HIGHLIGHTS NORTH AMERICA COLLIERS.COM Q3 2014 | OFFICE MARKET INDICATORS Relative to prior period NORTH AMERICAN OFFICE MARKET Summary Statistics, Q3 2014 US Q3 2014 US Q4 2014* Canada Q3 2014 Canada Q4 2014* VACANCY NET ABSORPTION CONSTRUCTION RENTAL RATE** *Projected Construction is the change in Under Construction. **Rental rates for current quarter are for CBD Class A space. Rent forecast is for metro-wide rents. US CAN NA VACANCY RATE (%) 13.46% 8.43% 13.11% CHANGE FROM Q2 2014 (%) -0.22% -0.12% -0.21% ABSORPTION (MSF) 16.6 1.2 17.8 NEW CONSTRUCTION (MSF) 7.4 0.6 8.0 UNDER CONSTRUCTION (MSF) 88.9 20.7 109.6 ASKING RENTS PER SF US CAN DOWNTOWN CLASS A ($) $45.68 $49.89 CHANGE FROM Q2 2014 (%) 1.5% 2.7% SUBURBAN CLASS A ($) $27.61 $30.32 CHANGE FROM Q2 2014 (%) 1.3% -1.3% Tech, Sun Belt Office Markets Lead Broad Recovery ANDREA CROSS National Office Research Manager | USA KEY TAKEAWAYS • Job growth drove office demand in both the U.S. and Canada through the first three quarters of 2014. Employment grew year-over-year in both countries, with the U.S. on pace to create the most jobs in 2014 since 1999. • U.S. office-using employment growth was even stronger than overall job growth, at 2.8% year-over-year in September compared with 1.9% growth in total payrolls. About 1.3 office-using jobs have been added during the recovery for every 1 office-using job lost in the recession. • Indicative of the broadening economic and office market recoveries, just 15 of the 84 U.S. metro areas tracked by Colliers lost office-using jobs year-over-year in August 2014. Previous laggards such as Las Vegas, Los Angeles, Sacramento, Phoenix and Jacksonville were among the strongest markets for office-using job growth. • The North American vacancy rate in Q3 2014 decreased by 21 basis points to 13.1%, with improvements in both the U.S. and Canada. The U.S. vacancy rate of 13.5% was the lowest since Q2 2008. • North American absorption of 17.8 million square feet (MSF) in Q3 2014 was the highest quarterly total this year, with both the U.S. and Canada posting positive absorption both in Q3 2014 and year-to-date. • In a notable shift from recent quarters, absorption in the primary finance, insurance and real estate (FIRE) markets at 6.9 MSF nearly equaled the 7.9 MSF of absorption in the primary intellectual capital, energy and education (ICEE) markets. With the ICEE markets having led the current recovery, strong absorption in the FIRE markets indicates how much the recovery has broadened to include markets driven by more traditional office-using industries. • Construction activity continued to tick up in Q3 2014 but remains highly concentrated in a small number of markets. More than 60% of the 110 MSF underway in North America is located in the top 10 metro areas. • According to Real Capital Analytics, North American office transaction volume reached $32.0 billion in Q3 2014, the highest total this year. Demand from both domestic and cross-border investors remains voracious, particularly given softening economic conditions elsewhere around the globe. We expect stronger office market fundamentals in secondary and tertiary markets to attract greater investor interest into 2015, further boosting aggregate transaction volume.
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HIGHLIGHTSNORTH AMERICA
COLLIERS.COM
Q3 2014 | OFFICE
MARKET INDICATORSRelative to prior period
NORTH AMERICAN OFFICE MARKETSummary Statistics, Q3 2014
US Q3
2014
US Q4
2014*
Canada Q3
2014
Canada Q4
2014*
VACANCY NET ABSORPTION
CONSTRUCTION RENTAL RATE**
*Projected Construction is the change in Under Construction. **Rental rates for current quarter are for CBD Class A space.
Rent forecast is for metro-wide rents.
US CAN NA
VACANCY RATE (%) 13.46% 8.43% 13.11%
CHANGE FROM Q2 2014 (%) -0.22% -0.12% -0.21%
ABSORPTION (MSF) 16.6 1.2 17.8
NEW CONSTRUCTION (MSF) 7.4 0.6 8.0
UNDER CONSTRUCTION (MSF) 88.9 20.7 109.6
ASKING RENTS PER SF US CAN
DOWNTOWN CLASS A ($) $45.68 $49.89
CHANGE FROM Q2 2014 (%) 1.5% 2.7%
SUBURBAN CLASS A ($) $27.61 $30.32
CHANGE FROM Q2 2014 (%) 1.3% -1.3%
Tech, Sun Belt Office Markets Lead Broad RecoveryANDREA CROSS National Office Research Manager | USA KEY TAKEAWAYS
• Job growth drove office demand in both the U.S. and Canada through the first three quarters of 2014. Employment grew year-over-year in both countries, with the U.S. on pace to create the most jobs in 2014 since 1999.
• U.S. office-using employment growth was even stronger than overall job growth, at 2.8% year-over-year in September compared with 1.9% growth in total payrolls. About 1.3 office-using jobs have been added during the recovery for every 1 office-using job lost in the recession.
• Indicative of the broadening economic and office market recoveries, just 15 of the 84 U.S. metro areas tracked by Colliers lost office-using jobs year-over-year in August 2014. Previous laggards such as Las Vegas, Los Angeles, Sacramento, Phoenix and Jacksonville were among the strongest markets for office-using job growth.
• The North American vacancy rate in Q3 2014 decreased by 21 basis points to 13.1%, with improvements in both the U.S. and Canada. The U.S. vacancy rate of 13.5% was the lowest since Q2 2008.
• North American absorption of 17.8 million square feet (MSF) in Q3 2014 was the highest quarterly total this year, with both the U.S. and Canada posting positive absorption both in Q3 2014 and year-to-date.
• In a notable shift from recent quarters, absorption in the primary finance, insurance and real estate (FIRE) markets at 6.9 MSF nearly equaled the 7.9 MSF of absorption in the primary intellectual capital, energy and education (ICEE) markets. With the ICEE markets having led the current recovery, strong absorption in the FIRE markets indicates how much the recovery has broadened to include markets driven by more traditional office-using industries.
• Construction activity continued to tick up in Q3 2014 but remains highly concentrated in a small number of markets. More than 60% of the 110 MSF underway in North America is located in the top 10 metro areas.
• According to Real Capital Analytics, North American office transaction volume reached $32.0 billion in Q3 2014, the highest total this year. Demand from both domestic and cross-border investors remains voracious, particularly given softening economic conditions elsewhere around the globe. We expect stronger office market fundamentals in secondary and tertiary markets to attract greater investor interest into 2015, further boosting aggregate transaction volume.
U.S. ECONOMIC TRENDSThe U.S. economic recovery continued at a healthy clip through Q3 2014. Year-to-date through September, U.S. employers added more than 2 million positions, putting the economy on pace to add the most jobs this year since 1999. Unlike earlier in the cycle, where industries such as tech, energy, education and healthcare drove growth, job gains in recent months have been broad-based, with even the lagging government sector increasing slowly in recent months.
The story has been even more positive for office-using employment. Growth in the primary office-using employment sectors (professional and business services, financial activities and information services) continues to track ahead of the recovery in overall employment, with 2.8% year-over-year growth in office-using jobs in September compared with 1.9% growth in overall payrolls. The U.S. economy has added approximately 1.3 office-using jobs for every 1 job lost during the recession, compared with 1.1 jobs added in all sectors for every 1 lost during the recession. Office-using employment surpassed 30 million jobs for the first time in September and now stands about 727,000 positions more than the prerecession peak in July 2007.
OFFICE VACANCY, INVENTORY & ABSORPTION | Q3 2014 | NORTH AMERICA
The economic recovery has also broadened geographically. Of the 84 U.S. metro areas tracked by Colliers, just 15 of them lost office-using jobs between August 2013 and August 2014. Also, more than half of the metro areas have recovered all of the office-using jobs lost during the recession. No longer is the list dominated by intellectual capital, energy and education (ICEE) markets; among the strongest markets for office-using job growth in August were Jacksonville, Las Vegas, Los Angeles, Sacramento, Orlando, Phoenix and the Inland Empire (Calif.) -- metro areas that all were hit particularly hard by the housing and financial crises.
The professional and business services sector remains the most significant driver of office-using employment growth, but financial activities continues to improve at a moderate pace, with growth concentrated in lower-cost Sun Belt and Midwest metro areas such as St. Louis, Phoenix, Jacksonville, Nashville, Raleigh and multiple Texas metro areas. Traditional higher-cost financial centers such as Nassau-Suffolk, Hartford, Bridgeport, Chicago, Los Angeles, Newark and Orange County have been among the slowest to recover jobs in the financial activities sector. Firms including Deutsche Bank, UBS, Charles Schwab and Goldman Sachs have been moving operations to lower-cost areas in recent years, driving this trend.
HIGHLIGHTS | Q3 2014 | OFFICE | NORTH AMERICA
COLLIERS INTERNATIONAL | P. 3
Looking forward, we expect the economic recovery to continue at a similar pace through 2015. IHS Global Insight projects an addition of nearly 2.5 million jobs in 2014, increasing slightly to nearly 2.6 million jobs in 2015. This would amount to four consecutive years of net job gains exceeding 2 million — the longest such stretch since the 1997-2000 period. GDP should also reflect these positive economic trends. Due to poor weather conditions early in the year, IHS predicts only a small improvement in GDP growth: 2.29% in 2014, up slightly from 2.22% in 2013. However, growth is projected to accelerate to 2.74% in 2015.
CHANGE IN EMPLOYMENT FROM CYCLICAL PEAK | US
Total Employment O�ce-Using Employment Professional & Business Services Financial Activities
Note: Latest data as of September 2014; x-axis indicates number of months elapsed since each sector’s previous cyclical employment peak; office-using employment sectors include professional and business
services, financial activities and information services; information services not displayed separately because sector peaked in 2001. | Sources: Bureau of Labor Statistics, Colliers International.
UNITED STATES 41.1%Note: All data are seasonally adjusted as of August 2014;
Includes markets tracked by Colliers with at least 25,000 financial activities jobs as of August 2014. Sources: Bureau of Labor Statistics, Federal Reserve Bank of St. Louis, Colliers International.
MARKETS WITH FINANCIAL ACTIVITIES EMPLOYMENT AT OR ABOVE PRERECESSION PEAK | AUGUST 2014 | US
UNITED STATES 125.6%Note: All data are seasonally adjusted as of August 2014; Includes markets tracked by Colliers with at least
100,000 office-using jobs as of August 2014.Sources: Bureau of Labor Statistics, Federal Reserve Bank of St. Louis, Colliers International.
TOP 20 MARKETS FOR OFFICE-USING JOBS RECOVERED | AUGUST 2014 | US
MSA % CHANGE MSA % CHANGE
Raleigh 8.7% Orlando 3.6%
Nashville 6.2% Phoenix 3.6%
Jacksonville 5.3% Inland Empire 3.5%
Austin 5.2% San Jose 3.4%
Dallas-Fort Worth 5.1% Atlanta 3.3%
Las Vegas 4.7% Houston 3.2%
San Francisco 4.0% Miami 3.2%
Charlotte 3.8% Memphis 3.0%
Los Angeles 3.7% St. Louis 2.9%
Sacramento 3.6% Seattle 2.7%
UNITED STATES 2.6%
Note: All data are seasonally adjusted as of August 2014; Includes markets tracked by Colliers with at least 100,000 office-using jobs as of August 2014.
Sources: Bureau of Labor Statistics, Federal Reserve Bank of St. Louis, Colliers International.
FASTEST OFFICE-USING EMPLOYMENT GROWTH | AUG. 2013-2014 | US
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HIGHLIGHTS | Q3 2014 | OFFICE | NORTH AMERICA
CANADA ECONOMIC TRENDSThe Canadian economy continues to expand at a moderate pace, buoyed by growth in the U.S. but restrained by government cutbacks and private-sector caution regarding investment. Like the U.S. economy, growth has rebounded from the weather-impacted Q1 2014 period, but job creation has been choppy, with alternating gains and losses in employment each month this year through September. Nonetheless, the overall trend has been positive, with approximately 157,600 jobs added year-to-date 2014, up from 106,200 jobs added year-over-year but down from more than 200,000 jobs added during the first nine months in each of the prior three years.
Despite the aforementioned headwinds, the Canadian economy should continue to grow through the remainder of 2014 and 2015, benefiting from the ongoing recovery of the U.S. economy, energy sector growth and expansion of the professional, scientific and technical services sector -- an important driver of demand for office space in markets including Vancouver and Toronto, and an economic bright spot in the Canadian economy. The Conference Board of Canada expects employment growth to slow to 1.0% in 2014 -- the weakest reading since Canada’s brief recession -- but accelerate thereafter to 1.8% in 2015. Real GDP is projected to increase by 2.0% in 2014, which is on par with the 2013 growth rate, and to accelerate to 2.7% in 2015. At the local level, Edmonton and Calgary are projected to remain among the fastest growing markets in terms of real GDP in 2014 and through the Conference Board’s forecast period from 2015 to 2018 due to continued growth in the energy industry and its spillover effect on other sectors. Vancouver is forecast to be the fastest-growing metro area with job gains in virtually every sector through 2018.
MARKET VACANCY (%) MARKET VACANCY
(%)
Toronto, ON 6.62% New York, NY - Midtown South Manhattan 8.46%
CANADA 2.3% Source: The Conference Board of Canada.
CANADA AVERAGE ANNUAL FORECASTED REAL GDP GROWTH %
Source: Colliers International.
Source: The Conference Board of Canada.
“ ~157,600 jobs added in Canada year-to-date 2014”
HIGHLIGHTS | Q3 2014 | OFFICE | NORTH AMERICA
COLLIERS INTERNATIONAL | P. 5
North American Downtown Markets:Excluding renewals, of the leases signed this quarter in your CBD/downtown, did most tenants...?
Hold Steady58.4%
Expand19.5%
Contract14.3%
North American Downtown Markets:What was the trend in Free Rent (in months) o�ered by CBD landlords this quarter?
Same68.8%
Less18.2%
More 6.5%
North American Downtown Markets:What was the trend for tenant improvement allowances o�ered by CBD landlords this quarter?
Same77.9%
Less9.1%
More6.5%
North American Suburban Markets:Excluding renewals, of the leases signed this quarter in your suburban market, did most tenants...?
Hold Steady52.2%
Expand30.4%
Contract17.4%
Note: Charts above reflect % of markets reporting
OFFICE OUTLOOK 2014 BEHIND THE STATISTICS & BEYOND THE BASICSScope of Colliers’ Office Outlook Report: Colliers’ office space universe encompasses 87 markets in the U.S. and Canada, with a combined total of more than 6.4 billion square feet (BSF). The 75 U.S. markets account for most of this space, with nearly 6.0 BSF of tracked inventory and the remaining 449 MSF in Canada. Our coverage includes 21 markets with more than 100 MSF of space, with a combined total of 3.8 BSF or nearly 60% of our office market inventory. The largest U.S. markets are New York, Washington, D.C., Chicago, Dallas and Atlanta. Toronto is the only Canadian market with more than 100 MSF of space.
VacancyThe North American vacancy rate decreased again in Q3 2014, falling by 21 basis points to 13.1%. Unlike in recent quarters, this improvement was not confined to the U.S. office market; the Canadian vacancy rate decreased as well, as construction completions slowed from recent quarters. Canadian vacancy dipped below 8.5%, landing at 8.4% in Q3 2014 and remaining nearly five percentage points below the U.S. vacancy rate. In the U.S., broader economic improvements contributed to a 22 basis-point decrease in the vacancy rate to 13.5%, the lowest rate since Q2 2008. Both the CBD and suburban vacancy rates decreased, reaching their lowest respective levels since 2008 as well.
Of the 81 markets reporting both Q2 2014 and Q3 2014 vacancy rates, 57 markets (more than 70%) posted vacancy rate decreases in Q3, which reflected widespread improvement in office market conditions. ICEE and Canadian markets continued to dominate the list of markets with the
lowest vacancy rates. These include Toronto, Montreal, San Francisco, Midtown South Manhattan and Calgary. However, more markets are benefiting from the recovery, including markets adjacent to ICEE metro areas that are experiencing more spillover demand from tech and energy tenants, as well as increases in demand from traditional office tenants such as business services, finance and insurance companies. In New York, Downtown Manhattan and Midtown Manhattan were among the top markets for vacancy rate decrease in Q3, as demand spread beyond the hot Midtown South Manhattan market. In the San Francisco Bay Area, both San Francisco and Silicon Valley once again ranked among the top markets for vacancy rate decrease, as did lagging Oakland. Although San Francisco and Silicon Valley remain the preferred locations for many tech tenants, Oakland is starting to see demand from tenants priced out of these areas. Other markets that have lagged behind in the economic and office market recoveries also saw significant improvements in vacancy in Q3 2014, including Stockton, Los Angeles and Stamford.
MARKET VACANCY RATE Q2 2014
VACANCY RATE Q3 2014
BASIS-POINT CHANGE
Stockton, CA 15.66% 14.12% -155
Montréal, QC 8.68% 7.31% -137
New York, NY - Downtown Manhattan 13.35% 12.20% -115
Greenville, SC 17.72% 16.68% -103
San Jose - Silicon Valley 10.70% 9.77% -94
Los Angeles, CA 17.97% 17.07% -90
Stamford, CT 20.97% 20.11% -86
San Francisco, CA 8.28% 7.46% -82
New York, NY - Midtown Manhattan 11.39% 10.57% -82
Kansas City, MO 12.37% 11.60% -77
NORTH AMERICA 13.33% 13.11% -22
LARGEST QUARTER-OVER-QUARTER DECREASE IN OVERALL VACANCY RATE | NA
Note: Latest data as of Q3 2014. Source: Colliers International.
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HIGHLIGHTS | Q3 2014 | OFFICE | NORTH AMERICA
Tenant Demand and Leasing ActivityICEE tenant leasing activity remained robust in 2014, with tenants seeking markets and properties that enable them to attract and retain top-flight talent. Technology companies continue to expand in, relocate to or open satellite offices in both well-established and emerging tech clusters in order to reap the benefits of these clusters, such as knowledge-sharing, access to specialized services and capital, and an established talent pool. Recent examples include Arkansas-based software company Acxiom, which announced in Q3 2014 plans to open an Austin office, and e-commerce titan Alibaba, which recently opened an office in Silicon Valley on the heels of its US IPO and will open a second office in Downtown Seattle near rival Amazon’s planned 4.1 million-square-foot campus. Boston area-based healthcare technology firm athenahealth is expanding into Austin and Atlanta, and is also relocating Bay Area employees from the suburban San Mateo submarket to San Francisco’s SoMa submarket, citing the strategic advantage of locating in SoMa in terms of attracting talent and engaging with clients. Also in San Francisco, Bloomberg announced plans this quarter to open an R&D office, citing the region’s deep talent pool in data science and analysis. Google continues its astounding rate of expansion in Silicon Valley, recently purchasing six buildings at Redwood City’s Pacific Shores Center, which is adjacent to the CalTrain commuter rail, and leasing all of the 1.9 MSF of space under development at Sunnyvale’s Moffett Place. The company also purchased 188 Embarcadero and leased 250,000 SF at One Market’s Spear Tower in San Francisco in Q3 2014, underscoring the symbiotic technology industry growth occurring in suburban Silicon Valley and urban San Francisco.
The clustering trend is occurring in other industries as well. In Houston, energy companies and supporting firms continue to expand in and relocate to the market. For example, Boston area-based Doble Engineering recently opened its first Houston office and oil lab, seeking proximity to its energy industry clients.
Although downtown markets like San Francisco and New York have been among the fastest-growing areas for tech tenants, other markets that offer some of the same urban amenities have been benefiting from this growth as well. Atlanta, which posted the sixth-highest absorption year-to-date through Q3 2014, has experienced significant growth in its tech sector, especially submarkets such as Midtown and Buckhead that offer significant amenities and are transit-accessible. In addition to athenahealth, Twitter and Amazon have been expanding operations in the Atlanta area as well.
AbsorptionNorth American absorption totaled 17.8 MSF in Q3 2014, up from 16.9 MSF in Q2 2014 and 13.5 MSF in Q1 2014. Both the U.S. and Canada posted positive absorption during the quarter as well as year to date. In the U.S., absorption totaled 16.6 MSF, the sixth straight quarter in which absorption was above 14 MSF, and all but 18 of the 72 markets reporting Q3 data posted positive absorption. Dallas ranked first in quarterly absorption (2.2 MSF), followed by Midtown Manhattan (1.9 MSF), Downtown Manhattan (1.3 MSF) and Phoenix (1.2 MSF). In Canada, five of the nine markets reporting Q3 data posted positive absorption, led by Montreal (1.1 MSF), Calgary (449,000 SF) and Ottawa (253,000 SF).
In previous reports, we highlighted the dominance of ICEE markets during the current recovery. Indeed, this trend continued through the first half of 2014. During the first two quarters of the year, absorption in the primary ICEE markets totaled 15.1 MSF, roughly two-thirds higher than the 9.2 MSF of
absorption in the primary FIRE markets. However, in Q3 2014, absorption in the primary FIRE markets totaled 6.9 MSF, nearing the ICEE market total of 7.9 MSF. In fact, all of the primary FIRE markets that Colliers tracks posted positive absorption year-to-date, and all but two posted positive absorption in Q3 2014. This is a noteworthy shift in market dynamics and reflects the contributions to office demand from a greater number of industries and sectors rather than the handful that dominated earlier in the cycle.
Construction ActivityAs the market has improved, office construction activity has increased in recent quarters but remains low overall and focused on the strongest cities. Further along in both the economic and office market cycles, Canada is ahead of the U.S. in terms of new supply. As of Q3 2014, 20.7 MSF were under construction in the Canadian markets tracked by Colliers, amounting to 4.6% of existing inventory. In the U.S. markets tracked by Colliers, 88.9 MSF were underway, representing just 1.5% of existing inventory.
Although still trailing the Canadian office market, development activity in the U.S. has been rising. The amount of space underway in Q3 2014 was the highest since Q4 2008 and was up nearly 40% from Q3 2013. Construction activity is occurring in a greater number of U.S. markets; as of Q3 2014, 23 markets had no construction underway, down from 31 one year earlier.
Despite the increase in construction activity, development remains highly concentrated in a small number of markets. The top 10 U.S. markets accounted for 60.2 MSF under construction or about 68% of total square footage underway, the same percentage as one year earlier. Houston alone accounts for about 16% of North American office space underway and nearly 20% of U.S. office space under construction. Leading tech markets San Francisco, Silicon Valley, Boston, Seattle and Midtown South Manhattan, most of which have vacancy rates below 10%, account for more than 27 MSF underway or more than 30% of all U.S. office space under construction. Tech and energy companies continue to aggressively pursue large blocks of space in new buildings in the most desirable markets and submarkets in anticipation of future growth, as well as due to a lack of available existing space in many of these markets. Also, many REITs are disposing of existing assets and using the proceeds on their development pipelines in the hottest markets where pricing is nearing or exceeding replacement costs. As an example of both of these trends, Kilroy Realty Corporation recently inked a lease with cloud file management provider Box
MARKET ABSORPTION (MSF) MARKET ABSORPTION
(MSF)
Dallas, TX 2.21 Boston, MA 1.08
NYC - Midtown Manhattan 1.88 Chicago, IL 0.96
NYC - Downtown Manhattan 1.27 San Francisco, CA 0.78
Phoenix, AZ 1.24 Los Angeles, CA 0.77
Montréal, QC 1.10 NYC - Midtown South Manhattan 0.77
YTD NORTH AMERICA ABSORPTION: 17.8 MSF
TOP MARKETS FOR METRO OFFICE ABSORPTION | YTD | NA
Source: Colliers International.
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HIGHLIGHTS | Q3 2014 | OFFICE | NORTH AMERICA
Los Angeles County. A lack of large blocks of space, a low overall vacancy rate compared with the overall Los Angeles market and the revitalization of the area through mixed-use, residential and entertainment projects in recent years have been driving investor confidence in the submarket.
Still-low levels of development activity in most markets illustrate the measured approach to development that developers continue to take during the current recovery. The ratio of absorption to new supply -- one of the key metrics that we use to gauge the supply-demand balance of the CRE markets -- was 2.2:1.0 in Q3 2014, indicating that office users absorbed more than twice the amount of space that was delivered to the market during the quarter. Indeed, absorption has outpaced new supply in all but one quarter since Q3 2010. Based on current construction levels and positive absorption trends, we expect this trend to persist into 2015.
In addition to overall low levels of construction activity, residential conversions continue to remove office space from the market, particularly in dense urban areas favored by the Millennial generation. This trend is occurring in traditional urban residential markets such as New York, where Claremont Group recently announced plans to convert a 100,000-square-foot Financial District office building to luxury condos. However, conversions are also occurring in historically less popular residential downtown areas in the South and Midwest in response to demand from young residents. For example, multiple conversions are planned for or underway in Downtown Milwaukee, including Vangard Group’s recently announced redevelopment of the Germania Building. Also, in Downtown Kansas City, much of the office space in the underused Commerce Tower was removed from the market in Q3 2014 to be redeveloped into apartments. The ongoing maturation of a Millennial cohort that is expected to account for 50% of the workforce by 2020, coupled with an improving economy that is enabling more young adults to form households, should drive this trend for the foreseeable future.
CAPITAL MARKETS & TRANSACTION ACTIVITYInterest rates continue to defy expectations, remaining near historically low levels despite the end of the Federal Reserve’s bond-buying programs in October and anticipated interest rate hikes beginning in 2015. Amid geopolitical turmoil and economic weakness in many regions across the globe including Europe and Asia, investors continue to pile into safe U.S. Treasuries, suppressing yields. These fears also continue to drive demand for both U.S. and Canadian real estate, with both countries viewed as bright spots globally, especially in light of the positive economic trends highlighted in this report. In particular, improving office market fundamentals are attracting greater interest in the property type. A number of REITs are capitalizing on strong demand for office assets by disposing of non-core assets. These trends boosted aggregate transaction volume in the U.S. and Canada to $32.0 billion in Q3 2014, the highest quarterly total this year according to Real Capital Analytics. Also, 12-month trailing transaction volume reached $126.1 billion through Q3 2014, the highest 12-month trailing total since Q1 2008.
Average cap rates have decreased to the high end of the 6% range in the U.S. and the mid-5% range in Canada, but these figures vary wildly by
MSA CONSTRUCTION (MSF)
Houston, TX 17.28
San Jose - Silicon Valley 8.26
Toronto, ON 6.80
Dallas, TX 5.36
Seattle/Puget Sound, WA 5.18
Boston, MA 5.11
San Francisco, CA 4.97
Washington DC 4.74
Calgary, AB 4.63
New York, NY - Midtown South Manhattan 3.60
TOP MARKETS FOR OFFICE SPACE UNDER CONSTRUCTION - Q3 2014 - NA
Note: Rankings are based on the 87 U.S. and Canadian markets tracked by Colliers International. Source: Colliers International.
for the entire Crossing/900 development under construction in Redwood City on San Francisco’s Peninsula.
Development is also occurring in submarkets where demand is stronger than in the overall metropolitan area. Tishman Speyer broke ground in Q3 2014 on the 500,000 square-foot Three Alliance Center, a speculative office tower in Atlanta’s Buckhead submarket, which has one of the lowest vacancy rates in the Atlanta metro area. In Kansas City, a lack of Class A options in Johnson County prompted Block Real Estate Services to announce groundbreaking on Pinnacle Corporate Centre V in September. In Los Angeles’ Hollywood submarket, which has successfully attracted tech, entertainment and other creative tenants in recent years, Hudson Pacific Properties broke ground in Q3 2014 on 405,000 SF of office space at Sunset Bronson Studios, bringing the total square footage underway in that submarket to 1.1 MSF, accounting for 44% of all construction underway in
MARKET SQUARE FEET UNDERWAY
% OF EXISTING INVENTORY
San Jose - Silicon Valley 8,258,649 11.30%
Edmonton, AB 2,287,893 8.58%
Houston, TX 17,277,411 8.18%
Calgary, AB 4,633,348 6.98%
Vancouver, BC 3,208,682 5.88%
San Francisco, CA 4,965,035 5.56%
Toronto, ON 6,801,189 4.91%
Regina, SK 221,000 4.89%
Seattle/Puget Sound, WA 5,184,094 4.62%Boston, MA 5,108,261 2.91%
NORTH AMERICA 109,556,173 1.71%
CONSTRUCTION AS % OF EXISTING INVENTORY - Q3 2014 - NA
Note: Rankings are based on the 87 U.S. and Canadian markets tracked by Colliers International. Source: Colliers International
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HIGHLIGHTS | Q3 2014 | OFFICE | NORTH AMERICA
region and asset type. Top-tier properties in gateway markets such as San Francisco and New York have been trading in the 3% to 4% range, while cap rates for recent transactions in Sacramento and Cincinnati were in the 9.0% to 9.5% range. According to Real Capital Analytics, the average cap rate in the six major U.S. metros (Boston, Chicago, Washington, D.C., Los Angeles, New York and San Francisco) decreased to 4.1%, the lowest rate on record, in Q3 2014, as demand for gateway assets from both domestic and foreign capital sources remained voracious.
Growth in foreign investment in North American office properties has been even stronger than overall investment growth. Year-to-date through October, cross-border investment into the U.S. and Canada totaled $17.9 billion, exceeding the full-year total for 2013 and reaching the highest level since 2007. In fact, cross-border volume is approaching the previous cyclical peak of $21.6 billion in 2006, in contrast with overall transaction volume which has recovered only to about half of its the previous peak. After Canada, Norway is now the largest cross-border investor in the U.S. as its government pension fund aggressively pursues assets in gateway markets including New York, Boston, Washington, D.C., and San Francisco. Asian countries remain a major source of capital for U.S. office properties, with Hong Kong, South Korea, Singapore, China and Japan all ranking among the top countries for cross-border flows year-to-date. Like domestic investors, foreign investors are increasingly considering secondary markets. In September, German fund Union Investment Real Estate purchased Target-anchored 50 South 10th Street in Minneapolis for $330 per square foot, well above the metro average of $113 in Q3 2014 according to Real Capital Analytics data.
Although interest rates have remained low to this point, expectations for higher interest rates in 2015, particularly following the Fed’s confirmation of the end of its bond-buying program, should drive a growing amount of investor interest to geographies that have been less favored up to this point in the cycle, boosting transaction volume and narrowing cap rate-to-Treasury spreads in those areas. In particular, suburban assets, especially those that are accessible to transit options, provide on-site and nearby amenities, and offer flexible, open floorplans that enable denser employee configurations, should benefit from growing demand. Secondary and tertiary markets that have been lagging in the recovery but are starting to experience stronger employment growth and absorption also should post stronger transaction activity. In addition, secondary markets with concentrations of ICEE industries, such as Portland, Pittsburgh, Nashville and Raleigh-Durham, will likely see greater investor interest as investors respond to organic growth as well as tenant relocations -- both ICEE firms and otherwise -- from higher-cost markets such as New York and San Francisco.
MOODY’S/RCA COMMERCIAL PROPERTY PRICE INDICES - US OFFICE
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Major Market-CBD Non-Major Market-CBD Major Market-Sub Non-Major Market-Sub
Long Island, NY 74,884,709 80,000 80,000 20,000 10.12% 10.23% -63,544 -115,183New Jersey - Central 129,118,877 0 100,826 1,298,674 14.53% 14.74% 285,158 960,371
New Jersey - Northern 163,981,980 519,108 594,595 0 15.66% 15.33% 541,457 1,000,459
Philadelphia, PA 110,247,204 0 605,631 746,000 15.05% 14.74% 294,983 625,492
Washington DC 289,209,866 498,270 2,454,672 3,211,891 17.26% 15.03% -303,325 -955,877Westchester County, NY 37,680,319 0 0 0 13.41% 14.27% -322,760 -463,982
Northeast Total 1,149,799,654 1,439,359 5,207,781 9,316,988 14.60% 14.12% 604,512 4,245,729
SOUTH
Atlanta, GA 171,738,942 0 0 2,111,298 16.06% 17.15% 486,282 1,780,861
Birmingham, AL 14,676,855 0 0 0 14.19% 13.43% -20,555 -25,355
GlossaryInventory — Includes all existing multi- or single-tenant leased and owner-occupied office properties greater than or equal to 10,000 square feet (net rentable area). In some larger markets this minimum size threshold may vary up to 50,000 square feet. Does not include medical or government buildings.
Vacancy Rate — Percentage of total inventory physically vacant as of the survey date, including direct vacant and sublease space.
Absorption — Net change in physically occupied space over a given period of time.
New Supply — Includes completed speculative and build-to-suit construction. New supply quoted on a net basis after any demolitions or conversions.
Annual Quoted Rent — Includes all costs associated with occupying a full floor in the mid-rise portion of a Class A building, inclusive of taxes, insurance, maintenance, janitorial and utilities (electricity surcharges added where applicable). All office rents in this report are quoted on an annual, gross per square foot basis. Rent calculations do not include sublease space.
Cap Rate — (Or going-in cap rate) Capitalization rates in this survey are based on multi-tenant institutional grade buildings fully leased at market rents. Cap rates are calculated by dividing net operating income (NOI) by purchase price.
NOTE: SF = square feet
MSF = million square feet
PSF = per square foot
CBD = central business district
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FOR MORE INFORMATION
Andrea B. CrossOffice Research Manager | USA TEL +1 415 288 7892 EMAIL [email protected]
CONTRIBUTORS
Jeff Simonson Senior Research Analyst | USA
Cliff Plank National Director | GIS & Mapping
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The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.
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VACANCY RATES
13.46 8.43
60% of the 110 MSF underway in North America is located in the top 10 metro areas
