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U.S. office sector posts lowest vacancy rate of the recovery In the third quarter of 2014, nearly 15.7 million square feet of office space was absorbed, and through the first nine months of 2014, occupancy levels jumped by 38 million square feet (44.0 percent). Not only is growth escalating, but it is dispersing. Ninety percent of markets displayed increased occupancy levels compared to year-end 2013 levels and 88.0 percent of markets posted quarterly occupancy gains for the second quarter in a row. Click through for an overview, then get your free copy of our complete report on the state of the U.S. office market, and expectations for the rest of 2014, at http://bit.ly/1pLKEtk
Citation preview
Another strong quarter of occupancy growth chips away at vacancy
United States Office Review Q3 2014
For the past three years, tech-and energy-centered markets have dominated expansion activity with those geographies accounting for more than 56 percent of occupancy gains from 2011 through the second quarter, but many other markets are beginning to top those growth numbers. Ninety percent of markets displayed increased occupancy levels compared to year-end 2013 levels and 88 percent of markets posted quarterly occupancy gains for the second quarter in a row.
3
Fundamentals are tightening across markets, particularly absorption and development
Source: JLL Research
Leasing activity• Q3 posted 61.2 million square feet of leasing activity.• Leasing levels down 0.4 percent from Q2 2014.• Compared to Q3 2013, leasing volume is up 6.6 percent.
Absorption• Absorption levels increased, resulting in the 18 th consecutive quarter of occupancy growth.• The 15.9 million square feet of net absorption during Q3 represents the highest quarterly occupancy growth
during this cycle so far.• This quarter’s biggest contributors to absorption were New York, Boston, Dallas, Raleigh-Durham, Houston,
and Chicago.
Vacancy• Vacancy dropped by 40 basis points to a recovery low of 15.9 percent this quarter, and by 90 basis points year-
over-year.• Both CBDs and suburbs played a role in this decline, falling to 12.7 percent and 17.7 percent, respectively.
Rents• Despite improved market conditions, asking rents increased by just 0.1 percent to $30.05 per square foot. This
was mostly the result of blocks of quality Class A space being taken off the market in many markets• In supply-constrained CBDs, rents actually declined by 0.1 percent, whereas strong leasing activity in suburbs
led to a 0.7 percent increase in rents.
Construction• YTD construction starts have totaled almost 34.2 million square feet. This is 53.5 percent higher than total
2013 construction starts.• There are 18 markets with more than 1.0 million square feet under construction, led by Houston with 15.6
million square feet, and total construction volume has increased by 8.0 percent quarter-over-quarter.
4
Leasing activity sentiment across markets was mixed during Q3, with a plurality posting declines in volumes…
2011 2012 2013 20140%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Up Neutral Down
Source: JLL Research
5
…pushing down leasing activity by 0.4 percent to 61.2 million square feet
2007 2008 2009 2010 2011 2012 2013 20140
10,000,000
20,000,000
30,000,000
40,000,000
50,000,000
60,000,000
70,000,000
80,000,000
90,000,000
Leas
ing
activ
ity (s
.f.)
Source: JLL Research
6
This also represented a 6.6-percent decline year-on-year, although Q3 volumes vary significantly
Q3 2007
Q3 2008
Q3 2009
Q3 2010
Q3 2011
Q3 2012
Q3 2013
Q3 2014
0 10,000,000 20,000,000 30,000,000 40,000,000 50,000,000 60,000,000 70,000,000 80,000,000
67,652,882
60,412,400
58,747,620
73,987,648
65,406,846
58,715,037
65,385,862
61,150,463
Leasing activity (s.f.)
Source: JLL Research
7
Outside of top markets, leasing activity relatively even across geographies, similar to previous quarters
New
York
Chica
goW
ashin
gton
, DC
Bosto
nLo
s Ang
eles
San
Fran
cisco
Dalla
sNe
w Je
rsey
Denv
erOr
ange
Cou
nty
Silic
on V
alley
Atlan
taSa
n Di
ego
Hous
ton
Oakla
nd-E
ast B
ayPh
ilade
lphia
Seat
tlePh
oenix
Tam
paM
innea
polis
San
Fran
cisco
Pen
insula
Baltim
ore
St. L
ouis
Portl
and
Austi
nDe
troit
Ralei
gh-D
urha
mPi
ttsbu
rgh
Char
lotte
Miam
iSa
cram
ento
Milw
auke
eSa
lt Lak
e Ci
tyFo
rt La
uder
dale
Cinc
innat
iCl
evela
ndOr
lando
Wes
t Palm
Bea
chJa
ckso
nville
Colum
bus
Wes
tches
ter C
ount
yFa
irfiel
d Co
unty
India
napo
lisLo
ng Is
land
San
Anto
nioHa
mpt
on R
oads
Rich
mon
d0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
8,000,000
9,000,000
Leas
ing
activ
ity (s
.f.)
Source: JLL Research
37.7% 18.4% 43.9%
8
After a recovery high in Q2, Q3 demonstrated even more gains in occupancy, with 15.7 million square feet of net absorption
2008 2009 2010 2011 2012 2013 2014-1.0%
-0.5%
0.0%
0.5%
1.0%
1.5%
Qua
rterly
net
abs
orpt
ion
(as
% o
f inv
ento
ry)
Source: JLL Research
15-year trailing annual average
9
As a result, YTD absorption now trails year-end 2013 totals by only 10 basis points, a further sign of a broadening recovery
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
YTD
net a
bsor
ptio
n (a
s %
of i
nven
tory
)
Source: JLL Research
15-year trailingannual average
10
While Class A space continues to drive absorption, Class B take-up is growing as quality space options are becoming scarce
2010 2011 2012 2013 2014-10,000,000
-5,000,000
0
5,000,000
10,000,000
15,000,000
20,000,000 Class A (CBD) Class A (suburban)Class B (CBD) Class B (suburban)Class C (CBD) Class C (suburban)
Qua
rterly
net
abs
orpt
ion
(s.f.
)
Source: JLL Research
11
Only seven markets have experienced a net loss of occupancy YTD, of which four are greater than -100,000 square feet
New
York
Hous
ton
Bosto
nAt
lanta
Silic
on V
alley
Chica
goDa
llas
Phoe
nixLo
s Ang
eles
Seat
tle-B
ellev
ueRa
leigh
-Dur
ham
San
Fran
cisco
Denv
erCh
arlot
tePo
rtlan
dPh
ilade
lphia
Detro
itBa
ltimor
eOr
ange
Cou
nty
Miam
iKa
nsas
City
San
Fran
cisco
Pen
insula
San
Dieg
oM
innea
polis
Fa
irfiel
d Co
unty,
CT
Wes
t Palm
Bea
chSa
lt Lak
e Ci
tyFo
rt La
uder
dale
Austi
nM
ilwau
kee
Colum
bus
Sacr
amen
toTa
mpa
Bay
Cinc
innat
iSt
. Lou
isIn
diana
polis
Oakla
nd-E
ast B
ayPi
ttsbu
rgh
Sa
n An
tonio
Ham
pton
Roa
dsCl
evela
ndOr
lando
Jack
sonv
illeLo
ng Is
land
Rich
mon
dNe
w Je
rsey
Wes
tches
ter C
ount
y, NY
Was
hingt
on, D
C
-3,000,000
-2,000,000
-1,000,000
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
YTD
net a
bsor
ptio
n (s
.f.)
Source: JLL Research
YTD net occupancy losses amount to
2.1 million square feetin Washington, DC
12
The rise of the Sunbelt: Los Angeles, South Florida, Phoenix and Atlanta bring Sunbelt share of absorption to near-tech levels
Source: JLL Research
NYC and DC (*excludes Midtown South)
Tech markets (*includes Midtown South)
Energy markets
Sunbelt
All other markets
70.0%
29.7%
6.4%
2010
5.1%
33.5%
19.0%
18.4%
23.9%
201137.5%
26.0%
29.1%
7.4%
2012
11.1%
21.6%
22.3%
18.6%
26.4%
2013
8.7%
26.6%
15.9%22.2%
26.6%
2014
13
Energy, tech and Sunbelt markets all posting above-average absorption; Sunbelt surpassing energy in some cases
Dallas
Denve
r
Housto
n
Portlan
d
San Fran
cisco
Seattle
SF Penins
ula
Silicon
Valley
Atlanta
Miami
Phoen
ix
Raleigh
-Durham
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
1.1% 1.1%
2.0%
1.5% 1.6% 1.6%
2.3%
2.9%
1.5%
2.0% 2.1%
3.1%
YTD
net a
bsor
ptio
n (s
.f.)
Source: JLL Research
Energy Tech Sunbelt
U.S. average
14
NYC’s 3.8 million square feet of absorption in Q3 helps to boost East Coast’s share yet again
2010 2011 2012 2013 20140%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
East Coast Central West Coast
Shar
e of
qua
rterly
net
abs
orpt
ion
Source: JLL Research
15
Even though Atlanta and South Florida are nearing 2013 absorption levels already, rest of the East Coast is catching up
Source: JLL Research
2010 2011 2012 2013 2014-10,000,000
-5,000,000
0
5,000,000
10,000,000
15,000,000
20,000,000 Atlanta South Florida Rest of the East Coast
Net a
bsor
ptio
n (s
.f.)
16
2010 2011 2012 2013 2014-3,000,000
-2,000,000
-1,000,000
0
1,000,000
2,000,000
3,000,000
4,000,000Atlanta Chicago Los Angeles Miami Philadelphia Phoenix
Net a
bsor
ptio
n (s
.f.)
Diversified markets hit another recovery high with 3.2 million square feet of occupancy gains this quarter, led by Chicago
Source: JLL Research
Atlanta and Phoenix have absorbed a combined 13.9 million square feet since 2010, or 65.1 percent of cumulative total.
17
Quarterly Class B absorption over the past four quarters is taking place 3.4x faster than from 2010 to Q3 2013…
Source: JLL Research
2010-Q3 2013 Past four quarters0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
14,000,000
16,000,000
14,049,878
12,688,994
Clas
s B
net a
bsor
ptio
n (s
.f.)
936,658 s.f. per quarter 3,172,248 s.f. per quarter
18
…although 4.8x as much Trophy and Class A space has been absorbed than Class B and C space during the same time period
Source: JLL Research
Trophy and Class A net absorption
129.0m.s.f.
2010-2014
Class B and C net absorption
26.7m.s.f.
2011-2014
19
Lack of available Class A space is pushing down its share of quarterly absorption
2011 2012 2013 20140.0%
50.0%
100.0%
150.0%
200.0%
250.0%
300.0%
350.0%
133.5%
93.9%74.5% 76.3%
295.2%
98.5%82.0% 78.3%
45.2%
73.4%63.5%
80.9%
57.3%
82.3%66.9%
Clas
s A
shar
e of
qua
rterly
abs
orpt
ion
Source: JLL Research
20
CBD absorption remains somewhat volatile; after Class A being responsible for all gains in Q2, now only two-thirds in Q3
2011 2012 2013 20140.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
140.0%
160.0%
180.0%166.2%
90.4% 88.8%80.8%
100.0%106.1%
74.8%
0.0%
88.1% 86.5%
49.6%
92.0%
48.8%
100.9%
66.4%
Clas
s A
shar
e of
qua
rterly
abs
orpt
ion
Source: JLL Research
21
Absorption in Class A space maintains largest share, with CBDs and suburbs nearly evenly split
2011 2012 2013 20140.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
140.0%
160.0%
180.0%
116.9%
97.9%
62.3%
75.1%
167.8%
102.5%
84.3% 85.3%
43.2%
73.4% 72.8% 70.3%61.1%
67.6% 67.4% 66.8%
Clas
s A
shar
e of
qua
rterly
abs
orpt
ion
Source: JLL Research
22
But demand for creative office space is strengthening Class B in many submarkets across the United States
San Francisco (SOMA)
Philadelphia (The Navy Yard)
Boston (East Cambridge)
Chicago (River West)
Portland (Lloyd District)
New York (Penn Plaza/
Garment)
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%7.3%
5.9%5.6%
4.7%
3.3%
2.6%
YTD
CBD
Clas
s B
net a
bsor
ptio
n (%
of i
nven
tory
)
Source: JLL Research
U.S. average
23
Still, Class A continues to trump Class B according to most indicators
Source: JLL Research
70.5%of absorbed space in 2014
has been Class A
$10.67per square foot difference
between Class A and B space…
44.0%premium charged for Class A space
versus Class B
-220bpdifference between Class A and
Class B total vacancy
24
The steep decline in vacancy this year, currently at 15.9 percent, is the result of nearly 40 million square feet of absorption
2009 2010 2011 2012 2013 201414.0%
15.0%
16.0%
17.0%
18.0%
19.0%
20.0%
Tota
l vac
ancy
(%)
Source: JLL Research
25
Vacancy is now closer to its previous low point, rather than the high
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 20140.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
Tota
l vac
ancy
(%)
Source: JLL Research
26
Total vacancy declining overall, but all segments of the CBD are outperforming the suburbs, lower by 480 basis points
2010 2011 2012 2013 201410.0%
12.0%
14.0%
16.0%
18.0%
20.0%
22.0% Class A (CBD) Class A (suburban)Class B (CBD) Class B (suburban)Class C (CBD) Class C (suburban)
Tota
l vac
ancy
(%)
Source: JLL Research
27
Industry Real estate footprint Most affected markets
State government Contracting California, Illinois, New JerseyFederal government Contracting Washington, DCMedia/print Contracting LA, NYCFinance/banking Contracting NYC, Charlotte, Chicago, Palm Beach, PittsburghLaw firms Contracting (rightsizing) Washington, DC, NYC, SF, Atlanta, LAConsulting Contracting (rightsizing) NYC, Chicago, Washington, DCAccounting Contracting (rightsizing) Chicago, NYC, LATelecom Stable NJ, Dallas, AtlantaRetail/consumer goods Stable NYC, Atlanta, Los AngelesEducation Growing EverywhereMedia (digital and TV) Growing Atlanta, NYC, LA, Philadelphia, Washington, DCGreen energy/clean technology Growing Pittsburgh, Silicon Valley, Denver
Real estate (residential) Growing Southern CA, Nevada, AZ, FL, GA, Carolinas
Technology Growing Silicon Valley, San Francisco, Austin, Seattle, Portland, Midtown South NYC, Cambridge, MA
Shared office space providers / co-working spaces Growing All markets particularly coastal markets and Chicago
Natural gas/oil/energy Growing Denver, Houston, Dallas, PittsburghBiotech/pharmaceutical Growing San Francisco, San Diego, NJ/Phil, Boston, RDU
Office growth being driven by atypical tenant industries
Source: JLL Research
28
Demographics and technology are driving productivity and utilization and the next evolution of office space use
Source: JLL Research
15%space reduction by U.S. law firms and financial services
relocating
72%of global CREs plan
to aggressively increase density in
next 3 years
150Square-foot-per-
employee average target density, down
from 225 in 2009
50% of the U.S.
workforce was baby boomers in 2010. Gen Y will be 50% by 2020
29
Many of these changes show stark pre- and post-recession contrasts
Source: JLL Research
Floor plates
Floor plates are up from 25,000 square feet before the recession to 60,000 square feet.
Personal space
Before the recession, employees had around 300 s.f. per person; now they have 200 s.f.
Interaction
Employees have gone from rarely running into others to a nine-in-ten chance of bumping into a coworker.
Building features
Aesthetic and building features such as increased roof heights and floor-to-ceiling windows are “in.”
30
And, as a result, law firms are shifting
Source: JLL Research
15.2%Giveback by law firm across the U.S. when
relocating
20.5%Giveback by law firm
across the top seven U.S. markets when relocating
24.7%Giveback by law firm
across DC when relocating
• Going digital• Elimination of law libraries• One-sized fits all office• Higher administrative ratios
• Migration to glass boxes• Migration to long and lean• Migration to smaller floorplates
31
Consulting and accounting are shifting
Source: JLL Research
25.0%Giveback by consulting
firms across the U.S.when relocating
225 s.f.Average space per
consultant inyears past
90 s.f.Average space per
consultant in the most efficient firms today
• Benching• Work flexibly and client officing• Offices gone, collaboration rooms in
• Increasingly looking at new construction to meet efficiency standards
• Industry giving back most space
32
Technology companies are shifting
Source: JLL Research
22.0%Percent increase in
high-tech service jobssince 2009
13.6%Total vacancy in core tech markets, compared to 16.3
percent nation-wide
2.2%Growth in
core tech marketrents in 2014
• Benching is standard• Less personal space, more shared
and amenity space• “Open hangar” design preferred
• Migration to Class B+ with character
• Space viewed as core to culture• Remote work is waning
33
Banks are shifting
Source: JLL Research
10.1%Give-back by average bank
across the U.S. when renewing (flat headcount)
86.0%Percent of banking transactions that nolonger need a teller
66.0%Percent of surveyed banks planning to
reduce CRE footprint
• Regulation and cost pressures forcing portfolio consolidation
• Offices shrinking• Business units competing
• Branch reductions common• Increasing importance of back
office (second- and third-tier markets)
• Remote working increasing
34
Even the federal government is shifting
Source: JLL Research
170 s.f.Target utilization rate per
employee for federally leased space
$1.7 billionAmount spent annually
by the GSA for propertiesdeemed underutilized
15.9%Average give-back by GSA across Metro DC
in FY 2013
• Telecommuting• Benching• Co-locations• Minimal funds to implement
• Consolidations in low cost buildings/submarkets
• Migration to off-center locations• Disposition of underutilized
assets.
35
As office-using employment increases by 212,000 net new jobs, vacancy declines to 15.9 percent
2011 2012 2013 201426,000
26,500
27,000
27,500
28,000
28,500
29,000
29,500
30,000
30,500
14.5%
15.0%
15.5%
16.0%
16.5%
17.0%
17.5%
18.0%
18.5%
19.0%Office-using employment (thousands) Total vacancy (%)
Offi
ce-u
sing
em
ploy
men
t (th
ousa
nds)
Tota
l vac
ancy
(%)
Source: JLL Research
36
CBD vacancy nearing historic low, while suburban vacancy still rather elevated
CBD (hist
oric)
Suburb
an (h
istori
c)20
1020
1120
1220
1320
145.0%
7.0%
9.0%
11.0%
13.0%
15.0%
17.0%
19.0%
21.0%
23.0%
Tota
l vac
ancy
(%)
Source: JLL Research
37
Following declines in total and direct vacancy, sublease space falls to a low 46.8 million square feet
2009 2010 2011 2012 2013 201430,000,000
40,000,000
50,000,000
60,000,000
70,000,000
80,000,000
90,000,000
100,000,000
Subl
ease
spa
ce (s
.f.)
Source: JLL Research
38
Rent growth remains minimal, but is expected to increase upon increasing demand as office-using sectors grow
2008 2009 2010 2011 2012 2013 2014-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
Qua
rterly
rent
gro
wth
(%)
Source: JLL Research
39
CBD segments posting negative or nearly flat results, while suburban segments record 2.0 percent or more
2010 2011 2012 2013 2014$15.00
$20.00
$25.00
$30.00
$35.00
$40.00
$45.00
$50.00 Class A (CBD) Class A (suburban)Class B (CBD) Class B (suburban)Class C (CBD) Class C (suburban)
Aver
age
aski
ng re
nts
($ p
.s.f.
)
Source: JLL Research
Peakingphase
Fallingphase
Risingphase
Bottomingphase
Q3 2014 U.S. overall office clock
Fort Lauderdale, Kansas City, Orange County,Salt Lake City, Tampa
Houston, San Francisco,San Francisco Peninsula, Silicon Valley
Austin, Pittsburgh, Seattle-Bellevue
Baltimore, Hampton Roads, Long Island, Sacramento
Dallas
Atlanta, Fairfield County, Indianapolis,Jacksonville, Phoenix
Charlotte, Detroit, Milwaukee, Oakland-East Bay, Philadelphia, Richmond, San Diego
Chicago, Cincinnati, San Antonio,St. Louis, Westchester County
New York, Portland
New JerseyCleveland, Minneapolis, Raleigh-Durham
Boston, Miami
Denver, Los Angeles, United States
Columbus, Orlando,Washington, DC, West Palm Beach
Source: JLL Research
Peakingphase
Fallingphase
Risingphase
Bottomingphase
Q3 2014 U.S. CBD office clock
Salt Lake City
Austin, Houston
Miami, Portland, San Jose CBD, Seattle CBD
Baltimore, SacramentoDallas, Milwaukee, Orlando
Chicago, Downtown (New York),Indianapolis, Minneapolis, Stamford CBD
Atlanta, Jacksonville, Philadelphia, Tampa
Columbus, San Diego,White Plains CBD
Fort Lauderdale, Greenwich CBD,Midtown (New York)
Midtown South (New York), San Francisco
St. Louis
Boston, Pittsburgh
Charlotte, Cleveland, Detroit, Kansas City,Los Angeles, Oakland CBD, Raleigh-Durham
Phoenix, Richmond, San Antonio,Washington, DC, West Palm Beach
Cincinnati
Denver, United States
Source: JLL Research
Peakingphase
Fallingphase
Risingphase
Bottomingphase
Q3 2014 U.S. suburban office clock
Cambridge, Houston, San Francisco,San Francisco Peninsula
Cleveland, Fairfield County, Jacksonville, Miami, Milwaukee,Seattle-Bellevue, St. Louis, Westchester County
Atlanta, Baltimore, Charlotte, East Bay, Fort Lauderdale,Lehigh Valley, Philadelphia, San Diego
Dallas
Orange County, Richmond, Salt Lake City
Columbus, Northern Delaware
Southern New Jersey
Northern and CentralNew Jersey
Chicago, Cincinnati, Detroit, Minneapolis, Oakland, Raleigh-Durham, Sacramento, San Antonio, Southside (Hampton Roads)
Boston, Phoenix
Pittsburgh
Los Angeles
West Palm Beach
Orlando, Washington, DC
Silicon Valley
Bellevue CBD
Suffolk County (Long Island)
Denver, Indianapolis, Portland, NassauCounty (Long Island), Tampa, United States
Peninsula (Hampton Roads)
Austin, Kansas City
Source: JLL Research
43
After spiking, CBD rents fall due to removals of quality space; suburban rents on the up quarterly and are more stable
2011 2012 2013 2014-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0% CBD rent growth Suburban rent growth
Qua
rterly
rent
gro
wth
(%)
Source: JLL Research
CBD average: 0.9%
Suburban average: 0.2%
44
The consistent decline in CBD space is shrinking the rent gap with the suburbs, falling $0.22 per square foot since last quarter
2010 2011 2012 2013 2014$20.00
$25.00
$30.00
$35.00
$40.00
$45.00 CBD Suburbs
Aver
age
aski
ng re
nt ($
p.s
.f)
Source: JLL Research
$11.36
$14.97
45
A similar trend has emerged regarding the Class A premium vs. overall rents, which is down $0.02 per square foot to $4.90 per square foot compared to Q2
2010 2011 2012 2013 2014$3.00
$3.50
$4.00
$4.50
$5.00
$5.50
$3.40$3.49 $3.49 $3.53
$3.68
$3.81
$3.97 $3.99
$4.21$4.26
$4.37 $4.38
$4.86
$4.71$4.82
$4.76
$4.97$4.92 $4.90
Clas
s A
prem
ium
($ p
.s.f.
)
Source: JLL Research
46
TI allowances are beginning to elevate due to new construction
2006 2007 2008 2009 2010 2011 2012 2013 20140.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
$23.00
$24.00
$25.00
$26.00
$27.00
$28.00
$29.00
$30.00
$31.00
3.5
4.1
5.1
6.1 6.2
5.7
5.15.3
5.7
Free months of rent TI allowance ($ p.s.f.)
Free
mon
ths
of re
nt
TI a
llowa
nce
($ p
.s.f.
)
Source: JLL Research
47
New supply coming to market is slowly increasing, but still well below historic norms
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20140
20,000,000
40,000,000
60,000,000
80,000,000
100,000,000
120,000,000
140,000,000
Com
plet
ions
(s.f.
)
Source: JLL Research
Average annual completions
48
The vast majority of new completions are Class A, the majority of which is arriving in suburban markets rather than CBDs
2010 2011 2012 2013 YTD 20140
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000 Class A (CBD) Class A (suburban)
Class B (CBD) Class B (suburban)
Class C (CBD) Class C (suburban)
YTD
com
plet
ions
(s.f.
)
Source: JLL Research
49
Construction volumes jumped 49.4 percent compared to YE 2013, led by Houston
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 20140
20,000,000
40,000,000
60,000,000
80,000,000
100,000,000
120,000,000
140,000,000
160,000,000
Unde
r con
stru
ctio
n (s
.f.)
Source: JLL Research
50
The majority of new construction is now in suburbs rather than CBDs, and the share continues to grow thanks to Silicon Valley, Dallas, Austin and Houston, in particular
2010 2011 2012 2013 20140%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
CBD Suburbs
Shar
e of
con
stru
ctio
n
Source: JLL Research
51
Year-to-date construction starts are 53.5 percent higher than 2013, a clear sign of improving economies
2010 2011 2012 2013 YTD 20140
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
30,000,000
35,000,000
40,000,000
11,843,789
18,490,24417,558,896
22,251,850
34,154,704
Cons
truct
ion
star
ts (s
.f.)
Source: JLL Research
52
Houston once again leads construction starts with Amazon’s Lake Union campus following
Housto
n
Seattle
-Bellevu
e
Philade
lphia
Milwau
kee
Chicag
oDalla
s
Washin
gton,
DC
Phoen
ixAus
tin
Minnea
polis
Orange
County
Northe
rn Virg
inia
San Anto
nio
Raleigh
-Durham
Boston
Charlo
tte
Portlan
d
San Fran
cisco
Baltim
ore
Cincinn
ati
Denve
r
Kansa
s City
Hampto
n Roa
ds
Fort La
uderd
ale
Orland
o0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
3,500,000
Cons
truct
ion
star
ts (s
.f.)
Source: JLL Research
53
Strong preleasing activity is helping new developments go ahead, but is also reducing the ability to ease supply constraints
Source: JLL Research
San Francisco: 62.5%
Washington, DC: 92.6%
New York: 57.9%
Chicago: 58.4%
Atlanta: 63.0%
Houston: 58.8%
Seattle-Bellevue: 44.7%
54
Source: JLL Research
Outlook buoyed by economic headwinds
U.S. GDP levels are forecasted to grow by 3.0 to 3.5 percent in 2015 and 2016, driven by an energized corporate and consumer.
The market will move from an environment that absorbed +/- 0.8 percent to 1.0 percent of inventory levels annually over the past few years to a market that likely hits the 1.2 percent to 1.5 percent levels over the next 24 to 30 months.
Vacancy levels in many CBDs will approach the single-digits over the next two years with overall U.S. levels expected to dip below 15 percent by the early part of 2016.
JLL forecasts over the next 27 months call for rent increases nationally of 13 to 14 percent, driven largely by a new wave of developments delivering, priced at 20.0 to 25.0 percent premiums, which will trickle down to reset market pricing.
The market over the next 36 months will likely shift from an under-supplied market to an over-supplied one by late 2016, with many of the buildings that lead to the environment breaking ground over the next nine months
1.
2.
3.
4.
5.
Although market conditions are still largely in favor of tenants, fundamentals continue to tighten and the decline in quality space is leading to both increased activity in second-tier product as well as new developments across the country. As activity increases, the shifting landscape will provide greater value for owners and investors capitalizing on a recovery that’s finally taking hold beyond gateway markets.
COPYRIGHT © JONES LANG LASALLE IP, INC. 2014
John SikaitisManaging Director – Office and Local Markets Research+1 202 719 [email protected]
Julia GeorgulesAssociate Director, Office Research+1 415 354 [email protected]
Phil RyanResearch Analyst, Office and Economy Research+1 202 719 [email protected]
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