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We are pleased to share this 19 th annual edition of TrendLines:
Trends in Washington Commercial Real Estate , a collaborative
effort of Delta Associates and Transwestern’s research group. In
this report, we review the results of 2015 and shed light on the
forces and issues that we anticipate will shape the region’s
economy and commercial real estate markets in 2016 and
beyond.
As expected, 2015 was a year of economic expansion in the
Washington area, due in no small part to the stabilization of
federal government employment and procurement after several years
of cutbacks. The private side of the regional economy —
particularly the professional and business services sector — picked
up the slack and the region recorded the most signicant job growth
in a decade. In response to a growing economy, market conditions
improved for all major property types during 2015 — trends that are
poised to continue during 2016.
Though market fundamentals in the Washington area are
strengthening, we detect a transition in forces that will power
economic and real estate market growth in the future. Historically,
the federal government drove growth in the Washington area, through
its employment, leasing, and contracting activity. But the federal
presence in the region, although stabilized, is unlikely to grow
signicantly in the foreseeable future as a share of the overall
economy. As a result, the private sector will lead the current
expansion cycle, relying more than ever before on innovation,
international trade, and regional cooperation.
The region’s public and private sector leaders have already
identied the need to change the way that business is done in the
Washington metro area. Two
Foreword
To our friends, clients and colleagues:
major efforts emerged in 2015 that will help guide the conversation
about how the region will grow and prosper in the future: the
Roadmap for the Washington Region’s Economic Future led by George
Mason University and the 2030 Group; and the Global Cities
Initiative by the Metropolitan Washington Council of Governments,
the Greater Washington Board of Trade, and the Consortium of
Universities of the Washington Metropolitan Area. These
initiatives, if widely embraced by local jurisdictions and the
private sector, can change the approach to economic development and
improve the region’s chances of fostering sustainable economic
growth and a ourishing real estate market.
Overall, we expect 2016 to be a year of continued growth, but also
a year of rapid change. To succeed in the marketplace, real estate
developers, owners, and investors must understand how these changes
will inuence investment and development opportunities. This report
highlights major changes afoot not just in the Washington region,
but nationally and globally as well. With this in mind, we have
subtitled this report A Region in Transition.
Over the years, we have been fortunate to work with the individuals
and organizations contributing the success of the Washington area’s
economy and its real estate markets. Thank you for your business.
We appreciate your interest in our consulting and other services —
including brokerage, property management, investment sales, and
development — and we look forward to being your real estate service
partner in the period ahead. Best wishes for a successful
2016.
PHILLIP M. MCCARTHY
KEITH A. FOERY
DAVID WEISEL, CRE
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Section 2 The National Economy 18
Section 3 The Washington Area Economy 28
Section 4 The Washington Area Ofce Market 35
Section 5 The Washington/Baltimore Regional Flex/Industrial Market
44
Section 6 The Washington Area Apartment Market 50
Section 7 The Washington Area Condominium Market 60
Section 8 The Washington Area Retail Market 70
Section 9 Capital Markets and Investment Trends 78
Section 10 2016 TrendSetter Award Recipients 87
Navigation Panel
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Acknowledgments: The editor, David Weisel, CRE, wishes to
acknowledge and thank the TrendLines team at Delta Associates:
David E. Versel, AICP, Senior Vice President; David Parham, Senior
Vice President; William Rich, Senior Vice President; Jonathan
Chambers, Associate; and Dylan Jones, Associate. Special thanks are
due to Elizabeth Norton, Transwestern’s Managing Research
Director—Mid-Atlantic Region, who authored and reviewed sections of
the report. The entire Delta Associates team made valuable
contributions in various ways. Ji Chang and his creative design
team at Transwestern who made the report visually attractive have
our gratitude. Finally, we greatly appreciate the dozens of
industry leaders who contributed their insights about the future of
the commercial real estate industry in the Washington area.
Representations: Although the information contained herein is based
on sources that Delta Associates (DA) and Transwestern (TW)
believe
to be reliable, DA and TW make no representation or warranty
thatsuch information is accurate or complete. All prices, yields,
analyses, computations, and opinions expressed are subject to
change without notice. Under no circumstances should any such
information be considered representations or warranties of DA or TW
of any kind. Any such information may be based on assumptions that
may or may not be accurate, and any such assumption may differ from
actual results. This report should not be considered investment
advice.
A Region in Transition
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A Region in Transition
While the overall economic news is positive, it comes with a major
caveat: the forces that will drive economic growth in the
Washington region in the future will differ from those that have
driven growth in the past. Where past growth cycles in the region
were led mostly by Federal employment and
procurement, all signs point to at or declining Federal spending in
the region over the next several years. Consequently, the impetus
for growth in the Washington economy and real estate market must
come from the private sector. There are several nascent efforts
aimed at fostering better conditions for starting and growing
businesses in the Washington area. To succeed, these efforts must
capital- ize on the dramatic political, economic, and cultural
changes that are reshaping how the region will grow and prosper.
With this in mind, we believe that Washington is a region in
transition . Our research for this year’s TrendLines highlights
several ways in which the Washington area is changing.
We think that change in the Washington area will be shaped in part
by these four MegaTrends:
1. THE FEDERAL GOVERNMENT IS AT A CROSSROADS. The inuence of the
Federal government over the Washington metro area’s economy –
direct employment, procurement, and related activity – has waned
dramatically over the past several decades. The region’s economic
prospects
going forward will necessarily depend far more on the performance
of the private sector. 2. THERE IS A MISMATCH BETWEEN HOUSING
SUPPLY AND DEMAND IN THE REGION. At recent
construction rates, the Washington metro area is producing 13,000
fewer housing units per year than would be justied by job and
household growth. Undersupply is helping fuel appreciation growth
that increasingly prices households out of the market. Two huge
demographic cohorts – Baby Boomers and Millennials – are driving
the housing market, but with different and often contradictory
preferences. The mismatch between overall supply and demand and
between selection/price and household preference/budgets will be
key issues for the region in the coming years.
3. THE SHARING ECONOMY LOOKS A LOT LIKE LEASING OR BUYING.Today, it
is possible to take a vacation that includes driving a shared car,
staying in a private room or home, using some-
one else’s bicycle or golf clubs that you rented, eating a meal in
a home with a local family whilewearing someone’s clothing that you
rented, and then returning to work in your shared ofce space. These
are examples of the sharing economy – one of today’s hottest
economic topics. We take a look at two sharing economy examples
that directly affect real estate: Airbnb and the hotel industry;
and coworking space and its relation to the conventional ofce
market.
4. COMMERCIAL REAL ESTATE MUST BECOME MORE RESILIENT. Catastrophic
events, both natural and man-made — oods, storms, droughts,
terrorism, cyber-attacks, and even economic shocks — require
preparation and a new way of looking at the world. The term that
has emerged to describe these efforts is resilience . The
commercial real estate community – planners, develop- ers,
architects, engineers, construction companies, owners, and managers
-- will need to be more proactive in order to make their assets
more resilient and protect their investments.
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Federal Employment Washington Metro Area| 1950 – 2015*
Source: BLS (Not Seasonally Adjusted), GMU Center for Regional
Analysis, Delta Associates; February 2016.
Federal Procurement Washington Metro Area| FY1980 – 2015
Source: GMU Center for Regional Analysis, Delta Associates;
February 2016.
This year is likely to be one of transition for the Washington
metro area’s economy and commercial real estate market. We are
likely to see a transition from weak job growth to stronger, from
excess apartment deliveries to more equilibrium conditions, and
from experiential real estate as a new niche to a full-edged
template of how to develop and operate real estate.
Yet, for all the change in our market, we see a lot of the
constants enduring, qualities of the region that have underpinned
our successful market for decades: The highest-paid and
best-educated
workforce in the country; the presence of the Federal government
that lends stability and which appeals to long-term investors; and
the entrepreneurial spirit that is creating jobs and attracting
Millennials. Savvy investors can capitalize on this blend of
transition and consistency to yield successful real estate
results.
We hope the information in this report assists you in making
informed decisions to meet your business objectives in 2016 and
beyond. Best wishes for success in the period ahead.
Megatrend #1: Federal Government at a Crossroads STILL IMPORTANT,
BUT NOT AS DOMINANT, THE FEDERAL GOVERNMENT FACES CHANGES For
better or worse, the Washington metro area economy has long been
dominated by the Federal government. While the conventional wisdom
remains that Washington is recession-proof, the truth is much less
optimistic. In fact, the inuence of the Federal government over the
Washington metro area’s economy has waned dramatically over the
past several decades. In 1950, 38% of all jobs in the region were
provided by the Federal government; today, government workers
account for just 12% of the region’s jobs. While the number of
Federal jobs has uctuated over the past 20 years, there are
presently about 365,000 people in the region’s Federal workforce –
the same as in 1994.
Equally important to the region’s economy is the inuence of Federal
procurement. Between 1980 and 2010, the amount of annual Federal
procurement spending in the region increased from $4.2 billion to
$82.4 billion. From 2010-2015, though, procurement spending
decreased by 14%, and is not expected to approach its 2010 peak
anytime soon.
The combination of at Federal employment and declining procurement
is contributing to a dramatic decline in the inuence of the Federal
government on the Washington area’s economy. In 2010, the Federal
Government sector accounted for about 40% of the region’s Gross
Regional Product (GRP). According to the George Mason University
Center for Regional Analysis, by 2020 Federal spending will
represent only 27% of the Washington area’s GRP.
150
200
250
300
350
400
Nixon- Ford Bush II
2010: $82.5B
2015: $71.1B
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The negative impacts of Federal cutbacks on the region’s ofce
market have been exacerbated by the actions of the General Services
Administration (GSA). During the current cycle, GSA has consoli-
dated more Federal agencies in owned space, reduced the amount of
square footage per employee, and relocated several agencies to
lower-cost spaces. As a result, from 2012-2015 the total amount of
ofce space leased by GSA in the region declined by three million
square feet and the average rent for GSA leases dipped by about
$4.50/SF. The GSA is expected to continue these trends – this
will
further depress ofce demand and rental rate growth in the region’s
ofce market. Looking ahead, several factors could have profound
effects on the role of the Federal government in the Washington
area’s economy:
• The 2016 presidential election is shaping up to be the most
unpredictable race since at least 1968, and the results of the
election could result in a fundamental reshaping of the govern-
ment’s footprint in the region. Or not — cataclysmic changes
anticipated ahead of previous changes in administration and parties
often did not pan out.
• Pressure is building in Congress to pursue another round of Base
Realignment and Closure (BRAC) activity. The 2005 BRAC process
resulted in a shift of millions of SF of ofce space from leased
buildings to GSA-owned properties, and between submarkets within
the region.
• The heightened threat of terrorist attacks is likely to lead to
higher security standards for government agencies, which would
favor GSA-owned properties over leased space.
• The potential for an international military con ict would ramp up
defense spending, which would drive procurement spending for
defense and cybersecurity contractors.
Regardless of how these factors play out, it is clear that the
Federal government will not dominate the Washington region’s
economy in the future as it has in the past. The region’s economic
pros- pects going forward will necessarily depend far more on the
performance of the private sector.
Share of Gross Regional Product By Source Washington Metro Area|
2010 & 2020
Source: GMU Center for Regional Analysis, Delta Associates;
February 2016.
GSA Leasing Trends: Downsizing Washington Metro Area
2010 2020
Non-Federal 60.2%
Non-Federal 70.2%
& Salaries 6.7%
Procurement 12.8%
f S F L e a s e
d
Source: GSA, Delta Associates; February 2016.
• Approx. 40% of expiring GSA leases will be downsized and moved to
smaller/consolidated space
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Megatrend #2: Housing Market Mismatch NOT ENOUGH HOUSING TO MEET
DEMAND, AND NOT ALWAYS THE RIGHT TYPES At recent construction
rates, the Washington metro area is producing 13,000 fewer housing
units per
year than would be justied by job and household growth. As of 2011
there were 2.12 million housing units in the Washington metro area.
Of these, 675,000 (32%) were multi-family units. According to the
George Mason University Center for Regional Analysis, housing
demand in the region between 2011 and 2023 will total 410,000
additional housing units, an average of 34,000 per year. Of this
demand, 155,000 units (38%) will be for multi-family units.
While expected job growth will sustain demand for housing in the
region, in practice, the region’s housing production has not kept
pace with demand during this cycle. During the last expansion cycle
from 2000-2005, the region added an average of 37,000 housing units
per year – by compar- ison, the region only added an average of
21,000 units per year from 2010-2014. With demand pro- jected to
average 34,000 units per year, this recent construction pace
amounts to an undersupply of
13,000 units per year. The repercussions of this undersupply
include individuals sharing housing or delaying household
formation, and households nding homes outside the metro area and
enduring long commutes. Partly due to the slow pace of housing
construction, the median home sale price in the Washington metro
area increased by 24% between June 2010 and June 2015.
The undersupply of housing in the region has also had a dramatic
effect on the rental market, particularly for low-income renters.
From 2009-2015, Delta Associates’ research shows that the aver- age
effective apartment rent in the Washington area increased by 20%.
The Washington area has become of the most cost-burdened rental
markets in the U.S.– as of 2014, 81% of households in the region
that earn less than $45,000 per year spent more than 30% of their
incomes on housing.
As with the rest of the U.S., the Washington area’s housing market
is primarily being inuenced by the wants and needs of two
generations: Baby Boomers and Millennials. The divergent – and
often
contradictory – preferences of these two generations will shape the
region’s housing market overthe next decade and beyond.
Demand for Housing: Type of Housing Washington Metro Area
Source: GMU Center for Regional Analysis, Delta Associates;
February 2016.
New Building Permits for Privately Owned Residential Units
Washington Metro Area
Source: Census Bureau, Delta Associates; February 2016 .
1,440
675
1,695
830
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
d s o
h o
d
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
2014: 24K
As with the rest of the U.S., the Washington area’s housing market
is primarily being inuenced by the wants and needs of two
generations:
Baby Boomers and Millennials.
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Photo
Demand for Housing: Washington Has One of Highest Cost Burden for
Lower Income Renters Largest Housing Markets| United States
Note: Cost-burdened households pay more than 30% of income for
housing. Source: JCHS tabulations of US Census Bureau ACS Data,
Delta Associates; February 2016.
Baby Boomers: Postponing Retirement and Aging in Place Labor Force
Participation Rate and Housing Mobility
Source: Census Bureau Decennial Census, ACS, and Current Pop.
Survey, Delta Associates; February 2016.
81% 79% 78% 73% 70%
63% 57% 56%
W a s h i n g t o n
S a n F r a n c i s c o
L o s A n g e l e s
N e w Y o r k
B o s t o n
P h i l a d e p h i a
A t l a n t a
C h i c a g o D a l l a s
U. S .
S h a r e o
f R e n
t e r s
B u r d e n s
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
L a
P
t i o n
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Boomers are bucking the patterns of previous aging generations in
two key ways. First, they are working longer – the 2014 national
labor force participation rate among the 65+ population was 17%, up
from 15% in 2010 and from 12% in 1990. Second, Boomers more likely
to stay in their homes and age in place than prior generations,
with the mobility rate for individuals age 65 and older dropping
from 5.0% in 1990 to 4.1% in 2014. Even with many Boomers aging in
place, the sheer size of this generation contributed to Boomers
accounting for about half of all new renter households in the U.S.
over the past 10 years. So, contrary to popular notions,
Millennials are not the only force behind apartment demand.
Millennials nd themselves in a very different position. Only about
one-quarter of young adults in the U.S. are married and living in
their own households, compared with 43% in the 1980s and 56% in the
1960s. Many Millennials have yet to even form their own households:
as of 2015, 35% of those age 18-34 live with their parents – this
gure has historically hovered around 30%. Among those who are
living on their own, most are renting their homes, and a growing
share is living in central cities or close-in suburbs.
The critical question for the housing market as it relates to
Millennials is this: Will they start buying homes in large numbers
and, if so, where will they buy? Like prior generations,
Millennials do want to be homeowners: Trulia reports that 93% of
adults age 18-34 plan to buy a home in the future. More critically,
as documented in a recent ULI survey, a signicant number of
Millennials actually want to live in the suburbs. With median
single-family prices in excess of $500,000 in most of Washington’s
close-in suburbs, however, most young buyers will either need to
settle for condos or townhouses, or seek homes in outlying
areas.
Megatrend #3: The Sharing Economy and Real Estate THE SHARING
ECONOMY: SEEMS LIKE LEASING OR BUYING The sharing economy is one of
today’s hottest economic topics. What began as a cottage
industry
focused on lending, borrowing, and trading now has the potential to
generate at least $335 billionin revenues by 2025, according to
estimates from PwC. The sharing economy has denitely become big
business.
From forerunners such as Couchsurng and Craigslist that were based
on exchanging excess or un- used goods and services between
individuals, sometimes for free, the sharing economy has explod- ed
since the 2008 recession. Known by a variety of terms —
Collaborative Economy, Gig Economy, On-Demand Economy,
Collaborative Consumption, Peer Economy, among other — it now
comprises hundreds of large and small companies and organizations
that are selling, lending, or giving away just about anything
imaginable. It has become monetized and depends on technology to
maximize convenience to users, and it increasingly relies on
branding as the measure of quality and trustworthi- ness. Signicant
ly, some companies are growing in part through service expansion.
For example, Uber not only gives rides but it has also started food
delivery (UberEATS) and a messenger service
(UberRUSH).
Source: Goldman Sachs, Trulia, Delta Associates; February
2016.
93%
P e r c e n
t a g e
W h o p
l a n t o B u y a H
o m e
F u t u r e
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Airbnb Uber Chegg Freelancer Lending Club
HomeAway Lyft Ebay Instacart Funding Circle
Love Home Swap ZIpcar Craigslist Task Rabbit Prosper
Onenestay RelayRides Rent the Runway Angie’s List Kick
Starter
Wework Zimride Etsy Elance Go Fund Me
Regus Car2Go Cookening Bidwilly Zopa
Today, it is possible to take a vacation that includes driving a
shared car from Turo or Getaround, staying in a private room or
home that you found through Airbnb or HomeAway, using someone
else’s bicycle or golf clubs that you rented through Spinlister or
GearCommons, and eating a meal in a home with a local family that
you discovered through BonAppetour or Cookening while wearing
someone’s clothing that was listed on Rent the Runway or Vinted.
And during your vacation, a pet sit- ter from DogVacay or Rover.com
can take care of your dog. You can facilitate all of these
transactions
through a website or an app on your smartphone, and when you return
to work in your shared ofce space at WeWork or Cove, you can write
an electronic review of your experiences for others to read,
helping them to decide if this is for them. By the way, you will
also be rated for your desirability as a customer or a guest, so if
you broke your Airbnb host’s best china without offering to replace
it or pay for it, you may want to look for a different service the
next time around.
Perhaps you have noticed that none of these t ransactions involved
any real sharing – all of them require a monetary payment. In other
words, sharing is actually very similar to those conventional
concepts of buying and renting.
So how is the sharing economy affecting the real estate industry?
We will try to answer that by looking at two sectors where the
sharing concept has had direct consequences for real estate: the
lodging and ofce sectors.
Sharing and the Hotel Industry Airbnb does not own any hotels, but
it has more accommodations (list- ings) than the newly-merged
Marriott/Starwood and Hilton combined, according to The New York
Times, and it is by far the largest sharing economy service in the
lodging sector. Since its founding in 2008, Airbnb says it has
grown to over two million listings serving 60 million guests in
more than 34,000 cities and 190 countries. It has a current market
capitalization of $25.5 billion; only Marriott/Starwood and Hilton
Worldwide are more valuable. Airbnb’s revenue grew 106% in 2015 —
far outpacing Choice Hotels and Hilton, the next-closest hotel
chains, each of which saw about 9% growth.
In the District of Columbia, Airbnb’s inventory is only about 12%
as large as the hotel room inventory, but this gure is growing.
Given that the District’s hotel occupancy rate has risen since
2010, even as the room supply has grown, it appears that Airbnb may
be helping to expand the market instead of cannibalizing existing
market share. Its pricing may be affecting the composition of hotel
demand, particularly in the economy sector. The $118 average price
of an Airbnb accom- modation in the District in 2015 is about 43%
less than the average daily rate for a hotel room, indicating that
Airbnb is primarily serving the leisure travel sector, rather than
business travelers, and perhaps inducing new demand from guests who
would not otherwise pay for a hotel.
This could change, however, with the introduction of serviced
apart- ments through Airbnb for Business, a new division offering
rentals with business class hotel amenities through a partnership
with Bridg- eStreet, which has more than 50,000 mid-range and
luxury rentals in about 60 countries. Additionally, the Wall Street
Journal reports that Airbnb has discussed arrangements with
national apartment operators
to allow tenants to rent out their units in exchange for a share of
the revenue. However, it remains to be seen if Airbnb will succeed
in con- vincing local governments, tenant organizations, and
property owners and managers that increasing the number of
apartments on Airbnb will not cut the rental housing supply overall
(affordable housing in particular has been a sensitive political
topic), out existing zoning regulations, affect tax revenues, or
compromise security and safety — issues that have been raised in
several cities already. Looking ahead, Airbnb is expanding into new
services that will improve the experi- ences of both its hosts and
their guests and is expected to broaden its strategic partnerships
with apartment operators and perhaps even hotel companies.
Airbnb does not own any hotels, but it has more rooms (listings)
than the new Marriott/Starwood and Hilton combined. At $25.5
billion in market capitalization, it is the third-largest
hospitality company in the U.S.
“
“
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Sharing and the Ofce Real Estate Industry The same shifts in
consumer attitudes fueling the growth of Airbnb and other sharing
economy companies are driving changes in the commercial ofce
market. In addition, there are basic differ- ences in the types of
ofce jobs being created today, with independent contractors
supplanting some permanent, full-time employees. These changes are
affecting how and when ofce space is used and thus how it is
designed and leased. New coworking concepts such as WeWork are
offering coworking space with a new set of design, leasing, and
occupancy parameters that are better-suited for today’s workers in
sectors of the economy where the work is more demand-based. By 2020
up to one million professionals will work in coworking facilities,
according to Emergent Research.
In the case of WeWork, their business model involves renting large
blocks of ofce space and build- ing them out as fully furnished
coworking spaces that range from unassigned desks in a large open
area to enclosed, lockable, private ofces that can accommodate one
or more people, and leasing them on a month-to-month basis.
Today there are over 70 coworking or on-demand ofce space locations
of various types in the Wash- ington area. Variations include Cove,
MakeOfce, Carr Workplaces, Metro Ofces, Regus, and Liquid- Space
(which is an online matchmaking service to list and nd workspaces).
The principal opportu- nity in the on-demand ofce space sector is
that owners and managers can maximize their rents. For
example, it has been estimated that a typical coworking space in
the Washington area averages 55 square feet per person and an
average membership cost of $500 per month — equating to more than
$90 per square foot in rent to the operator. Of course, this
premium rent is offset by higher operating expenses, and occupancy
rates typically are lower than in the conventional ofce market. But
the lure of making productive use from otherwise vacant or
under-utilized space is appealing.
While we expect coworking to continue to grow and to be a useful
component of the ofce market, it is not likely to replace the vast
majority of conventional ofce space demand.
Megatrend #4: Resilience: Commercial Real Estate Must Adapt
PREPARING FOR PROBLEMS, DESIGNING FOR RECOVERY The specter of
climate change and sea level rise is having a dramatic effect on
the real estate and urban development world. In the wake of
Hurricane Katrina, Superstorm Sandy, and other natural disasters,
public and private interests alike have identied the need to plan
and prepare for future catastrophic events.
The term that has emerged to describe these efforts is resilience .
This term, as commonly used, re- fers to preparations for all types
of catastrophic events, both natural and man-made: oods, storms,
droughts, terrorism, cyber-attacks, and even economic shocks.
Business and political leaders around the world are rapidly
embracing the notion that, unless cities and buildings are made
more resilient to such events, the losses could be dire in both
human and economic terms.
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The uptick in catastrophic weather events over the past 20 years is
real and increasingly alarming. From 1950 through the 1990s, there
was an average of about two natural catastrophes per year in the
U.S. The average over the past decade has been eight per year; in
2011 alone there were 14 such events. In terms of economic damage,
the two costliest types of natural catastrophes are
hurricanes/tropical storms and tornadoes. Between 1950 and 2013,
these two types of events caused more than $300 billion in damages
(in 2014 dollars), representing 80% of the total damage
nationwide.
A wide variety of responses have been advanced to address the
mounting threat from both natural and man-made catastrophes. The
Federal government now requires local governments to prepare hazard
mitigation plans in advance of disasters in order to qualify for
FEMA funding. Congress has passed several new laws aimed at
improving the National Flood Insurance Program. Numerous state and
local governments have undertaken adaptation plans that ensure that
infrastructure and build- ings are protected from rising sea
levels. The nonprot community has taken on many initiatives, most
notably the Rockefeller Foundation’s 100 Resilient Cities program
that is building a dialogue among peer cities facing similar
issues.
Professionals in the planning, engineering, and design elds have
been devising new approaches to resilience. This is exemplied by
RELi, a resiliency standard created by the design rm Perkins + Will
that is modeled on LEED (the Leadership in Energy &
Environmental Design rating system of the U.S. Green Building
Council) and measures how effectively buildings are designed to
respond to different types of hazards and events. RELi is
envisioned as a standard that can be used by under- writers to
measure the mitigation of risk for structures built in vulnerable
locations.
Catastrophe Costs by Type United States| 1950 – 2013
Source: Munich Re, Delta Associates, February 2016.
41%
39%
7%
6%
Hurricanes/Tropical Storms $161.2
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The commercial real estate community has been somewhat slower to
respond to the rapidly increasing need for resilience, though. The
conventional wisdom in the real estate development and nance world
is that resiliency requires enormous upfront capital outlays with
no increase on return. The challenge is that future damages from
oods and other natural disasters are typically not measured in
development pro formas, so there is no way to know the potential
costs of ignoring
resilience measures. There are several recent projects that are
challenging this mindset – mainly located in oodplains or coastal
areas. While these have mainly been l arge-scale mixed-use projects
such as The Wharf here in Washington, there have been some smaller
scale developments in other cities that have begun to incorporate
resilience into their designs. As the threat of catastrophic events
rises, the real estate community will need to be more proactive in
order to protect their investments.
The Washington area is, in spite of its low-lying location and
prevalence of oodplain, well posi- tioned to thrive in a
resilience-focused world. A recent study by Grosvenor examined the
vulner- ability and adaptability of cities in the U.S. and
globally. While this study found that Washington was moderately at
risk for future catastrophes, particularly ooding, it also found
that Washington was among the most prepared cities in the world in
terms of its ability to respond to hazards. This adapt-
ability should be a great asset for Washington real estate in the
years to come.
Resilient Building Design Strategies
• Super-insulated building envelopes
• Green roofs
• Reduce soil compaction
• Material speci cation
• Tornado safe room
• Reduce water use—indoor
• Reduce water use—landscape
“
“
LEAST VULNERABLE MOST ADAPTIVE
1. Chicago 1. New York 2. Pittsburgh 2. Los Angeles
3. Atlanta 3. Washington, D.C.
4. Boston 4. Chicago
7. Seatlle 7. Boston
Source: Grosvenor International, Delta Associates; February
2016.
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The National Economy THE NATIONAL ECONOMY OVERCAME A SLOW START AND
EMERGED FROM 2015 IN GOOD CONDITION, BUT CONCERNS LINGER
After a sluggish start, the national economy ended 2015 on a high
note with strong job gains and respectable GDP growth. Through
November 2015, the U.S. economy marked 70 consecutive months of job
gains and added more jobs in the past two years than in any
two-year period since 1998-2000. The unemployment rate is low, new
claims for unemployment insurance are at cyclical lows, and home
prices rose. Still, some indicators have been only tepid and
economic and political troubles around the globe reverberate
through the U.S. economy, leading to the feeling that things are
not quite stable yet.
Here are some highlights from 2015:
• Payroll job growth was strong, with 2.71 million jobs added
during 2015; job growth was led by the Professional/Business
Services sector, which is among the highest paying employment
sectors. In addition, the Federal government nally posted a net job
gain in 2015, ending
several consecutive years of reductions. • The unemployment rate
continued to decline through the year, and stood at 5.0% at
December
2015.
• After a sluggish start to 2015, GDP growth resumed in the 2nd
quarter of 2015 and remained healthy throughout the balance of the
year.
GDP growth was primarily driven by increased consumer spending,
though inventory cutbacks and a slowdown in net exports prevented
stronger growth. Strong employment growth over the year pushed the
national unemployment rate down throughout the year, even as the
labor force participation rate increased. Despite the healthy job
increases, much of the growth has come in lower paying industries,
leading to weak wage growth. This should change over the next
couple of years, as higher-wage industries add more jobs and the
low unemployment rate forces businesses
to compete for top talent. Another encouraging sign for the
national economy is continued growth in consumer buying power from
increases in both household net wealth and revolving credit. These
trends reect the upside of historically low interest rates, which
have encouraged consumers to invest their cash in riskier assets
and reach for their credit cards. With the national economy having
weathered a scare in the interna- tional markets in August, the
Federal Funds Rate was increased for the rst time in nearly a
decade at the December 2015 meeting of the Federal Open Market
Committee (FOMC). The increase was just one quarter of a percent
and will likely slow consumer spending and revolving credit
somewhat, but will strengthen the dollar even further.
Moving forward, the U.S. economy is poised to continue gaining
strength through 2016 and beyond. Major economic indicators are
moving in a positive direction, although wage growth,
international
trade, and economic turbulence in China and Europe remain areas of
concern. The timing and size of additional increases to interest
rates also bear watching over the coming year.
*12-month percentage change through November 2015, seasonally
adjusted. Source: Federal Reserve Board, Delta Associates; February
2016.
Revolving Credit United States| 1999 – 2015
*As of 3rd Quarter 2015. Source: Federal Reserve Board, Delta
Associates; February 2016.
Change in U.S. Household Net Worth United States| 2005 – 2015
-15%
-10%
-5%
0%
5%
10%
15%
1 2
t a g e
-20.0%
-15.0%
-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
2 00 5 2 00 6 2 00 7 2 00 8 2 00 9 2 01 0 2 011 2 01 2 2 01 3 2 01
4 2 0 15 *
1 2
t a g e
C h a n g e Cumulative Annual Growth Rate (CAGR) = 2.96%
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Now, for a look at major U.S. economic indicators:
Payroll Jobs Job growth was robust throughout 2015 with the
national economy adding 2.71 million new payroll jobs over the
year. Nearly all job growth was in the private sector, with 2.6
million private jobs added over the 12-month period. After several
years of job reductions, public sector employment began to pick up
in 2015, especially in the latter half of the year, with 110,000
new jobs added during the year. The pace of public sector hiring is
currently at its highest level since early 2010.
Net monthly job growth for the last three months of 2015 averaged
over 275,000 jobs; this resurgent job growth has helped dispel
concerns that the economic recovery was faltering after recording
two consecutive months of net job additions below 200,000 in August
and September. Month-to-month gains (seasonally adjusted) from
January to December 2015 has averaged approximately 221,000 jobs
per month:
• October 2015: 307,000
• November 2015: 252,000 (Preliminary)
• December 2015: 292,000 (Preliminary)
The rebound in public sector hiring has been driven largely by the
state and local government subsectors, though there has nally been
some recent growth at the Federal level. Following 47 consecutive
months of year-over-year declines, Federal employment increased in
every month of 2015 except for January.
Overall, the public sector has now added jobs (year-over-year) for
18 consecutive months after shedding jobs over the previous several
years. Federal employment is expected to continue growing over the
next couple of years, especially now that the Federal government
nally approved a budget in November after ve years of turmoil and
continuing resolutions. The agreement increases discretionary
spending by $80 billion over the next two years, and will go a long
way towards easing uncertainty in economic sectors relying on
Federal spending.
During the 12-month period ending November 2015 the top four
sectors in job gains were Education/ Health Services,
Professional/Business Services, Leisure/Hospitality, and Retail
Trade. These four sectors alone added about 2 million new jobs,
accounting for 73% of net job growth. Job gains were positive
across all major super sectors, and seven of the 13 sectors added
at least 100,000 payroll jobs over the year. A healthy Professional
and Business Services sector is especially important for commercial
real estate markets, since these jobs typically boost both retail
spending and ofce demand.
Note: Data are not seasonally adjusted. Source: Bureau of Labor
Statistics, Delta Associates; February 2016.
Payroll Job Growth United States| Year-Over-Year
Note: Data are not seasonally adjusted. Source: Bureau of Labor
Statistics, Delta Associates; February 2016.
Payroll Job Growth United States| 12 Months Ending December
2015
“
A p r. 1
J u l y 1 5 A u
g . 1 5 S e p
. 1 5 O c t. 1
5 N o v.
1 5
Private Sector
Public Sector
d s o
l l J o
Federal Government Manufacturing
Information Wholesale Trade
Transportation/Utilities Construction/Mining
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Note: Seasonally adjusted; shaded bars represent recessions.
Source: Bureau of Labor Statistics, Delta Associates; February
2016.
Unemployment Rate United States| 1980 – 2015
Labor Force and Wages Overall, initial unemployment claims have
steadily decreased since peaking in March 2009. As of the rst week
of January 2016 initial cl aims were 275,750, based on a four-week
seasonally-adjusted moving average. This is 5.8% below the same
week in 2015, and 27.2% below the 15-year average of 348,794.
Unemployment claims should continue to erode into 2016 as the
nation approaches full employment and cyclical unemployment
approaches zero.
The unemployment rate (seasonally adjusted) declined to 5.0% as of
December 2015, down from 5.6% one year earlier, and marking its
lowest level since before the Great Recession. This decline
occurred despite the labor force increasing 1.9% during the same
time period. As the nation’s economy has returned to a healthy
state, unemployed persons are becoming more condent in being able
to nd full-time jobs. The unemployment rate should continue to
decline in 2016, but at a slower rate, as the number of cyclically
unemployed persons dwindles.
An ongoing area of concern for the national economy is the national
average hourly wage , which has increased at a slow rate since the
end of the recession. Over the past ve years, the growth rate of
average hourly wages has hovered around 2.0%. Prior to the
recession, from 2007 to 2009, the hourly wage growth rate averaged
3.1%. This is a pressing issue for many aspects of the economy,
including price levels and consumption patterns.
There are multiple competing theories that may explain the weak
wage growth. One is that slow growth in wages is an indicator that
the jobs being created are in lower-paying industries. Even if
people are nding jobs, they are likely to be underemployed, meaning
job seekers are taking jobs that are below the education and
experience levels they have achieved. Another theory has to do with
the changing composition of the workforce. The average age of
workers has remained relatively constant over the last few years,
which indicates that younger workers are entering the workforce at
a faster pace than other age cohorts. These younger workers tend to
start with lower salaries, which may partly explain depressed
average wage growth.
A third theory is that, due to slow moving wage adjustments, known
as “sticky” wages, rms could not adequately reduce wages to offset
lower demand during the Great Recession, and we are witnessing a
slow correction in wages or “pent-up wage cuts” as workers become
more accepting of reduced nominal wages. Wage growth tends to be a
lagging indicator of an economic recovery, and
the current recovery has progressed much slower than most. The
combination of low unemploy- ment and continued employment growth
should lead to stronger wage growth in 2016 and beyond.
0%
2%
4%
6%
8%
10%
12%
U . S .
l o y m e n
t R a t e
“
“
*Data available starting March 2007. Source: Bureau of Labor
Statistics, Delta Associates; February 2016.
Average Hourly Earnings 12-Month Percentage Growth| 2007 – December
2015
0%
1%
2%
3%
4%
5%
1 2
t a g e
G r o w
Average 2010-2015 = 2.0%
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Note: Data are seasonally adjusted. Source: Bureau of Labor
Statistics, Delta Associates; February 2016.
Employment Levels by Job Status United States| 2010 – 2015
-6,000
-5,000
-4,000
-3,000
-2,000
-1,000
0
Full-Time
Part-TIme
Note: Based on 12-month trailing average. Data are not seasonally
adjusted. Source: Bureau of Labor Statistics, Delta Associates;
February 2016.
Number of Unemployed vs. Job Openings 12-Months Average Ending
November 2015
0 200 400 600 800 1,000 1,200 1,400
Wholesale and retail trade
Thousands of Jobs
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The past year has been an auspicious time for underemployed workers
seeking full-time employment. As recently as 2011, the U.S. economy
was adding more part-time than full-time jobs. Since 2014 , though,
the gap (seasonally adjusted) between full-time and part-time
employment growth has grown along with the overall workforce. In
August 2015, the gap between the 12-month net gain in employment
for full-time and part-time jobs reached a post-recession high of
4.03 million. The gap narrowed somewhat in the fall, and was 2.69
million as of December 2015. Full-time positions translate to more
hours worked and higher paychecks. Recent trends in full-time
employment seem to also indicate that any negative effects of
Obamacare on full-time hiring have been blunted by the need for
more ful l-time workers.
Another positive indicator is the declining job availability ratio
— the relationship between potential applicants and the number of
jobs available. The national job availability ratio was 1.2 as of
November 2015, down from 1.6 in November 2014. The
Professional/Business Services sector had the greatest number of
job openings as of November 2015, with 1,074,000 jobs, and had the
lowest job opening ratio at 0.8, tied with the Education and Health
Services sector.
Gross Domestic Product (GDP) Real GDP growth for the 3rd quarter of
2015 was estimated at 2.1%, somewhat below the expected growth rate
of 2.7% for the quarter. GDP growth in 2015 was largely driven by
consumer expendi-
tures, state and local government spending, and exports, but was
held back by restrained inventory accumulations by businesses.
After starting 2015 on a sour note, with 1st quarter GDP coming in
at a paltry 0.6%, GDP quickly recovered, recording a very healthy
3.9% growth rate in the 2nd quarter. The economy shook off many of
the weaknesses during 2015 including harsh weather, declining oil
prices, a sell-off in international markets (mainly China), and
accelerated appreciation of the dollar, which sent net exports
plunging.
Looking forward into 2016, strong consumer spending will continue
to be the main engine of eco- nomic growth, but steady improvements
in the housing market, Federal and state/local government spending,
and business investments will move the economy forward as
well.
The most recent report from the Federal Reserve Bank of
Philadelphia’s Survey of Professional Forecasters projects real GDP
growth to be 2.8% in the 4th quarter of 2015 and 2.4% for all of
2015.
Looking further ahead, real GDP is predicted to average 2.6% in
2016, 2.5% in 2017, and 2.8% in 2018. Corporate Prots U.S.
corporate prots totaled $2.06 trillion during the 3rd quarter of
2015 on an annualized basis, down very slightly from $2.08 trillion
in 2nd quarter of 2015 and from $2.20 trillion in the 3rd quar- ter
of 2014. Corporate prots have largely plateaued in recent years as
more companies are taking a cautious approach of buying back shares
and slowly increasing dividends. Companies are continu- ing to
weigh options on how to best deploy earnings and prots and, in many
cases, are showing a preference for mergers and acquisitions over
riskier, capital intensive projects that could rock the boat for
shareholders. However, the recent increases in hiring indicate that
corporate leaders are becoming more condent about consumer
demand.
Note: Quarters are seasonally adjusted at annual rates.
Source: Bureau of Labor Statistics, Delta Associates; February
2016.
GDP Percent Change United States| 2007 – 2015
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
l G D P C h a n g e
i n 2 0
20-Year Average = 2.4%
Note: *Through Sept. 2015, seasonally adjusted at annual rates.
Yearly data are not seasonally adjusted. EPS reect operating
earnings as of Sept. 2015. Source: Bureau of Economic Analysis,
Standard and Poor's, Delta Associates; February 2016.
U.S. Corporate Pre-Tax Prots 2008 – 2015
$0
$20
$40
$60
$80
$100
$120
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
C o r p o r a
t e P r o
t s i n T r i l l i o n s
S & P 5 0 0 1 2
- M o n
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Note: Data reect 20-city composite index. Source:
S&P/Case-Shiller, Delta Associates; February 2016.
Annual Change in Existing Home Sale Prices United States| 2008 –
2015
Housing Market Home prices in the 20 major metro areas covered by
S&P/Case-Shiller increased 5.5% during the 12 months ending
October 2015, the most recent data available. This is up from the
September 2015 gure of 5.4%. The growth rate of home prices largely
stabilized in 2015 as expanding inventories of homes for sale in
many metro areas eased pricing pressure. With an interest rate hike
just implemented, mortgage rates will almost certainly see a
corresponding increase. However,
we expect the housing market to continue to ourish into 2016 with
increased construction and higher sales prices.
According to the National Association of Realtors, the annualized
pace of existing home sales decreased to 4.8 million (preliminary)
in November 2015, down from 5.0 million in November 2014. The
average existing home sales price was $263,900 (preliminary) in
November 2015, up 4.0% from $253,800 in November 2014.
The Federal Budget The Federal budget decit for the 2015 scal year
was $439 billion (2.5% of GDP)--the lowest level since FY 2007, and
below the 40-year average. The budget shortfall in FY 2015 marked
the sixth consecutive year that the decit’s share of the GDP has
decreased since peaking at 9.8% in 2009. The smaller decit is
attributed to greater than anticipated tax revenues from businesses
and house- holds as a result of the improving economy. In spite of
thi s progress, the U.S. is still running a decit – we are not
paying down our debt, we are just increasing it at a slower
rate.
After years of political wrangling Congress nally passed a budget
bill in the 4th quarter of 2015, which was signed by President
Obama in November. The budget brought an end (at least for the
short term) to the ongoing drama of impending Treasury defaults,
Federal government shutdowns, and forced continuing resolutions.
Federal discretionary spending caps were raised by $80 billion over
the next two years and provide $32 billion in overseas contingency
funds to the Pentagon.
While the budget deal provides some scal stability over the next
couple of years, there are still many long-term concerns. Without
action, the decit would reach $1.0 trillion by 2025, with growth
driven by an aging population, rising health care costs, an
expansion of Federal subsidies for health insurance, and growing
interest payments on the Federal debt. The national elections of
2016 could have a major impact on the long-term picture as well,
since the outcome could l ead to profound changes in Federal
taxation and spending policies.
While the budget deal provides
“
“
P e r c e n
t C h a n g e
F o r
M e d
i a n
o f S i n g
l e - F
e s
*Data as of November 2015. **Seasonally adjusted annual sales rate.
Source: National Association of Realtors, Delta Associates;
February 2016.
U.S. Existing Home Sales vs. Sales Price 2006 – 2015
$200,000
$210,000
$220,000
$230,000
$240,000
$250,000
$260,000
$270,000
$280,000
3,000
3,500
4,000
4,500
5,000
5,500
6,000
6,500
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015*
Number of Existing Home Sales**
Average Existing Home Sales Price
N u m
d s o
f U n
i t s
S a
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Baseline budget projections as of August 2015. Source:
Congressional Budget Ofce, Delta Associates; February 20 16.
Baseline Budget Projections United States| 2015 – 2025
Interest Rates and Ination There had been a great deal of
discussion throughout 2015 about when the Fed would increase the
Federal Funds Rate, and by how much. Stock market woes on Wall
Street brought about by a faltering Chinese economy and extremely
low oil prices led the Federal Open Market Committee to decline to
raise rates at it s September meeting. The somewhat disappointing
August and Septem- ber job growth numbers furthered the rumor that
any interest rate hike would be pushed into 2016.
However, revitalized job growth in October and November, and
consumer price increases, provided the FOMC with the condence to
implement a slight, 0.25% increase in the Federal Funds Rate target
at the December 16 board meeting. The rate hike, which was nearly
universally anticipated, is the rst since the recession.
In addition to the December 2015 interest rate increase, the Fed
has also indicated its intention to enact further incremental
increases to interest rates in 2016. Still, interest rates have
been at histori- cally low levels, so the expected modest increases
will keep long-term interest rates relatively low.
Global nancial markets are expected to experience continued
volatility in the short-term, at least until uncertainty
surrounding the Ch inese economy, and the Chinese government’s
corrective measures, diminishes. Sudden swings in commodity prices
and exchange rates also remain a con- cern. Sectors that have
beneted from record-low borrowing rates will experience the most
market
volatility. Commercial real estate and the REIT sphere are
experiencing downward pressures as themarket accounts for higher
costs of capital, though REITs with solid property fundamentals
should be able to weather the storm. As of the end of trading on
January 12, 2015, the S&P 500 index stood at 1938.68, down
about 4% over the previous 12 months. The Index reached a 2015 high
of 2130.82 on May 21, up 13% over 12 months.
Ination remained at during the 12 months ending November 2015, with
a strong dollar and lower domestic energy prices keeping prices in
check. This is well below the Fed’s benchmark of a 2.0% increase,
which had been a contributing factor to the delay in raising the
Federal Funds Rate. The personal consumption expenditure price
index (PCEPI), which takes into account changes in consumption
habits as people substitute some goods and services for others,
rose 0.4% during the 12 months ending November 2015. We expect
ination to be contained in the near-term due to modest wage growth
and a strong dollar, coupled with the fact that price pressure
tends to lag economic growth by a year or more. Given these
conditions, ination will likely remain in the 0.5% to 1.0% range on
an annualized basis through 2016.
Economic Outlook The national economic recovery continued in 2015,
with most of the damage done by the Great Recession now in the rear
view mirror. GDP growth is projected to be 2.8% in the 4th quarter
and 2.4% for all of 2015.
Over the past couple of years the economic recovery has been fueled
by healthy employment growth. All major employment sectors have
experienced strong job growth, with the high-wage
Professional/Business Services sector leading the way. The
unemployment rate steadily declined by 60 basis points over the 12
months ending December 2015, and the national economy is now
approaching the point of full economic employment. We expect that
the sustained health of theemployment market will lead to
improvements to the housing and retail markets in 2016.
F e
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
-1,200
-1,000
-800
-600
-400
-200
0
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
D e ci t % o f GD P
D e
% o
f R e a
l G D P
Data are non seasonally adjusted monthly averages. 30-Year Treasury
not issued between March 2002-Dec. 2005. Source: Federal Reserve
Economic Data (FRED), Delta Associates; February 2016.
Selected U.S. Government Interest Rates 2000 – 2015
0%
1%
2%
3%
4%
5%
6%
7%
t R a
t e s
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Despite the generally good economic news in 2015, the current
recovery has shown a few areas of weakness. The primary area of
concern is the lack of signicant wage growth, stemming from job
growth in lower-paying sectors and limited competition for quality
workers. We expect 2016 to bring improvement in this area, as the
pool of unemployed workers looking for jobs continues to dry up and
employers increase compensation to attract the best qualied
personnel.
Another major concern moving forward in 2016 is international
trade. China, one of the largest U.S.
trading partners, is in the midst of a considerable economic
slowdown which will likely be a drag onU.S. net exports – bad
economic news from China has already caused signicant of economic
turbu- lence in the rst weeks of 2016. In addition, a strong U.S.
dollar which saw virtually zero ination in 2015, will also hurt the
nation’s trade balance. We do expect ination to return modestly,
especially since energy prices have likely hit bottom.
Overall, 2016 will bring another year of sustained, but modest
economic growth. The national economy will expand and add jobs over
the next year, but growth will continue to be slower than in past
economic recovery cycles.
Specically, we believe the economic outlook is as follows:
• Real GDP growth: 2.6% in 2016.
• Payroll jobs: 2.75 million added in 2016.
• Housing: Price appreciation around 5.5% to 6.0% in 2016.
• Unemployment rate: 4.6% at end of 2016. • Federal Funds Rate: At
least one incremental increase in 2016, following the 0.25%
increase
in December 2015.
• Long-term interest rates: Edging higher during 2016, particularly
short-term rates, following the Federal Funds Rate increase.
Long-term interest rates will only increase very modestly.
• In ation: 1.5-2.5% for 2016 as consumer demand continues to
strengthen, but fuel costs remain low.
National Payroll Job Growth Summary The U.S. economy gained 2.65
million payroll jobs over the 12 months ending November 2015,
virtually unchanged compared to all of 2014. This compares to the
25-year annual average of 1.2 million jobs at a 1.0% average growth
rate.
Note: *CPI-U and PCEPI through November 2015. Data reects 12-month
percentage change. Source: Federal Reserve Economic Database
(FRED), Delta Associates; February 20 16.
U.S. Ination and Personal Consumption Expenditure Index 1980 –
2015
-2%
0%
2%
4%
6%
8%
10%
12%
14%
16%
P e r c e n
t a g e
CPI-U
PCEPI
“
YEA R JO B C HAN GE % C HA NGE
2015 2,707,000 1.9%
2014 2,649,000 1.9%
2013 2,289,000 1.7%
2012 2,262,000 1.7%
2011 1,567,000 1.2%
2010 -958,000 -0.7%
2009 -5,937,000 -4.3%
2008 -766,000 -0.6%
2007 1,538,000 1.1%
2006 2,393,000 1.8%
2005 2,256,000 1.7%
2004 1,431,000 1.1%
2003 -310,000 -0.2%
2002 -1,446,000 -1.1%
Note that BLS has rebenchmarked gures since their initial
publication; the gures presented above are the most recent
estimates. Source: Bureau of Labor Statistics, Delta Associates,
February 2016.
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JOB CHANGE JOB CHANGE
METRO AREA # % METRO AREA # %
New York 167,000 1.8% Denver-Boulder 36,600 2.7% LA Basin Portland
(OR) 36,500 3.3% Los Angeles/Long Beach/Glendale 73,200 1.7% Austin
36,100 3.9% Orange County (Santa Ana/Anaheim/Irvine) 39,000 2.5%
Charlotte 35,500 3.3% Riverside/San Bernardino/Ontario 46,100 3.5%
San Antonio 35,300 3.7% Total LA Basin 158,300 2.2% Philadelphia
34,500 1.2% San Francisco Bay Area Detroit (Detroit/Warren/Livonia)
33,800 1.8% San Jose/Sunnyvale/Santa Clara 52,300 5.1% Baltimore
31,600 2.3% San Francisco/San Mateo/Redwood City 42,200 4.1%
Minneapolis-St. Paul 30,700 1.6%
Oakland/Fremont/Hayward 18,100 1.7% Indianapolis 30,100 3.0% Total
Bay Area 112,600 3.6% Nashville 26,900 3.0%
Dallas/Ft. Worth 101,200 3.0% Sacramento 24,400 2.7%
Atlanta 86,500 3.4% Houston 23,700 0.8% Washington, DC 61,900 2.0%
Salt Lake City 23,400 3.5% Seattle 55,100 2.9% Las Vegas 23,100
2.6%
South Florida Columbus (OH) 21,700 2.1% West Palm Beach/Boca Raton
12,800 2.2% Cleveland 18,700 1.8%
Fort Lauderdale 27,000 3.4% Raleigh-Durham 18,300 2.2% Miami/Miami
Beach/Kendall 18,100 1.6% Cincinnati 16,800 1.6%
Total South Florida 57,900 2.3% Jacksonville 16,300 2.6% Phoenix
49,600 2.6% Kansas City 12,300 1.2%
Boston (Metropolitan NECTA) 47,900 1.8% Pittsburgh 12,000
1.0%
Chicago 47,000 1.0% Oklahoma City 10,700 1.7% Tampa-St. Petersburg
40,500 3.3% St. Louis 9,700 0.7% Orlando 39,900 3.5% Memphis 5,300
0.8% San Diego 37,800 2.7% New Orleans (1,700) -0.3%
Note: Data are not seasonally adjusted. Source: Bureau of Labor
Statistics, Delta Associates; February 2016.
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The Washington Area Economy RESURGENT ECONOMY PRODUCES STRONGEST
JOB GROWTH IN A DECADE, BUT IS ENTERING A PERIOD OF
TRANSITION
The Washington area’s economy performed very well in 2015, with
most economic indicators showing positive trends. Job growth has
been particularly strong, with 61,900 net job additions during the
12-month period ending November 2015, and year-end employment
growth gures are expected to show the region’s strongest job growth
in a decade. The private sector has been the pri- mary source of
job growth as it gains inuence on the regional economy, but Federal
employment and procurement have stabilized after several years of
declines. The Professional/Business Services and Education/Health
sectors led the region in job creation, adding 36,400 jobs combined
between November 2014 and November 2015.
The region’s labor market is also doing well, with the unemployment
rate continuing to decline even as the labor force expands. The
regional unemployment rate as of November 2015 was 4.1%, well below
the national average of 5.0%. One area of concern is the region’s
average wage, which is down substantially from its 2010 peak. Wages
are likely to begin increasing in 2016, though, as
growth has resumed in the metro area’s Professional/Business
Services sector, which has by far the highest average wage among
the region’s top employment sectors. The recent passage of a
Federal budget has removed a major source of short-term uncertainty
and should help bolster the region’s economic growth prospects. As
economic output and labor demand increase, competition among rms
for top talent will also drive wage growth.
The Washington metro is still an attractive place to do business,
visit, and live. A recent Washington Business Journal article
documented how Washington sits at or near the top of many “top 10
best cities” lists covering a range of factors, including: growth
in STEM employment (science, technology, engineering, math), women
in technology, energy efciency, walkability, gender pay equity, and
job opportunities for young professionals. With the region’s
fundamentals now back on track as well, all indicators point to
sustained economic growth over the next ve years.
2015 Highlights Payroll Employment: 3.2 million at November
2015.
Job Change: Increased 61,900 during the 12 months ending November
2015. Compares to 36,500 in the 12 months ending November
2014.
Unemployment Rate: 4.1% at November 2015, down from 4.6% one year
ago, one of the lowest among the nation’s largest metro
areas.
Ination: Prices increased 0.6% during the 12 months ending November
2015.
Housing Prices: Increased 2.1% during the 12 months ending
September 2015.
Source: Bureau of Labor Statistics, S&P/Case-Shiller; February
2016.
The Washington metro area’s economy performed very well in
2015, with most economic indicators showing positive trends.
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Payroll Jobs Following two weak years, 2015 brought a return to
strong job growth for the Washington metro area economy, mirroring
national trends. During the 12 months ending November 2015, the
metro area added an impressive 61,900 new payroll positions, well
above the 20-year annual average of 41,800. Looking ahead to 2016,
we expect job growth in the Washington metro area to continue at a
pace similar to what it did in 2015. With 3.2 million payroll jobs,
the Washington metro area ranks as
the fth largest job market, behind only New York, the LA Basin,
Chicago, and Dallas/Ft. Worth. The Washington area’s rebound in
2015 was due in part to a surging national economy – most of the
major metro areas also recorded healthy job growth over the year.
The New York metro area led the nation in total job growth in
during the 12 months ending November 2015, followed by the LA Basin
and San Francisco Bay metro areas. During this time period, the
Washington metro area ranked sixth in the nation in terms of net
job growth. The Professional/Business Services and Education/Health
sectors were the leading sources of job growth in most metro areas
in 2015, including Washington.
Payroll Jobs by Sector The top four sectors for job growth in the
Washington metro area in the 12 months ending November 2015 were
Professional/Business Services, Education/Health, State/Local
Government, and Construction. These sectors alone accounted for a
net gain of 50,900 jobs, representing more than three-fourths of
the total employment increase. The most positive development in
2015 was in the Professional/Business Services sector, which
rebounded from a net job loss in 2014 to reclaim its place as the
primary driver of job growth in the metro area. This is signicant
for the regional economy since jobs created in the
Professional/Business Services sector tend to pay well and increase
demand for ofce space.
Another notable trend in 2015 was the modest gain in Federal
Government employment. This sector shed jobs each year from 2011
and 2014 due to Federal budget reductions, so the increase, however
slight, is an indication that the recent period of Federal turmoil
has been resolved – at least until the 2016 election. The only
major sector to shed jobs over the year was Retail Trade, which is
one of the region’s lowest-paying sectors.
The stronger performance in the Washington metro area’s job market
has been inuenced by a steadily growing private sector share of the
regional economy. The private sector has been re- sponsible for the
vast majority of the job growth in the Washington region over the
past two years, although the waning effects of Federal budget cuts
have helped. The bump in Federal employ- ment growth, the recently
approved Federal budget, and growing state and local budgets point
to a brighter future for public sector employment, but the majority
of job growth will continue to be sourced from the private
sector.
*12 months ending in November 2015. Source: Bureau of Labor
Statistics, Delta Associates; February 2016.
Payroll Job Growth Washington Metro Area| 1994 – 2015
Source: Bureau of Labor Statistics, Delta Associates; February
2016.
Payroll Job Growth Selected Large Metro Area| 12 Months Ending
November 2015
-60
-40
-20
0
20
40
60
80
100
120
140
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
15*
T h o u s a n
d s o
l l J o
l A v e r a g e
)
NY LA Basin
S F B ay D FW A tl Wa s S ou th FL
P hx Bo s C hi D e nv er H ou
T h o u s a n
d s o f
l l J o
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Source: Bureau of Labor Statistics, Delta Associates; February
2016.
Payroll Job Growth Washington Metro Area| 12 Months Ending November
2015
*Seasonally adjusted. Source: Bureau of Labor Statistics, Delta
Associates; February 2016.
Unemployment Rate Large Metro Areas| November 2014 vs. November
2015
Trends in Employment by Major Sector Washington Metro Area
NOVEMBER 2015
12-MONTH CHANGE
20-YEAR ANNUAL AVE RAG E
Professional/Bus. Svcs. 735.3 24.9 15.6
Education/Health 427.8 11.5 9.1 State and Local Govt. 344.2 8.3
4.1
Construction/Mining 157.4 6.2 1.7
Leisure/Hospitality 304.5 4.2 5.6
Transportation/Utilities 66.8 2.5 -0.1
Information 76.2 0.1 -0.3
Manufacturing 50.0 0.0 -1.0
Total 3,220.6 61.9 41.8
Note: In thousands of payroll jobs. Data are not seasonally
adjusted. Source: BLS, Delta Associates; February 2016.
Unemployment Rate The Washington metro area, along with most other
major metro areas, saw a marked decline in unemployment in 2015.
Although it maintained the lowest unemployment rate among the
nation’s large metro areas during the recent recession, the
Washington metro area now has the fth low- est unemployment rate
among its peer group. Still, the region’s unemployment rate has
declined steadily from its post-Recession peak of 7.1% and its
November 2014 level of 4.6% to just 4.1% in November 2015. This
compares favorably with the national (seasonally adjusted) rate of
5.0%
as of November 2015, which is also down substantially from its
November 2014 level of 5.8%.We expect the Washington metro area’s
unemployment rate to hover around 4 .0% during 2016.
-5,000 1,000 7,000 13,000 19,000 25,000
Retail Trade Manufacturing
Information Wholesale Trade
Professional/Business Services
0%
1%
2%
3%
4%
5%
6%
7%
8%
Den S F Bay DFW Bos Was NY Hou Phx S Fl a Atl LA Basin
Chi
l o y m e n
t R a
t e
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Note: Data is 12 months ending in each period, through November
2015. Source: Bureau of Labor Statistics, Delta Associates;
February 2016.
Consumer Price Index (CPI) Washington/Baltimore Region| 2009 –
2015
Note: Seasonally adjusted. Source: S&P/Case-Shiller, Delta
Associates; February 2016.
Percent Change in House Prices Washington MSA vs. U.S. 20 MSA
Composite| 2001 – 2015
Regional Consumer Price Index Overall ination was relatively at in
the Washington/Baltimore region in 2015, but it ticked upward
toward the end of the year as the economy grew. During the 12
months ending November 2015, prices in the metro area increased
0.6%, which was higher than the national ination rate of exactly
0.0% over the same period, but still minimal. Both the regional and
national rates are far below the 2.0% rate that the Federal Open
Market Committee (FOMC) targets. The marginal increase in the
regional ination rate was driven by a 1.8% increase in the cost of
housing and 5.6% increase in the cost of medical care, but these
were offset by a 7.0% decline in transportation costs. Low oil
prices and a strong dollar are holding back signicant gains in the
CPI, but this will likely change over the long term. We expect
ination to pick up slightly in 2016 as the economy grows. Wage
growth in the coming years will also cause ination to pick
up.
Housing Prices Home prices increased 2.1% (seasonally adjusted) in
the Washington metro area during the 12 months ending September
2015, according to the S&P/Case-Shiller Home Price Index. This
com- pares to a growth rate of 5.5% for the 20-City MSA Composite
Index. The region’s price growth has been hampered by a growing
inventory of homes for sale and a shift in market share toward con-
dominium units, which priced lower than single-family units.
Looking ahead, sustained job growth
should drive increased housing prices over the next few
years.
-2%
-1%
0%
1%
2%
3%
4%
5%
10-Year Annual Average = 2.6%
l P r
i c e
C h a n g e
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
2014 2015
Washington MSA
t C h a n g e
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Source: George Mason University Center for Regional Analysis, U.S.
Conference of Mayors, Delta Associates; February 2016.
Share of GRP Washington Metro Area| 2015 Projections
*Projected Source: George Mason University Center for Regional
Analysis, Delta Associates; February 2016.
Annual Change in Federal Procurement Spending Washington Metro Area
(Current Dollars)
Region’s Core Industries The Gross Regional Product (GRP) for the
Washington metro area is expected to reach $501.7 billion in 2015 –
a 5.5% increase from the estimated $475.5 billion in 2014. While
the Federal government remains the largest contributor to the
Washington area economy, its share of spending is shrinking.
Federal government spending currently accounts for approximately
35% of GRP. By 2020, we expect this share to fall to 27%, as
private sector economic growth will accelerate while Federal
spending will
remain relatively at. A major share of Federal spending in the
metro area economy is from procurement – the gov- ernment’s
purchase of goods and services from the private sector. After three
years of declines, total procurement spending in the Washington
metro area (measured by place of performance) increased 3.0% during
2014 (compared to revised 2013 data), to roughly $71.2 billion (in
2014 dollars). This represents 45% of all Federal funds owing into
the area economy. Since these dollars drive private sector
investment and job growth, they have a much greater secondary
economic impact than do dollars spent on Federal payroll.
As with direct Federal employment, the stabilization of Federal
procurement has been a major factor in the region’s economic
rebound during 2015. Contractors are nally adjusting to the new
eco- nomic environment in the region, which now depends more
strongly on the private sector than the
public sector. Growth in Professional/Business Services – by far
the region’s largest economic sector– bodes extremely well for
continued forward momentum in the regional economy in 2016.
The Education/Health Services sector has stayed on its long-term
growth trajectory: it was the only non-government sector in the
region to gain jobs during the Great Recession, and it has
continued to post strong employment gains throughout the recovery.
The impact of this sector’s growth is blunted by the fact that most
of its growth has occurred in lower-wage occupations, though. This
is also a concern for two other sectors: Retail Trade and
Leisure/Hospitality.
35%
15%
20%
25%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
2013 2014*
15-Year Annual Average = 6.1%
t C h a n g e
i n S p e n
d i n g
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Washington Area Economic Outlook: A Region in Transition After
experiencing slow and inconsistent growth between 2011 and 2014,
the Washington metro area nally experienced a sustained economic
expansion in 2015 – we expect this positive trend to continue
through 2016 and beyond. Net job growth improved from 36,500 during
the 12 months ending November 2014 to a solid 61,900 for the 12
months ending November 2015. We expect fu- ture years to bring more
gains, with 66,400 new jobs expected in 2016 and 57,800 in 2017.
Although
employment growth is expected to slow somewhat in 2018 and beyond,
the ve-year forecast of 54,500 net new jobs per year represents a
higher level of growth than the region has experienced since the
middle of the last decade.
This expansion cycle will necessarily be driven by the region’s
private sector. The region’s business community and elected leaders
have correctly identied that Federal employment and contracting can
no longer be relied upon to drive economic growth, although the
heavy Federal presence in the region will continue to provide
economic stability and shield the area from the worst effects of
any national or global economic downturns.
Private sector job growth will in turn depend on expanding
businesses already located in the region rather than businesses
lured from outside the region. The Washington area’s high wages,
property costs, and taxes put the region at a competitive
disadvantage for attracting companies that are
looking for low-cost places to do business. Efforts to build on the
region’s native assets – a highlyskilled workforce, access to
international markets, high quality education, and vast cultural
resources – should drive strong employment growth in the
Professional/Business Services sector. Growth in this sector will
both increase demand for commercial space and create additional
jobs in the Education/ Health, Retail Trade, Leisure/Hospitality,
and Construction sectors.
The passage of a Federal budget and related appropriation bills at
the end of 2015 is critical to the Washington metro area’s economy.
Moving forward into 2016, the regional economy is entering a period
of transition. While the Federal government’s role in the economy
is expected to remain stable, its inuence on the regional economy
continues to wane. The region will need to respond to profound
changes in the global economy, security, the climate, demographics,
the housing market, and other factors. These factors are already
reshaping business and real estate in the region and will
continue to do so over the next several years.
“
“
Source: Bureau of Labor Statistics, George Mason University Center
for Regional Analysis, Delta Associates; February 2016.
Payroll Job Growth Washington Metro Area
-60
-40
-20
0
20
40
60
80
100
120
T h o u s a n
d s o
l J o
l A v e r a g e
)
20-Year Annual Average = 41,700/Year 5-Year Projected Average =
54,500/Year
0100 02 03 04 0605 07 08 09 1110 12 13 14 1615 17 18 19 20
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The Washington Area Ofce Market This section of TrendLines was p
repared by Transwestern’s in-house research team
OFFICE MARKET TURNS THE CORNER IN 2015; VACANCY RATE DECLINES FOR
THE FIRST TIME SINCE 2010
On balance, we believe that the Washington metro area ofce market
nally turned the corner in 2015, and is beginning a period of
sustained improvement on the heels of several subpar years.
During 2015 net absorption totaled 1.9 million SF and the overall
vacancy rate declined 40 basis points during the year — the rst
decline in the vacancy rate since 2010. Despite these improv- ing
conditions, rents remain under pressure and declined 0.5% during
2015, as the vacancy rate remains elevated. However, the pace of
decline eased during the year, as generous concession packages
leveled off.
We believe performance fundamentals will continue to improve during
2016, as the economy strengthens and tenants become more certain
about the economic outlook. Rental rate momentum will appear in
some submarkets in 2016, with metro-wide growth slightly positive
and below average. There are limited blocks of new Class A space on
the market. Given the ight to quality, the pipeline of new or
renovated product could expand during 2016.
National Context At 421 million SF of private ofce space, the
Washington metro area is the 3rd largest ofce market in the nation,
behind New York and Los Angeles.
Net absorption of ofce space in the Washington metro area totaled
positive 1.9 million SF during 2015. The San Francisco Bay,
Dallas/Ft. Worth, and Houston markets were leaders in net
absorption during 2015.
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Largest U.S. Ofce Markets Selected Metro Areas| 2015
Source: CoStar, Transwestern; February 2016.
Ofce Net Absorption Selected Metro Areas| 2015
421
0
100
200
300
400
500
600
700
800
900
1,000
NY LA Basin W as Chi Bos SF Bay Phil DFW Hou Atl
I n v e n
t o r y
f S F )
1.9
0
2
4
6
8
10
12
SF Bay DFW Hou Bos LA Basin NY Atl Chi Phil Was
N e
t i o n
f S F )
The Washington area’s overall vacancy rate is 14.2% at year-end
2015, down from 14.6% one year ago. Still, the Washington metro has
the highest overall vacancy rate among large metro areas in the
United States. The San Francisco Bay and Boston metro areas have
the lowest vacancy rates at 6.2% and 8.4%, respectively.
Net Absorption Net absorption in the Washington metro area totaled
positive 1.9 million SF during 2015, compared to negative 1.2
million SF during 2014. This compares to the 15-year average annual
absorption of 3.6 million SF.
Each substate area within the Washington metro area had positive
net absorption during 2015, withthe District of Columbia leading
the way. The region’s positive absorption was driven by a handful
of pre-leased deliveries and healthy leasing act ivity. For
example, the Department of Justice signed a 336,000 SF deal at 175
N Street, NE in NoMa. In addition, MRP Realty delivered 111,000 SF
at 900 G Street, NW in the East End, which was 46% pre-leased at
delivery to Simpson Thacher & Bartlett and Herman Miller.
Net absorption was offset during 2015 by a handful of move-outs,
including: Freddie Mac vacated 217,000 SF at 8000 Jones Branch
Drive in Tysons, LMI vacated 235,000 SF at 2000 Corporate Ridge
Road in Tysons, and NIH vacated just over 150,000 SF at 6610
Rockledge Drive in North Bethesda.
2015 Highlights Net absorption: Positive 1.9 million SF during
2015, compared to negative 1.2 million SF during 2014. The ight to
quality continues: 2.1 million SF of Class A/Trophy space was
absorbed in 2015.
Overall vacancy rate: 14.2%, down from 14.6% one year ago. Compares
to 10.6% national rate.
Direct vacancy rate: 13.5%, down from 13.8% one year ago.
Pipeline (U/C and U/R): 7.8 million SF, down from 5.4 million SF
one year ago.
Pipeline pre-lease rate: 50%, compared to 38% one year ago.
Effective rents: Effective rents: Down 0.5% during 2015, compared
to a decline of 4.1%during 2014.
Investment sales: $6.2 billion ($355/SF) during 2015, compared to
$5.8 billi