Office. Investment Outlook. United States Q1 2016

Transcription

1 Office Investment Outlook United States Q1 2016

2 YTD Office investment sale volumes (billions of $US) OFFICE Limited opportunities and high barriers to entry in primary markets benefitting expanding secondary market activity U.S. Office property market month change in total vacancy (bp) 1.4% 12-month net absorption (as a % of inventory) 1.7% 8.7% 12-month completions (as a % of inventory) 12-month rent growth (p.s.f., %) Compressed vacancy pushes rental rates. Supply constraints persist across the country as demand for quality and location remain high on the list of must-haves for occupiers. In CBDs across the U.S., 11 markets are recording vacancy rates below 10.0 percent with an average vacancy in CBDs of 12.1 percent. The suburbs are recording an average vacancy of 16.3 percent. Rents on the rise as available large blocks diminish. In Q1, new developments was partially responsible for the 3.2 percent increase in rents across the U.S. In particular in the Class A space, large block supply is depleting with rents rising in tandem by 5.5 percent over the past 12 months. New supply outpaces occupancy growth. Development volume increased in the first-quarter by 9.7 million square feet, a 31.8 percent increase quarter-over-quarter. This marks the highest level of development thus far in the cycle. First-quarter pullback in investment volume after five years of growth. Modest growth of 1.0 percent year-over-year recorded $35.4 billion of capital markets activity. Despite the softening, $35.4 billion still makes it the second most active quarter of the past five years. While primary market activity is down quarter-over-quarter, secondary markets reach peak levels relative to primary. Following five consecutive years of strong growth, office transaction volumes increase by 1.0 percent year-over-year $250.0 $200.0 $150.0 $100.0 $50.0 $0.0 Q1 Q2 Q3 Q4 U.S. Office investment $35.6 Investment sales (YTD, billions of $US) 4.5% -41 Average cap rate (%) 1.0% YTD investment sale growth (%) 12-month change in cap rate (bp) Secondary-market activity increase driven by large portfolio acquisitions and urban submarkets. While primary markets are seeing moderate decreases in activity, diversification into secondary markets is evidenced, leading secondary markets to drive U.S. investment sale growth. Yield compression continues, though divergence appears in secondary markets. Nationally cap rates have compressed 30 basis points over the past 12 months from 4.8 to 4.5 percent. All primary markets have recorded compression, while secondary markets are bifurcating. One cluster of select leading secondary markets are slowing in the cycle, while the other cluster of emerging secondary markets is driving compression nationally with over 60 basis points of downward movement in the past 12 months. Foreign activity declines in the first-quarter, while European groups overtake Asian as most active source. Foreign activity accounted for 12.1 percent of total volume in the first-quarter, a decrease quarter-overquarter and below the cycle norm. In the first-quarter, Germany accounted for 37.0 percent of total foreign activity, shifting from Chinese and Canadian groups, who dominated in Primary and secondary cap rates continue to decline 10.0% 5.0% 0.0% 10-year Treasury (%) Primary cap rates (%) Secondary cap rates (%) 5.3% 4.2% 1.8% Source: JLL Research, Real Capital Analytics (Transactions larger than $5.0m) Source: JLL Research, NCREIF, Board of Governors of Federal Reserve JLL United States Investment Outlook Q

3 Completions (s.f.) 7 TOP OFFICE THEMES 1 Compressed vacancy rates push rental rates Supply constraints persisted across the country as demand for both quality and location remain high on the list of must-haves for occupiers. Across CBDs, 11 markets posted vacancy rates below 10.0 percent, and below the CBD average vacancy rate of 12.1 percent. Compared to the suburbs, which came in at a 16.3 percent vacancy rate, six suburban markets reported single-digit vacancy rates each benefitting from proximity to dynamic, urban CBDs that have captured occupier demand accordingly over the course of this cycle. CBD Total vacancy rate Suburb Total vacancy rate Oakland 5.1% Nashville 4.5% Portland Central City 6.5% Salt Lake City 5.4% Austin 6.7% Boston (Cambridge) 6.7% New York (Midtown South) 6.9% Portland-Eastside 7.2% Raleigh-Durham 7.6% San Francisco 7.5% Seattle (Downtown) 7.7% Seattle (Eastside) 9.3% San Francisco 8.5% Portland-Vancouver 9.3% Charlotte 8.5% Philadelphia CBD 8.6% Salt Lake City 9.2% Boston 9.6% Over the course of 2016, rental rate increases will continue but may slow as markets in the peaking phase of the cycle reach an inflection point while welcoming new supply across markets. In the longer term, the eventual cool-down of the labor market and further economic uncertainty globally will likely signal a slowdown in leasing dynamics starting in 2017 and moving into New supply outpaces occupancy growth, but not for long During the first-quarter, total U.S. development volume increased by 9.7 million square feet a 31.8 percent quarter-over-quarter increase in construction starts to bring the total development pipeline to 96.8 million square feet. This marks the highest level of development thus far in the cycle as consistent expansionary activity has encouraged developers to break ground where supply constraints persist. Despite improved fundamentals in most U.S. office markets, however, many secondary and tertiary markets await minimal new supply, and where development is under way, high preleasing rates have reduced the supply relief tenants would like to see. Primary markets, which compose 44.8 percent of the total office market, also contribute the largest share of developments to the total pipeline with 53.8 million square feet. Conversely, among the 24 tertiary markets that JLL tracks, only 11.3 million square feet (or 1.4 percent of total inventory) is currently under construction. Additionally, eight markets, including Jacksonville, Tampa and West Palm Beach, remain without any projects in the pipeline. As the development cycle nears its peak in 2016, deliveries will diminish slowly through 2019 During the first-quarter, new developments were partially responsible for the 3.2 percent spike in rents seen across the 50 markets that JLL tracks, but rent growth continues to be highly variable at the class level. Quarterly growth in CBD Class A submarkets continues to exceed the national average by 30 basis points, but this gap is lower than in earlier quarters. With the readily available supply of large, Class A blocks in the suburbs depleting, landlord confidence in that sector has risen appreciably. Asking rents in this segment increased by 1.9 percent over the quarter and 5.5 percent over the year. The spillover into Class B space has also been notable as well, with a 6.3 percent annual jump in rents. 50,000,000 40,000,000 30,000,000 20,000,000 10,000,000 0 Source: JLL Research Speculative (pre-leased) Speculative (available) BTS JLL United States Investment Outlook Q

4 Office investment sale volumes (billions of $US) Q highest absorption markets (thousands of s.f.) 3 First-quarter pullback in capital markets activity after five consecutive years of growth 4 Despite softened growth, occupancy markets remain strong and disjointed from capital markets First-quarter 2016 volumes increased a modest 1.0 percent year-overyear after five consecutive years of strong increases in office capital markets activity. Despite this increase, $35.4 billion of investment sales still makes it the second most active quarter of the last five years, a function broadly of 2015 deal closings. Current volatility in the macro economy, caution over pricing levels and scarcity of assets on the market drove declines in most primary markets. Chicago, following a very strong year in 2015 and the first acquisition of an office asset priced at over $1.0 billion, saw volumes decrease to $472.6 million. Silicon Valley also recorded a sharp decline after 2015 sales volume reached $3.1 billion and per-square-foot pricing of $1,300, while first-quarter 2016 volumes in Silicon Valley dropped to $147.0 million. Instability in energy markets is further suppressing capital markets activity in Houston, with less than $100.0 million in transactions year-to-date in While primary market activity overall is down quarter-over-quarter, Boston and Los Angeles posted strong first-quarters with $2.5 billion and $1.8 billion in transactions, respectively. Los Angeles activity was boosted by the Westside portfolio acquisition, totaling 1.7 million square feet, by Douglas Emmett Realty and Qatar Investment Authority for $1.3 billion, while in Boston, Blackstone s acquisition of BioMed Realty Trust, 21.0 percent of asset square footage being in Cambridge, elevated overall sales volume. In secondary markets, however, investment activity remains strong, reaching peak levels relative to primary markets in the first-quarter, with two markets recording transaction volumes over $1.0 billion. As we move further into 2016, flat growth to moderate declines in activity are projected as a result of these dynamics. Following five consecutive years of strong growth, office transaction volumes increase by 1.0 percent year-over-year Despite the slowdown in investment sales, office leasing fundamentals remain strong, with rents increasing across the U.S. by 3.2 percent. At 7.7 million square feet of absorption, take-up has slowed from the latter part of 2015, although the lack of expansionary activity is likely due to supply constraints in single-digit occupancy markets. The first-quarter saw a realized divergence in occupancy and capital markets fundamentals, especially in the primary markets. Overall primary markets saw a positive absorption reading, indicating that strong leasing fundamentals are catching up to the capital markets, which drove pricing in the early stages of the cycle. As an example, Chicago, the primary market with the largest decrease in investment sales, recorded the largest quarterly absorption figure of any market in the U.S. with 1.7 million square feet. Seattle came in after Chicago in terms of absorption and posted investment volumes slightly higher than average, although below the high levels recorded at earlier points in the cycle. On the other hand, leasing and capital markets fundamentals continue to more so move in tandem in the secondary markets. Austin, however, the highest secondary market for absorption, posted a moderate decrease in volume quarter-over-quarter. Other secondary markets leading in absorption for the quarter Philadelphia, San Diego and Phoenix are continuing to see upward trending investment volume. Across the U.S. this cycle, strong capital markets activity outperformed occupier markets, which had been slower to recover after the downturn. In early 2016, this outperformance has reversed, driving disjointed indicators across most markets reflective of an underlying improvement in income fundamentals across more markets. Occupational markets remain strong yet disjointed from investment sales activity in Q1, notably in primary markets $250.0 $200.0 $150.0 Q1 Q2 Q3 Q4 7,000 6,000 5,000 4,000 Chicago Seattle Silicon Valley Austin Philadelphia Los Angeles 3,000 $ ,000 $50.0 1,000 0 $0.0-1, Source: JLL Research, Real Capital Analytics (Transactions larger than $5.0m) Source: JLL Research JLL United States Investment Outlook Q

5 Primary market investment volumes (millions of $US) Annual cap rate fluctuations 5 Secondary market activity increase driven by large portfolio acquisitions and urban submarkets 6 Momentum in yield compression continues, though divergence appears, with select secondary markets beginning to show signs of softening In the first-quarter of 2016, 37.0 percent of total transaction volumes flowed into secondary markets, totaling $7.6 billion. Quarter-over-quarter, primary markets accounted for the overall moderation in volume growth, while secondary markets recorded a modest increase. In secondary markets in particular, this was boosted by large portfolio and entity-level acquisitions. In the largest transaction of the quarter, Blackstone acquired BioMed Realty Trust, taking over their life sciences-centric office and lab portfolio for $4.8 billion, boosting activity in San Diego as well as some of the primary markets, such as Boston s Cambridge submarket, the San Francisco Peninsula and Seattle. In another noteworthy secondary market portfolio, Och-Ziff Capital Management purchased 58 properties of suburban product from Brandywine Realty Trust for $398.1 million, totaling 3.9 million square feet located along the Northeast Corridor from New Jersey to Virginia. Outside of the large portfolio acquisitions in the secondary markets, increased activity was concentrated in urban submarkets. In particular, Philadelphia, Atlanta, New Jersey and Oakland boosted secondary market activity with urban volumes increasing in aggregate by percent year-over-year. Though secondary markets are recording stronger investment volume growth than primary markets, there is not a comparable level of institutional activity. Institutional acquisitions decreased, while purchases by private equity groups increased. The largest acquisition by this investor group was 70 and 90 Hudson Street in Jersey City in the Northern New Jersey market, which was acquired for $299.0 million by Spear Street Capital. The most active buyer in secondary office this quarter was Shorenstein, who purchased a Trophy asset in Pittsburgh and Class A assets in Philadelphia and Atlanta for a total of $566.2 million. While the primary markets are seeing activity decline, the diversification into secondary markets remains strongly evidenced, leading these markets to drive U.S. investment sale growth. This will continue through the year. However, despite resurgent economic and property market fundamentals in select small- and midsized markets such as Austin, San Diego and Phoenix, institutional capital remains disciplined and selective. Secondary markets have strongest first-quarter in three years, as primary markets in aggregate decline $20,000 $18,000 $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0 Primary Secondary Source: JLL Research (Assets larger than 50,000 s.f.) 2013 Q Q Q Q1 Nationally, cap rates remain in compression mode, declining 30 basis points in the past 12 months from 4.8 to 4.5 percent. At this level, national cap rates are below the prior peak of 4.8 percent, leading investor concerns over current pricing. Across the primary markets, all have recorded compression in the last 12 months by 39 basis points in aggregate. Of these, while New York and Chicago cap rates remain flat, West Coast markets Seattle, Silicon Valley and San Francisco continue to see strong cap rate compression, having decreased over 30 basis points over the last 12 months. However, cap rates in three primary markets Houston, Boston and Los Angeles have not yet surpassed their respective prior peaks. While Houston is unlikely to see further compression due to the slowdown in energy markets, strong property market fundamentals and resilient investor demand in Boston and Los Angeles are expected to drive continued compression, notably in highbarrier-to-entry submarkets. Secondary markets are seeing a dichotomous trend as two clusters emerge: one leading national cap rate compression and the other showing signs of slowing. The secondary markets driving compression Nashville, Minneapolis, Salt Lake City, Phoenix and Charlotte have each recorded over 60 basis point of downward movement in the past 12 months. These markets are emerging as destinations for diversifying capital and, as a result, are seeing cap rates compress as the risks associated with smaller secondary markets recede. Meanwhile, select leading secondary markets are beginning to move in the opposite direction, indicating a moderation of investor confidence. Raleigh- Durham, Tampa and St. Louis cap rates are softening, with Dallas stabilizing. In 2016, cap rate compression will continue across most markets, though at modest levels, with perceived fully priced secondary markets beginning to show signs of stabilization or softening. Cap rates continue to compress, with nearly 94.0 percent of markets seeing compressing or stabilizing yields Compressing Stable Softening Source: JLL Research, NCREIF. (Includes 32 major office markets; Stable defined as markets seeing fluctuations within 10 basis points year-over-year.) JLL United States Investment Outlook Q

6 7 As foreign activity declines in first-quarter, European overtake Asian groups as most active source Foreign activity made up 12.1 percent of total volume in the first-quarter, totaling $2.6 billion a decrease of 20.5 percent year-over-year and slightly below established current cycle norms on a percentage basis in recent years. A factor in this decline statistically is the decline in primary market activity, where this capital remains focused with selective diversification into secondary markets. Foreign investment into the office sector reached a peak in 2015 of $22.0 billion, equating to 20.9 percent of total volume. In 2015, groups from Canada and China were the most aggressive in purchasing U.S. office real estate, accounting for 40.9 percent of total acquisitions. In the first-quarter of 2016, the foreign buyer pool has shifted, with groups from Germany accounting for 37.0 percent of the total. This was driven by Deutsche Bank and Jamestown, who acquired assets in New York, Silicon Valley and Seattle. New inbound entrants to the market decreased other than smaller groups from the United Kingdom and Canada, who were active in Chicago, Atlanta and New York. In 2016, it is likely that further increases in inbound capital from European groups, including Germany, will be evident given ongoing economic and political concerns with resilient capital from Asia as well. Germany dominates as top origin of inbound capital, surpassing active Asian and Canadian capital from prior two years M O S T A C T I V E F O R E I G N I N V E S T O R S 9.0% 16.4% 18.5% 24.0% 13.5% 21.9% 15.3% 5.6% % 15.5% 15.8% 35.1% 12% 10% 6% 2% Q % 37% Norway Canada South Korea Germany Singapore All others Canada Germany Hong Kong China South Korea All others Germany South Korea China Qatar Canada United Kingdom Source: JLL Research (Assets larger than 50,000 s.f.) JLL United States Investment Outlook Q

7 Continued cap rate compression evident to sub percent in most primary and rising secondary markets in the CBD, while suburban markets sit between percent U.S. core product office CBD cap rates Seattle 4.25 WA 5.50% Portland % OR Sacramento % San Francisco % CA East Bay % Los Angeles % NV San Diego % ID UT Phoenix AZ % MT WY Denver CO % NM ND SD NE KS OK MN Dallas % TX Austin % Houston % NH Minneapolis Boston WI NY % Detroit MA % % Pittsburgh CT MI New RI York Chicago Cleveland % IA % % % Philadelphia NJ Columbus % Indianapolis IL IN 8.00 OH 9.00% PA DE % Washington, DC Cincinnati WV Kansas City 4.00 MD 6.00% % % MO VA KY Raleigh Charlotte NC % TN % AR LA MS AL SC Atlanta % GA Tampa % Orlando FL % VT ME U.S. core product office suburban cap rates Miami % Seattle % WA Portland 6.00%-7.50% OR Sacramento % East Bay % CA Silicon Valley % Los Angeles % San Diego % NV % % % % % 9.00% + ID UT Phoenix AZ % MT WY Denver CO % NM ND SD NE KS OK Dallas % Austin TX % Houston % MN NH Minneapolis Boston WI NY % Detroit MA % % Pittsburgh New Jersey CT MI RI Chicago Cleveland % % IA % % PhiladelphiaNJ Indianapolis Columbus % IL IN OH PA Washington, DE % % DC Cincinnati WV 6.00 MD 8.00% % MO VA KY Raleigh Charlotte 7.00 NC 8.00% TN % AR LA MS AL Atlanta % GA Tampa % SC Orlando FL % Miami % VT ME Source: JLL Research, January 2016 JLL United States Investment Outlook Q

8 Notable primary market transactions, Q Market Property Buyer Seller Price ($) Size (s.f.) Price (p.s.f.) Multiple - National Portfolio Biomed Realty Trust, 108- Property Portfolio Blackstone Biomed Realty Trust $4,800,000,000 3,400,000 $1,412 New York Greenwich Street Citigroup SL Green $2,000,000,000 2,634,670 $759 New York 787 Seventh Avenue CalPERS AXA Investment $1,932,900,000 1,761,781 $1,097 Los Angeles Blackstone, 4-Asset Westside Portfolio Douglas Emmett Realty (60%) / Qatar Investment Authority (40%) Blackstone $1,340,416,500 1,725,501 $777 New York 5 Times Square RXR Realty David Werner $800,000,000 1,101,779 $726 New York George Comfort & Sons / Loeb Partners Realty, 2- Asset Gramercy Park and Grand Central Portfolio Jamestown George Comfort & Sons / Loeb Partners Realty $563,499,651 1,565,000 $360 Seattle-Bellevue th Ave Deutsche Asset & Wealth Management AEW Capital Management $370,000, ,985 $716 Los Angeles Pasadena Towers I&II CBRE Global Investors Beacon Capital Partners $257,000, ,650 $585 Washington, DC 1615 L Street, NW Carr Properties Spitzer Enterprises $229,000, ,852 $548 San Francisco Peninsula Bayhill Office Center Google Hudson Pacific Properties / Farallon Capital Partners $215,000, ,000 $417 Notable secondary market transactions, Q Market Property Buyer Seller Price ($) Size (unit) Price (per unit) Philadelphia Cira Square Coretrust Capital Partners / Korea Investment Management Brandywine Realty Trust $354,000, ,692 $410 Northern New Jersey 70 & 90 Hudson St Spear Street Capital CBRE Global Investors $299,000, ,940 $349 San Diego Santa Fe Summit - Intuit Campus Intuit Kilroy Realty $262,300, ,812 $563 Atlanta Bank of America Plaza Shorenstein Properties CWCapital $220,000,000 1,294,590 $170 Northern New Jersey Metropark Office Center Metropark Investor LLC Tishman Speyer $200,000, ,656 $218 Philadelphia 1700 Market Street Shorenstein Properties Nightingale Properties $198,000, ,172 $235 Oakland-East Bay Kaiser Center Rockpoint Group Swig Company $197,000, ,005 $243 Northern New Jersey Princeton Pike JFR Global Investments Pittsburgh One Oxford Centre Shorenstein Properties Prism Capital Partners Oxford Development Company $156,000, ,546 $195 $148,752,900 1,011,000 $147 Charlotte Carillon Tower KBS Realty Advisors Hines $147,000, ,308 $309 JLL United States Investment Outlook Q

9 For more information, please contact: Investor Sean Coghlan Director, Investor Research Office Rachel Johnson Analyst, Office Research About JLL JLL (NYSE: JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. A Fortune 500 company with annual fee revenue of $4.7 billion and gross revenue of $5.4 billion, JLL has more than 230 corporate offices, operates in 80 countries and has a global workforce of approximately 58,000. On behalf of its clients, the firm provides management and real estate outsourcing services for a property portfolio of 3.4 billion square feet, or 316 million square meters, and completed $118 billion in sales, acquisitions and finance transactions in Its investment management business, LaSalle Investment Management, has $57.2 billion of real estate assets under management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit About JLL Research JLL s research team delivers intelligence, analysis and insight through market-leading reports and services that illuminate today s commercial real estate dynamics and identify tomorrow s challenges and opportunities. Our more than 400 global research professionals track and analyze economic and property trends and forecast future conditions in over 60 countries, producing unrivalled local and global perspectives. Our research and expertise, fueled by real-time information and innovative thinking around the world, creates a competitive advantage for our clients and drives successful strategies and optimal real estate decisions Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.