growth across industries and companies in high-growth areas such as Penguin Random House, sectors, the top-performing leasing markets year-to-date have ranged Google, iCIMS, Illumina, Ellie Mae and NCR alone totaled 2.4 million from major diversified metros such as Atlanta (+33.5 percent) to industry- square feet across a variety of media and associated industries, from and corporate-driven secondary markets such as Salt Lake City (+136.2 publishing to software to mortgage lending and manufacturing.