What's on the horizon for the U.S. Skyline?

What’s the beat of the Skyline?2016 overview and trends

June 2016

2

Skyline at a glance

The Skyline set continues to demonstrate success…. From a fundamentals perspective, the top-tier office set posts significantly lower vacancy, higher rents and more developer interest in relative terms than the overall market.

The top of the market continues to outperform, but faces competition from emerging segments

Overall

CBD

Skyline

Trophy

Trophy U/C

$20 $25 $30 $35 $40 $45 $50 $55 $60 $65

$32.28

$43.42

$43.79

$56.82

$61.82

Average asking rent ($ p.s.f.)

3

Skyline at a glance

JLL’s Skyline focuses on the top tier of the office market, looking at some of the most iconic and highest-rent properties within CBDs and urban cores.

The top of the market continues to outperform, but faces competition from emerging segments

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016400,000,000

450,000,000

500,000,000

550,000,000

600,000,000

650,000,000

800

850

900

950

1,000

1,050

1,100RBA (s.f.) Numer of buildings

RBA

(s.f.

)

Num

ber o

f bui

ldin

gs

TrophyNon-Trophy

50.6%Trophy share

of supply

4

What are the trends in

2016?

5

1.Gone today, here tomorrowMany markets are expecting to see substantial office building deliveries, which will begin to shift the balance from landlord-favorable conditions and ease the leasing environment for tenants.

6

2.More, more, morePremium pricing for coveted Skyline buildings will be exacerbated as new Trophy buildings are delivered, forcing some tenants to look to lower cost options or different markets altogether.

7

3.Ready, steady, goThe global economy combined with the concern over the growth trajectory of the technology industry, continues to weigh on the minds of investors.

8

4.On the roadCost and competition in primary markets mean Skyline assets are harder to acquire, if at all. Investors are looking to hot secondary markets where rent growth is still achievable and tenant demand persists.

9

5.What have you done for me lately?Despite the rise in popularity of older creative buildings and fringe markets, Skyline assets still have lasting power, but only if owners meet the needs of tenants to remain competitive.

10

Vacancy

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 20166.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

16.0%

Vaca

ncy

(%)

Both direct and total vacancy continue to fall, but remain well above previous lows

12.7%Total vacancy

11.8%Direct vacancy

Source: JLL Research

Vacancy rate (%)

11

Direct vacancy

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 20160.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

Vaca

ncy

(%)

Direct vacancy for Trophy properties has fallen into the single-digits for the first time this cycle

14.2%Non-Trophy

9.6%Trophy

Source: JLL Research

Vacancy rate (%)

12

Net absorption

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016-5,000,000

0

5,000,000

10,000,000

15,000,000

20,000,000

82.0%

83.0%

84.0%

85.0%

86.0%

87.0%

88.0%

89.0%

90.0%

Net absorption (s.f.) Occupancy (%)

Net a

bsor

ptio

n (s

.f.)

Net a

bsor

ptio

n (%

)

Limited space options and strong growth in 2014 and 2015 slowed down gains in Q1

Source: JLL Research

13

2016 Skyline clockThe Skyline is enterting a new phase in the cycle after achieving peak rent growth

Peakingphase

Fallingphase

Risingphase

Bottomingphase

Chicago, New York, Orange County, Philadelphia

Denver

Oakland, Seattle

Austin, Bellevue, Fort Lauderdale, Raleigh

Dallas

Charlotte, Salt Lake CityHudson Waterfront, Milwaukee, West Palm Beach

Baltimore, Cincinnati, Detroit, Indianapolis,Minneapolis, Stamford, Washington, DC

San Francisco

Atlanta, Century City, Fort Worth, Tampa

Portland

Boston, Los Angeles, Miami, San Diego, United States

Hampton Roads, Newark, Phoenix, Pittsburgh, St. Louis

Richmond

Cleveland

Columbus

Houston

Orlando

Wilmington

Sacramento

Source: JLL Research

14

Average asking rent

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016$10

$15

$20

$25

$30

$35

$40

$45

$50

Aver

age

aski

ng re

nt ($

p.s

.f.)

Rents continue to reach record levels, rate of growth slowing markedly

$38.612008

$43.79Q1 2016

Skyline rents are 13.4 percent above previous

peak in 2008

Source: JLL Research

$43.79Skyline

$32.28Overall

Direct averageasking rent ($ p.s.f.)

15

Average asking rent

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016$0

$10

$20

$30

$40

$50

$60

$70

Aver

age

aski

ng re

nt ($

p.s

.f.)

Demand for non-Trophy space has boosted rents to new highs; Trophy beginning to flatline

$56.82Trophy

$33.73Non-Trophy

Source: JLL Research

$32.28Overall

Direct averageasking rent ($ p.s.f.)

16

Under construction

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 20160

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

40,000,000

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

Under construction (s.f.) Preleased (%)

Unde

r con

stru

ctio

n (s

.f.)

Prel

ease

d (%

)

Development slightly up in Q1 at a record 34.1 m.s.f.; preleasing down as confidence improves

Source: JLL Research

17

Market Under construction (s.f.)

New York 12,571,498

San Francisco 2,584,357

Chicago 2,250,000

Seattle 2,227,875

Philadelphia 1,970,864

Denver 1,326,821

Boston 1,215,000

Bellevue 1,078,693

Orange County 1,065,424

All other markets 8,855,014

Skyline 34,080,122

37%

8%7%7%

6%

4%

4%

3%

26%

New York San Francisco Chicago Seattle Philadelphia

Denver Boston Bellevue All other markets

Under constructionHudson Yards pushes New York well above other markets in terms of development

Source: JLL Research

18

Sales volume

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 20160

20,000,000

40,000,000

60,000,000

80,000,000

100,000,000

120,000,000

Sale

s vo

lum

e (s

.f.)

Sales volume on track to meet 2015 levels, but continues to be well below previous cycle

Source: JLL Research

19

Sales volume and pricing

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016$0

$10,000,000,000

$20,000,000,000

$30,000,000,000

$40,000,000,000

$50,000,000,000

$60,000,000,000

$0

$50

$100

$150

$200

$250

$300

$350

$400

$450

$500

Sales volume Price per square foot

Sale

s vo

lum

e ($

)

Sale

s pr

ice

($ p

.s.f.

)

Pricing growth of 26.7 percent from 2015 to Q1 2016 far exceeds expected increase in volume

Source: JLL Research

20

Average cap rate

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 20164.0%

4.5%

5.0%

5.5%

6.0%

6.5%

7.0%

Aver

age

cap

rate

(%)

Inbound capital flows for longer-term holds compressing yields to near-5.0 levels

6.2%2008

5.3%Q1 2016

Cap rates are down 90bpfrom their previous low

Source: JLL Research

COPYRIGHT © JONES LANG LASALLE IP, INC. 2016

Julia GeorgulesDirector – Office Research+1 415 354 6908Julia.Georgules@am.jll.com

Phil RyanSenior Research Analyst – Office and Economy Research+1 202 719 6295Phil.Ryan@am.jll.com

What else is on the horizon for Skyline? Visit Skyline or contact us.