HIGHLIGHTS NORTH AMERICA WWW.COLLIERS.COM Q1 2014 | OFFICE MARKET INDICATORS Relative to prior period NORTH AMERICAN OFFICE MARKET Summary Statistics, Q1 2014 US Q1 2014 US Q2 2014* Canada Q1 2014 Canada Q2 2014* VACANCY NET ABSORPTION CONSTRUCTION RENTAL RATE** *Projected | Construction is the change in Under Construction **Rental rates for current quarter are for CBD. Rent forecast is for metro-wide rents. US CAN NA VACANCY RATE (%) 13.90 8.05 13.49 Change From Q4 2013 (%) -0.11 0.19 -0.09 ABSORPTION (MSF) 13.2 0.3 13.5 NEW CONSTRUCTION (MSF) 15.6 2.0 17.6 UNDER CONSTRUCTION (MSF) 70.8 21.3 92.1 ASKING RENTS PER SF US CAN Downtown Class A ($) 44.24 50.13 Change from Q4 2013 (%) 2.64 -0.46 Suburban Class A ($) 27.17 32.24 Change from Q4 2013 (%) 1.18 1.00 The Rise of the Sun Belt ANDREA CROSS National Office Research Manager | USA KEY TAKEAWAYS • North American office vacancy decreased by 9 basis points in Q1 2014 to 13.49%, on par with the rate of recovery during the last few years. Steady job growth is driving demand, but tenants’ more efficient use of space is limiting occupancy gains relative to previous cycles. • ICEE markets continue to lead office market recovery. Vacancy in the primary ICEE markets decreased by 26 bps this quarter, vs. just 4 bps in the primary FIRE markets. • Sun Belt markets also are key drivers of the current recovery. Despite accounting for only about 30% of U.S. office inventory tracked by Colliers, the Sun Belt represented nearly 60% of Q1 office absorption. • Construction activity in the U.S. remains low and is concentrated in markets with the strongest demand, e.g., Boston, San Francisco, Silicon Valley. Space under construction in U.S. and Canadian markets tracked by Colliers totaled 92.1 million square feet in Q1 2014, up from 88.2 million square feet in Q4 2013 and 74.4 million square feet in Q1 2013. • Domestic and foreign capital continues to target North American office properties: According to Real Capital Analytics, combined transaction volume in the U.S. and Canada increased by 36% year-over-year in Q1 2014. Demand is still strongest for assets in CBDs and major metros, although we anticipate rising activity in suburban and secondary markets due to the broadening economic and office market recoveries, and higher yields on properties in those areas.
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NORTH AMERICA HIGHLIGHTS - Colliers InternationalP. 2 | COLLIERS INTERNATIONAL HIGHLIGHTS 1 2014 OFICE ORTH AMERICA U.S. Economic Trends The U.S. economy began 2014 on a weak note,
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HIGHLIGHTSNORTH AMERICA
WWW.COLLIERS.COM
Q1 2014 | OFFICE
MARKET INDICATORSRelative to prior period
NORTH AMERICAN OFFICE MARKETSummary Statistics, Q1 2014
US Q1
2014
US Q2
2014*
Canada Q1
2014
Canada Q2
2014*
VACANCY NET ABSORPTION
CONSTRUCTION RENTAL RATE**
*Projected | Construction is the change in Under Construction
**Rental rates for current quarter are for CBD. Rent forecast is for metro-wide rents.
US CAN NA
VACANCY RATE (%) 13.90 8.05 13.49
Change From Q4 2013 (%) -0.11 0.19 -0.09
ABSORPTION (MSF) 13.2 0.3 13.5
NEW CONSTRUCTION (MSF) 15.6 2.0 17.6
UNDER CONSTRUCTION (MSF) 70.8 21.3 92.1
ASKING RENTS PER SF US CAN
Downtown Class A ($) 44.24 50.13
Change from Q4 2013 (%) 2.64 -0.46
Suburban Class A ($) 27.17 32.24
Change from Q4 2013 (%) 1.18 1.00
The Rise of the Sun Belt
ANDREA CROSS National Office Research Manager | USA
KEY TAKEAWAYS
• North American office vacancy decreased by 9 basis points in Q1 2014 to 13.49%, on par with the rate of recovery during the last few years. Steady job growth is driving demand, but tenants’ more efficient use of space is limiting occupancy gains relative to previous cycles.
• ICEE markets continue to lead office market recovery. Vacancy in the primary ICEE markets decreased by 26 bps this quarter, vs. just 4 bps in the primary FIRE markets.
• Sun Belt markets also are key drivers of the current recovery. Despite accounting for only about 30% of U.S. office inventory tracked by Colliers, the Sun Belt represented nearly 60% of Q1 office absorption.
• Construction activity in the U.S. remains low and is concentrated in markets with the strongest demand, e.g., Boston, San Francisco, Silicon Valley. Space under construction in U.S. and Canadian markets tracked by Colliers totaled 92.1 million square feet in Q1 2014, up from 88.2 million square feet in Q4 2013 and 74.4 million square feet in Q1 2013.
• Domestic and foreign capital continues to target North American office properties: According to Real Capital Analytics, combined transaction volume in the U.S. and Canada increased by 36% year-over-year in Q1 2014. Demand is still strongest for assets in CBDs and major metros, although we anticipate rising activity in suburban and secondary markets due to the broadening economic and office market recoveries, and higher yields on properties in those areas.
P. 2 | COLLIERS INTERNATIONAL
HIGHLIGHTS | Q1 2014 | OFFICE | NORTH AMERICA
U.S. Economic TrendsThe U.S. economy began 2014 on a weak note, with severe weather conditions throughout much of the nation. The term “Frozenomics” was coined to describe the resulting negative economic impact. At the time, we believed the damage from Frozenomics was overblown and would be short-lived, and our prediction has been borne out by recent economic data. According to the Bureau of Labor Statistics (BLS), the U.S. economy added 288,000 jobs in April 2014, the highest monthly total since Janu-ary 2012; also, job creation figures for February and March were revised upward by a total of 36,000. We regularly caution that BLS employment statistics are revised multiple times—often substantially—but, in this case, payroll processing firm ADP’s recent data on actual payroll statistics from 20% of the nation’s private-sector companies mirrors the BLS data. ADP reported steady acceleration in monthly job creation in early 2014, from 121,000 jobs added in January to 220,000 jobs added in April, with the four major geographical regions all exceeding their respective six-month trailing monthly averages.
Looking specifically at office-using employment, the bifurcated recovery continues, with strong growth in professional and business services pro-pelling nearly all of the growth in office demand during the current re-covery. Moreover, professional and business services growth accelerated through early 2014, with 77,000 jobs created in April—the highest total since late 2012, according to ADP data. Technology-related employment was the primary driver of this growth earlier in the cycle, but other com-
CHANGE IN EMPLOYMENT FROM CYCLICAL PEAK | US
Total Employment O�ce-Using Employment Professional & Business Services Financial Activities
-10%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
0 4 8 12 16 20 24 28 32 36 40 44
MONTHS
48 52 56 60 64 68 72 76 80 84 88
Latest data as of April 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
ponents of this sector, such as legal and accounting, have been adding jobs during the last 12 months, albeit at a modest pace. Recent data from Thomson Reuters indicated an increase in law firm transaction activity among 70% of the 150 large firms surveyed in Q1 2014, compared with just 32% one year earlier—a positive sign for this important component of office demand. Financial activities, the other primary component of
OFFICE VACANCY, INVENTORY AND ABSORPTION | Q1 2014 | NORTH AMERICA
HIGHLIGHTS | Q1 2014 | OFFICE | NORTH AMERICA
COLLIERS INTERNATIONAL | P. 3
office-using employment, remains weak, although the sector does appear to have bottomed. Other than a decrease in January, the financial activi-ties sector has not lost jobs on a monthly basis in more than three years, according to ADP.
In 2014, we expect the U.S. economic recovery to occur at a similar rate as in 2013, with steady but unspectacular job creation averaging less than 200,000 per month. However, the economy should gain steam as the year progresses compared with the Frozenomics-driven weakness at the beginning of the year. Given the second estimate of a 1.0% decline in GDP in Q1 2014, we expect GDP growth of less than 2.0% during 1H 2014. However, growth should accelerate during the year, supported by greater business and consumer confidence, the carry-forward effect of purchas-es delayed due to weather conditions earlier in the year, and incremental improvements in state and local government finances. Thus, we expect healthy 3.0% GDP growth in 2H 2014, resulting in annual GDP growth in the 2.5%–2.75% range.
Canada Economic TrendsLike the U.S., Canada was not immune to the bad weather effect in Q1 2014. GDP expanded by 1.7%, well ahead of the U.S. rate, but still a slow-down from 2.9% in Q4 2013. Similar to the U.S., we expect stronger GDP growth through the rest of 2014 as the temporary negative effect of the weather dissipates. For the year, the Canadian economy will likely mirror the trend of the last few years, expanding at a modest rate. The Con-ference Board of Canada projects 2.3% GDP growth, a slight increase from 1.7% in 2013 and lower than our expectations for U.S. economic growth. However, it is important to note that the Canadian economy ex-perienced a shallower and shorter recession than the U.S., and several years ago recovered all of the jobs lost during the downturn. Canada is in the midst of a moderate expansionary period rather than the protracted recovery occurring in the U.S. For 2014, the withdrawal of fiscal stimu-lus measures implemented in response to the recession, coupled with a cautious outlook among private sector firms, will likely prevent faster
economic growth in Canada. The Conference Board expects improved private investment activity in 2014, but relatively low when compared with historical levels.
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, totaling more than 6.4 billion square feet. The 75 U.S. markets account for nearly 6.0 billion square feet of tracked inventory, with the remaining 446 million square feet in Canada. Our coverage includes 21 markets with more than 100 million square feet of space, which combined account for 3.8 billion square feet, or nearly 60% of our office market inventory. The largest U.S. markets are New York, Washington, D.C., Chicago, Dallas and At-lanta; Toronto is the only Canadian market with more than 100 million square feet of space.
VACANCYVacancy rate trends in Q1 2014 mirrored those observed during the last few years. The slow but steady economic recovery, coupled with low levels of new supply, supported an 11 basis-point decrease in the U.S. vacancy rate, to 13.9%. Once again, the Canadian vacancy rate increased during the quarter as additional new supply came to market. Although Canada’s vacancy rate rose above 8%, it remains well below the 10% threshold reflective of a healthy market.
Intellectual capital, energy and education (ICEE) markets remain the lead-ers in the office market recovery. The vacancy rate in the primary ICEE markets decreased by 26 basis points during the quarter, compared with just a 4 basis-point decrease in the vacancy rate of the primary FIRE markets. ICEE markets still top the list of tightest markets, including Ba-kersfield, Pittsburgh, Calgary and San Francisco. However, many mar-kets without significant clusters of ICEE industries are improving as well, mirroring the broader economic recovery. Grand Rapids, Hartford and Downtown Manhattan were among the markets with the largest decrease in vacancy rate. Albuquerque, a laggard in the current recovery due in part to its dependence on federal government spending, also ranked high in terms of quarterly vacancy rate decrease, as did former housing-bust markets Fresno and Stockton. We are also observing an increasing amount of tenant spillover from the leading tech markets and submarkets, in which rents have increased significantly in recent years, to adjacent, lower-cost areas with greater availabilities. Northern California’s East Bay is finally experiencing some tenant spillover from Silicon Valley and San Francisco, where rents have skyrocketed and the number of large blocks of available space has di-minished. Several tenants in the health care, non-profit and gourmet food sectors left San Francisco recently for the lower rents and/or larger spaces available in the East Bay; and both Oakland and Walnut Creek
posted vacancy rate decreases in Q1 2014. In Chicago, mobile market-ing firm Punchkick Interactive will relocate from River North, one of the metro area’s leading tech submarkets, to the nearby East Loop later this year. With technology tenants driving up rents in the hottest tech markets, we will likely see more tenant spillover into other submarkets by both tech and non-tech tenants.
neighborhoods that historically were less desirable than core, central city locations like San Francisco and Manhattan. Etsy, Inc. is expanding its Brooklyn presence, moving its headquarters into 200,000 square feet in the DUMBO neighborhood, and has plans to nearly double the size of its workforce. Vibrant, walkable areas proximate to transit, in core markets as well as in emerging neighborhoods and office markets, will benefit from these trends.
With modest economic growth still occurring in Canada, the increase in the vacancy rate in recent quarters was primarily the result of more ef-ficient space utilization by tenants, as well as the large amount of new supply coming to market. The demand drivers vary by metro area, but— as in the U.S.—ICEE firms continue to boost demand for space in core markets. In Calgary, for example, where nearly 70% of office construc-tion in Canada was delivered in Q1 2014, demand from energy companies seeking large blocks of space remains robust even though the vacancy rate increased slightly during the quarter. In Vancouver, digital media and technology firms remain active, as well as firms entering the Vancou-ver market for the first time. Microsoft and Sony recently signed large deals for high-quality space in downtown Vancouver. Overall, demand has stagnated somewhat, but this is primarily due to tenants delaying leasing decisions until the large amount of supply under construction starts to hit the market. Some concern remains regarding the impact of this new space on vacancy in Class B buildings and older Class A buildings.
ABSORPTIONAlthough a broader range of industries have been adding jobs in recent quarters, the ICEE industries remain the dominant force in the office market. Absorption in the main ICEE markets outpaced absorption in the major FIRE markets by more than four to one in Q1 2014. Houston alone accounted for more than one-quarter of the 8.6 million square feet of ab-sorption in the ICEE markets, posting its highest quarterly absorption total since Q2 2007. Energy companies continue to drive the Houston market, accounting for nearly 80% of leasing activity in Q1 2014, as high oil prices support the industry’s growth.
Housto
n, TX
New Yo
rk, NY -
Midt
own S
outh
Boston
, MA
Dallas
, TX
Atlanta
, GA
New Yo
rk, NY -
Downto
wn
Baltim
ore, M
D
Phoe
nix, A
Z
Minnea
polis,
MN
New Je
rsey -
Centr
al
0.0
0.5
1.0
1.5
2.0
2.5 MSF
Source: Colliers International
TOP MARKETS FOR METRO OFFICE ABSORPTION | Q1 2014 | NA
MSAVACANCY RATE (%)Q1 2014
VACANCYRATE (%)Q4 2013
BASIS- POINT
CHANGE
Grand Rapids, MI 18.36 20.72 -236
Hartford, CT 12.82 14.49 -167
San Jose – Silicon Valley 10.81 12.44 -163
New York, NY – Downtown Manhattan 14.43 15.55 -112
Ottawa, ON 9.70 10.73 -103
New York, NY – Midtown South Manhattan 8.83 9.74 -91
Albuquerque, NM 18.42 19.28 -86
Fresno, CA 12.74 13.50 -76
Walnut Creek, CA 15.57 16.23 -65
Atlanta, GA 16.07 16.67 -59
NORTH AMERICA 13.49% 13.58% -9
LARGEST Q-o-Q DECREASE IN OVERALL VACANCY RATE | NA
Source: Colliers International
MARKET VACANCY (%) MARKET VACANCY (%)
Toronto, ON 5.92 Winnipeg, MB 8.46
Saskatoon, SK 6.22 Vancouver, BC 8.68
Montréal, QC 7.24 Calgary, AB 8.71
Bakersfield, CA 7.29 New York, NY – Midtown South 8.83
Pittsburgh, PA 8.09 Nashville, TN 9.15
NORTH AMERICA: 13.49%
Source: Colliers International
LOWEST OVERALL VACANCY RATES | Q1 2014 | NA
Also expected to drive the spillover trend is the increased desirability of residential neighborhoods in areas such as Oakland and Brooklyn. Many companies are seeking to locate near where their employees want to live, and many millennials have been priced out of, or prefer to live in,
HIGHLIGHTS | Q1 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 Steady70.13%
Expand11.69%
Contract11.69%
North American Downtown Markets:What was the trend in Free Rent (in months) o�ered by CBD landlords this quarter?
Same81.16%
Less13.04%
More5.80%
North American Downtown Markets:What was the trend for tenant improvement allowances o�ered by CBD landlords this quarter?
Same81.16%
Less11.59%
More7.25%
North American Suburban Markets:Excluding renewals, of the leases signed this quarter in your suburban market, did most tenants...?
Hold Steady65.75%
Expand26.03%
Contract8.22%
Charts above reflect % of markets reporting
As the recovery progresses, shortages of space are emerging in certain submarkets, or for some sizes or classes of space in metro areas that have been slow to recover overall. For example, in Sacramento, which still has an 18+ percent vacancy rate, tenants leased half of the blocks of space containing 100,000 square feet or more between mid-2013 and the end of Q1 2014, leaving few con-tiguous options for large users. However, options for smaller and mid-sized users remain abundant.
Although the economy continues to improve, many companies remain highly cost-conscious, as re-flected in their real estate decisions. We continue to see large companies dividing functions into mul-tiple geographical locations in order to reduce operating expenses, affecting office market dynamics across the United States. Within the financial services industry, many major banks have been moving mid-level and back-office functions to lower-cost locations in the South and Midwest. As of April 2014, financial activities employment exceeded pre-recession peak levels in many metro areas within these regions, even in hard-hit housing markets such as Jacksonville, due to financial companies in-cluding Deutsche Bank, Goldman Sachs, Credit Suisse and BNY Mellon expanding operations. We are seeing a similar trend in non-financial industries as well. For example, GE recently announced plans to consolidate 1,400 employees, including human resources, IT, accounting and procurement profes-sionals, into a new Global Operations Center in the Cincinnati area by 2017. Many of the employees will come from outside of Cincinnati, and the facility eventually could house up to 2,000 employees in total, resulting in substantial net job creation in the area from just this company. In KPMG’s most recent Competitive Alternatives study, Cincinnati ranked second among large metro areas in terms of business costs, and indeed we are seeing strong job creation in many of the markets at the top of these rankings. We expect that low costs of doing business, coupled with aggressive company recruitment through tax and other incentives by states such as Texas, will result in continued tenant movement from higher-cost metros.
Consolidations and reconfigurations of space throughout the public and private sectors continue to limit office absorption. The General Services Administration (GSA) remains among the most aggres-sive in terms of downsizing, exemplified by its April renewal for 217,313 square feet in College Park, GA, for the Federal Aviation Administration’s Southern Regional Office. The GSA plans to relocate an additional 330 employees from another space at which its lease is expiring, bringing the College Park location’s headcount from less than 700 to about 1,000. With a federal budget in place, the GSA is be-ginning to deal with the backlog of expiring leases that built up during the last few years; one-quarter of all federal leases are set to expire in 2014. However, the agency will continue to utilize denser configurations and reduce its real estate footprint in order to cut real estate costs. Efficient buildings capable of handling high employee densities are in demand, potentially at the expense of incumbent buildings. The federal government is also looking to better utilize its real estate portfolio, moving some employees out of leased space into owned space. For example, the Department of Veterans Affairs recently announced plans to move 800 employees out of leased space in downtown St. Louis into a GSA-owned building in suburban Overland, MO.
Private-sector firms are attempting to cut costs as well, through more efficient space utilization—although the potential for this varies by industry and the individual tenant’s needs. Firms are using technology to monitor desk utilization rates, with some reporting less than 50% of workspaces used during business hours, indicating significant potential for increasing densities through the use of shared spaces. Many firms are reporting a desire for shorter, more flexible lease terms in order to respond to ever-changing technologies and uncertain business conditions.
CONSTRUCTION ACTIVITYConstruction trends reflect where the U.S. and Canada are respectively in the office market cycle. Outside of the strongest metro areas and submarkets, construction activity remains low in the U.S. due to more efficient tenant space usage, elevated vacancy rates and high construction costs. Can-ada’s economic expansion, on the other hand, is driving a large amount of construction activity, and new supply is just starting to hit the market in many metros.
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HIGHLIGHTS | Q1 2014 | OFFICE | NORTH AMERICA
Although still low, development activity has been increasing, albeit slowly. Square footage under construction in the U.S. and Canadian markets tracked by Colliers totaled 92.1 million square feet in Q1 2014, up from 88.2 million square feet in Q4 2013 and 74.4 million square feet in Q1 2013. Driven by voracious demand from energy companies, Houston con-tinues to lead the U.S. both in terms of square footage underway (1 5.1 MSF) and square footage underway as a percentage of existing inventory (7.2%). Most of the other top U.S. markets for construction activity are tech-driven, such as San Francisco, San Jose, Boston and Seattle. Like the energy industry, tech tenant demand remains robust, with large ten-ants pre-leasing significant amounts of space or entire buildings, prompt-ing additional construction. Several of the largest deals in the San Fran-cisco office market’s history were signed in buildings under construction in recent months, including Salesforce.com’s lease for more than half of the 1.4 million square feet of the tower anchoring the Transbay development (now called the Salesforce Tower), and LinkedIn’s lease of the entire 26-floor, 450,000-square-foot tower under construction at 222 Second Street.
Toronto, Calgary and Vancouver are the most active development markets in Canada, accounting for about 83% of office construction underway na-tionwide. In Calgary, total square footage under development accounted for more than 10% of existing inventory as of Q1 2014, the highest share of any U.S. or Canadian market. Like Houston, developers have responded to robust growth among Calgary energy firms, a trend that continued in Q1 2014 with expansions by a number of companies including Athabasca Oil Corp., Progress Energy, TransCanada Pipelines and Total Energy Ser-vices. Higher anticipated natural gas prices and optimism regarding lique-fied natural gas (LNG) projects and pipeline capacity are fueling construc-tion activity and tenant demand.
The measured supply response, particularly in the U.S., should contribute to a continued moderate office market recovery. Given high construction costs and only moderate increases in tenant demand in most markets, we expect development activity to remain low and targeted, with speculative
development focused on the strongest metro areas (e.g., San Francisco, Boston) as well as the strongest submarkets within lagging metro areas (e.g., West Los Angeles, Chandler, AZ).
The Rise of the Sun BeltLooking at both economic and office market indicators, the resurgence of the Sun Belt is evident. The region’s states and metropolitan areas pos-sess unique characteristics, such as the robust energy sector in Texas, strong technology clusters in Austin and North Carolina’s Research Tri-angle, and the expanding health care industry in Nashville. However, a common thread running through most of the region is a low cost of doing business that is proving attractive to expanding or relocating companies in a range of industries.
MSA SQUARE FEET UNDERWAY
% OF EXISTING INVENTORY
Calgary, AB 6,678,741 10.08
Vancouver, BC 4,140,952 7.68
Houston, TX 15,052,344 7.17
San Francisco, CA 5,381,410 6.06
Halifax, NS 647,446 5.78
Toronto, ON 6,799,062 4.83
Regina, SK 200,000 4.53
Edmonton, AB 886,748 4.28
San Jose/Silicon Valley, CA 2,305,928 3.18Seattle/Puget Sound, WA 3,436,907 3.06
NORTH AMERICA 92,063,015 1.43%
CONSTRUCTION AS % OF EXISTING INVENTORY | Q1 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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Toron
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N
Calga
ry, A
B
Washin
gton,
DC
San F
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Dallas
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Vanc
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New Yo
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Seatt
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0
2
4
6
8
10
12
14
16 MSF
NOTE: Rankings are based on the 87 U.S. and Canadian markets tracked by Colliers InternationalSource: Colliers International
TOP MARKETS FOR OFFICE SPACE UNDER CONSTRUCTION | Q1 2014 | NA
CANADA COST INDEX
Montréal 92.0
Toronto 93.6Vancouver 94.6UNITED STATES COST INDEX
Atlanta 94.7
Cincinnati 94.9
Orlando 95.1
Charlotte 95.2
San Antonio 95.6
Tampa 95.8Cleveland 96.3
U.S. BASELINE 100.0
LOWEST-COST CITIES WITH POPULATION > 2 MILLION | U.S. & CANADA
Source: 2014 KPMG Competitive Alternatives
P. 7 | COLLIERS INTERNATIONAL
HIGHLIGHTS | Q1 2014 | OFFICE | NORTH AMERICA
Office-using job growth is coming from a range of industries including financial services, with many firms moving operations to or expanding in lower-cost markets such as Jacksonville and Tampa. Charlotte also is in the midst of a remarkable recovery: Its urban yet affordable lifestyle appeals to millennial graduates of Southeastern universities, providing an attractive talent base to companies in a variety of industries.
The strength in the Sun Belt’s job market is spreading to the office mar-ket. Despite accounting for only 30% of U.S. office inventory tracked by Colliers, the Sun Belt markets represented nearly 60% of office absorp-tion during Q1 2014. Houston alone accounted for more than 17% of U.S. absorption during the quarter, with continued robust growth in the energy
CANADA COST INDEX
Edmonton 94.0
UNITED STATES COST INDEX
New Orleans 94.1
Nashville 94.9
Oklahoma City 95.1
Raleigh 95.6
Memphis 95.8
Indianapolis 96.2
Salt Lake City 96.6
Austin 96.8
Buffalo 96.9
U.S. BASELINE 100.0
LOWEST-COST CITIES WITH POPULATION 1-2 MILLION | US & CANADA
Source: 2014 KPMG Competitive Alternatives
Examining office-using employment trends from multiple angles, Sun Belt markets rank high. As noted in previous reports, ICEE markets Austin, Raleigh, Houston and Dallas-Fort Worth, as well as health care center Nashville, all rank among the top ten U.S. markets in terms of the per-centage of office-using jobs recovered. In fact, all of these markets have recovered more than twice the number of office-using jobs that they lost during the recession. However, looking at markets with the strongest year-over-year office-using job growth in April 2014, the list has broad-ened beyond the leading markets to include many previously lagging met-ropolitan areas. Among the top 20 markets for office-using job growth in April are 12 Sun Belt metros, including hard-hit Florida markets Cape Coral-Fort Myers, Jacksonville, Orlando, Tampa and West Palm Beach.
MSA PERCENT CHANGE MSA PERCENT
CHANGE
Reno 9.8 Orlando 4.5
Cape Coral-Fort Myers 8.9 San Jose/Silicon Valley 4.5
Raleigh 8.7 West Palm Beach 4.4
Savannah 7.4 Dallas-Fort Worth 4.0
Nashville 7.0 Harrisburg 3.9
Fresno 6.8 San Francisco 3.8
Austin 6.4 Greenville, SC 3.7
Holland, MI 6.1 Tampa-St. Petersburg 3.6
Jacksonville 4.9 Portsmouth 3.4
Indianapolis 4.9 Charlotte 3.4
UNITED STATES: 2.4%
NOTE: Includes markets tracked by Colliers International; all data are seasonally adjusted as of April 2014.Sources: Bureau of Labor Statistics, Federal Reserve Bank of St. Louis, Colliers International
FASTEST OFFICE-USING EMPLOYMENT GROWTH | APRIL 2013-2014 | US
MSA% OF JOBS
RECOVEREDMSA
% OF JOBS
RECOVERED
Ann Arbor 800.0 Pittsburgh 231.8
Midland, TX 400.0 Richmond 160.9
St. Louis 385.2 Trenton 137.5
Lincoln, NE 375.0 Phoenix 136.6
Nashville 355.6 Holland, MI 133.3
Dallas-Fort Worth 308.4 Grand Rapids, MI 122.7
Omaha 277.8 Jacksonville 106.6
Austin 234.5
UNITED STATES: 33.5%
NOTE: Includes markets tracked by Colliers International; all data are seasonally adjusted as of April 2014. Sources: Bureau of Labor Statistics, Federal Reserve Bank of St. Louis, Colliers International
MARKETS WITH FINANCIAL ACTIVITIES EMPLOYMENT AT OR ABOVE PRE-RECESSION PEAK | APRIL 2014 | US
NOTE: Includes markets tracked by Colliers International; all data are seasonally adjusted as of April 2014.Sources: Bureau of Labor Statistics, Federal Reserve Bank of St. Louis, Colliers International
TOP 20 MARKETS FOR OFFICE-USING JOBS RECOVERED SINCE RECESSION | APRIL 2014 | US
P. 8 | COLLIERS INTERNATIONAL
HIGHLIGHTS | Q1 2014 | OFFICE | NORTH AMERICA
sector. Corporate relocations to the Dallas-Fort Worth region continue at a brisk pace, highlighted this quarter by Toyota’s announcement that it will move its long-time headquarters from Torrance, CA, to Plano. Toyota has already leased 120,000 square feet of space in the region to house workers during construction of its new one-million-square-foot campus. The Toyota deal underscores the success that Texas, in particular—and the Sun Belt generally—has had in attracting companies and its impact on the office market. In another example of this trend, Prince Global Sports recently announced that it will move its headquarters from New Jersey to Atlanta’s Buckhead submarket.
The Sun Belt’s strength is unlikely to abate anytime soon, as increas-ingly cost-conscious firms look for low-cost locations for expansion and relocation. ICEE hubs like Austin and Raleigh-Durham will benefit from knowledge industry growth. The Sun Belt also will benefit from the trend of firms dividing functions across regions, with companies moving mid-level and back-office functions to lower-cost areas. Finally, although the Sun Belt has a more suburban profile compared with denser Northeast and West Coast metros, many Sun Belt markets are investing in pub-lic transit and mixed-use, walkable developments, which are particularly popular among millennials. Examples include:
• Raleigh-Durham – Research Triangle Park (RTP): RTP recently acquired 100 additional acres of adjacent land for the development of up to three million square feet of higher-density development in this suburban tech park in the Raleigh-Durham metro area, the first mixed-use space at the 55-year-old park;
• Dallas-Fort Worth – City Line: The location of State Farm’s new two-million-square-foot regional center in Richardson, TX, this $1.5 billion mixed-use project under development by KDC also will contain two hotels, nearly 4,000 apartments, 300,000 square feet of retail and entertainment space, three parks, pedestrian walkways, and open space for concerts and other public gatherings;
• Atlanta – Ponce City Market: This high-profile renovation of the Sears, Roebuck & Company building near Midtown and adjacent to the Atlanta BeltLine will feature 475,000 of Class A, loft office space, 330,000 square feet of retail and restaurants, and 259 residential units in a walkable, creative environment reminiscent of denser tech hubs such as San Francisco;
• Orlando – SunRail and Bike Share: Several development and transit projects more typical of denser urban areas are opening in Orlando. On the heels of the May 2014 opening of SunRail, the region’s new commuter rail system, SunCycles will begin offering rentable bicycles throughout Orlando, including near SunRail stations. Also, several transit-adjacent co-working facilities are in the works.
These types of mixed-use developments are well suited to the prefer-ences of the millennials, who represent an increasing share of the U.S. workforce as they enter the labor force and the baby boomers retire. The millennial cohort could exceed 50% of the workforce by 2020 and reach 75% of the workforce by 2025. As more millennials start families in the coming years, many Sun Belt markets will be well-positioned to offer a variety of living and working environments, including affordable single-family housing as well as the types of walkable, mixed-use developments for which this cohort has demonstrated a preference.
Capital Markets & Transaction ActivityThe office investment market remained active through Q1 2014, particu-larly in CBD markets and major metro areas. Capital from both domestic and international sources for investment in U.S. real estate remains plen-tiful, supporting price increases and transaction volume gains. Accord-ing to Real Capital Analytics (RCA), total transaction volume in the U.S. and Canada increased by 36% year-over-year in Q1 2014, and 12-month trailing investment volume increased by 30%, reaching $114.9 billion, the highest total since Q2 2008. Although investor interest is spreading be-yond gateway cities and CBDs in search of higher yields, demand remains robust in core markets. In the U.S., CBDs posted a much larger gain in year-over-year transaction volume (60%) compared with suburban mar-kets (10%), and investment volume increased the most in major metros, followed by secondary and tertiary markets, respectively. Likewise, cap rate compression was greatest in CBD markets and major metros.
NOTE: Latest data as of Q1 2014; all data are 12-month trailing.Source: Real Capital Analytics
Nonetheless, investors are responding to broader improvement in job growth and office absorption by moving into secondary submarkets and metropolitan areas, a trend that we expect to continue with the ongoing recovery. Also, investors are anticipating future demand growth in sub-markets proximate to core tech submarkets. For example, despite hav-ing an elevated vacancy rate, the El Segundo submarket in Los Angeles’s South Bay has attracted much investor attention in anticipation of greater tenant spillover demand from tech-driven, high-rent West Los Angeles, similar to what occurred during the last business cycle. DivcoWest, Grif-fin Capital and Montana Avenue Capital, among others, purchased El Se-gundo office properties in early 2014, and many investors continue to circle the market for acquisition and redevelopment opportunities. Given expected increases in interest rates, coupled with broadening economic and office market improvements, we anticipate secondary and tertiary markets, suburban markets and spillover ICEE submarkets to benefit from growing investor demand.
HIGHLIGHTS | Q1 2014 | OFFICE | NORTH AMERICA
COLLIERS INTERNATIONAL | P. 9
UNITED STATES | DOWNTOWN OFFICE | ALL INVENTORY
MARKETEXISTING
INVENTORY (SF) MAR 31, 2014
NEW SUPPLY Q1 2014
(SF)
UNDER CONSTRUCTION
(SF)
VACANCY RATE (%)
MAR 31, 2014
ABSORPTION Q1 2014
(SF)
NORTHEAST
Baltimore, MD 28,919,710 0 45,000 12.81 -315,134
Boston, MA 62,623,701 1,050,000 1,895,940 12.02 825,333
Hartford, CT 9,971,800 0 0 12.53 112,094
New York, NY – Downtown Manhattan 110,938,458 2,861,402 2,800,000 14.43 1,246,463
New York, NY – Midtown Manhattan 230,068,701 0 0 11.78 -1,270,068
New York, NY – Midtown South Manhattan 162,245,367 894,672 3,600,000 8.83 1,468,753
*Victoria and Winnipeg report semi-annually. Q4 data displayed. **Straight averages used.
Inventory — 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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COLLIERS INTERNATIONAL601 Union Street, Suite 4800Seattle, WA 98101TEL +1 206 695 4200
FOR MORE INFORMATION
Andrea B. CrossOffice Research Manager | USA TEL +1 415 288 7892 EMAIL [email protected]
CONTRIBUTORS
KC Conway Chief Economist | USA
Jeff Simonson Senior Research Analyst | USA
Jennifer Macatiag Graphic Designer | USA
Aaron Finkelstein Communications Manager | USA
Cliff Plank National Director | GIS & Mapping
485 offices in 63 countries on 6 continentsUnited States: 146Canada: 44Latin America: 25Asia Pacific: 186EMEA: 84
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.