State of the Office Market

Size: px

Start display at page:

Download "State of the Office Market"

Sharlene O’Connor’
6 years ago
Views:

1 State of the Office Market Al Pontius Brian McAuliffe James Street Bill Rogalla Managing Director Marcus & Millichap Head of Transactions RREEF Co-Head, Dispositions Prudential Real Estate Investors Senior Vice President/Director of Acquisitions - Central Region KBS Realty Advisors NAIOP. Do not distribute or reproduce without permission.

2 Office National Transactions and Dollar Volume Office Transactions $5M-$10M $10M-$20M $20M-$40M $40M+ Office Volume $5M-$10M $10M-$20M $20M-$40M $40M+ 1,200 $60 Total Transactions YTD 3Q-2009: 552 YTD 3Q-2010: 781 YTD 3Q-2011: 1,240 Total Dollar Volume $45 $30 $15 YTD 3Q-2009: $15.0B YTD 3Q-2010: $27.1B YTD 3Q-2011: $47.7B 0 $0 * Preliminary through 3Q 2011 Sources: Marcus & Millichap Research Services, CoStar Group, Inc., Real Capital Analytics NAIOP. Do not distribute or reproduce without permission. 2

3 Office National Transactions and Dollar Volume by Market YTD 3Q 2011 Top 10 Markets by Transactions YTD 3Q 2011* Transactions Y-O-Y Change Top 10 Markets by Dollar Volume YTD 3Q 2011* Dollar Volume (mil.) Y-O-Y Change Los Angeles % Washington, D.C % Dallas-Ft. Worth % Manhattan % Chicago % Houston % Ft. Laud/Palm Beach % San Jose % Boston % Seattle-Tacoma % New York $13, % Washington, D.C. $5, % Boston $2, % Los Angeles $2, % Houston $2, % Chicago $2, % San Francisco $1, % Seattle-Tacoma $1, % San Jose $1, % Dallas-Ft. Worth $1, % * Preliminary through 3Q Includes sales $1 million+ Sources: Marcus & Millichap Research Services, Real Capital Analytics, CoStar Group, Inc. NAIOP. Do not distribute or reproduce without permission. 3

U.S. Office Vacancy by Region 3Q 2011 Rate and YOY Change Top 5 Vac. YOY New York 10.6% -100 Washington, D.C. 13.1% 10 West 18.2% -70 Bps Midwest 19.7% -10 Bps Northeast 13.

4 U.S. Office Vacancy by Region 3Q 2011 Rate and YOY Change Top 5 Vac. YOY New York 10.6% -100 Washington, D.C. 13.1% 10 West 18.2% -70 Bps Midwest 19.7% -10 Bps Northeast 13.6% -40 Bps San Francisco 14.3% -90 Los Angeles 14.6% -40 Portland 14.7% -80 Southwest 19.3% -40 Bps South Atlantic 16.6% +0 Bps Bottom 5 Vac. YOY Palm Beach 20.8% -30 Tampa 20.8% -120 Jacksonville 21.0% 0 Indianapolis 21.1% 150 San Jose 22.2% -30 Sources: Marcus & Millichap Research Services, Reis NAIOP. Do not distribute or reproduce without permission. 4

5 Brian McAuliffe Managing Director RREEF Certain information in this research report constitutes forward-looking statements. Due to various risks, uncertainties and assumptions made in our analysis, actual events or results or the actual performance of the markets covered by this research report may differ materially from those described. The information herein reflect our current views only, are subject to change, and are not intended to be promissory or relied upon by the reader. There can be no certainty that events will turn out as we have opined herein. Reference to specific companies are being shown to related regional employment to real estate prospects in the area and should not be considered a recommendation for such company. NAIOP. Do not distribute or reproduce without permission. 5

6 Office: Changes in Outlook Since 4Q10 What is different? Rent movement occurring in more micro-markets (e.g., Beverly Hills, Seattle CBD) Rent forecasts for the strongest submarkets were moved forward (in BOS, HOU, NYC, SF, SJ, SEA) Absorption momentum has slowed since last half of 2010 Large users stepped in big during past 12 months, but smaller users remain sparse Vacancy in 2016 (added to forecast) to see upturn as demand growth slows amid growing supply Late recovery markets becoming more attractive risks as they move closer to recovery What is the same? The market is at bottom, with rents firming only in strongest submarkets U.S. vacancy to require until 2015 to reach 12% Average U.S. rent to require until to return to 2007/08 peak Leading metros are global gateways tied to tech, energy and/or Wall Street (esp. NY, SF) The most troubled metros are tied to housing woes and supply overhangs (ATL, MIA, PHX, RIV, SAC) Drag on absorption from shadow vacancy and right-sizing remain a long-term concern NAIOP. Do not distribute or reproduce without permission. 6

7 Job Recovery is More Protracted than Following Past Recessions Index Value Full Job Recovery Forecast in 2013, but Unemployment Still High 3Q1990 1Q2001 4Q2007 Current Recession End Source: BEA and IHS Global Insight, As of June Cumulative Change in Employment from Peak Indexed to Beginning of Recession NAIOP. Do not distribute or reproduce without permission. 7

8 Early and Late Recovery Job Markets Forecast Return to Peak Employment Metro Recoveries: Seattle Past peak By year end 2012 By year end 2013 After 2013 San Francisco San Jose Los Angeles Orange County San Diego Portland Sacramento Salt Lake Oakland City Las Vegas Riverside Note: Includes cities with over 500k jobs in Source: Economy.com & RREEF Research, as of June Phoenix Denver San Antonio Minneapolis Hartford Boston Milwaukee New York Detroit Providence Newark & Edison Long Island Chicago Pittsburgh Philadelphia Columbus Baltimore Indianapolis Kansas City Richmond Washington DC Cincinnati Norfolk St. Louis Greensboro Nashville Raleigh Oklahoma City Memphis Charlotte Dallas/ Fort Worth Austin Houston New Orleans Atlanta Tampa Jacksonville Orlando West Palm Beach Fort Lauderdale Miami NAIOP. Do not distribute or reproduce without permission. 8

9 U.S. Average Rent Growth in Sum of Markets Surveyed, by Sector (2007 = 100) 130 Forecast Period Apartments - NNN Industrial Office CBD - NNN Retail Office Suburban - NNN Apartments performing strongest, with peak rents regained in 2011 and are forecast to distinctly outperform through Retail is the steadiest performer, with rents declining the least, and regain peak levels before Office rents both peaked at then plummeted more than the other sectors in this cycle; suburban office is not forecast to regain peak levels by Industrial declined less than office rents in the downturn, and are forecast to outperform suburban office in the recovery. *Industrial and Retail are forecast on NNN basis. Apartments and Office are forecast based on Gross Rents, and these are converted to NNN equivalent, assuming 2% per year expense increases, for consistency in comparison across sectors. Data represents the unweighted average of markets surveyed by RREEF. Source: RREEF Research. As of July NAIOP. Do not distribute or reproduce without permission. 9

10 Office: Layoffs in Were Not Met with Commensurate Space Give-Backs, Putting a Drag on Recovery Absorption, as Happened in the Early 1990s Office Space Demand Growth Vs. Employment Growth 52 Major U.S. Metros Net Office Absorption (Left) New Office Jobs (Right) 200 Forecast 150 1, Millions of Square Feet Thousands of Office Jobs , Note: The right axis is scaled to align one new worker with approximately 165 square feet of office space. As of September Source: RREEF Research and CBRE-EA. NAIOP. Do not distribute or reproduce without permission. 10

11 Office: Limited Supply, But Weak Demand Will Keep Vacancy High Until 2015 U.S. Office Supply and Demand, Completions Net Absorption Vacancy 20% 100 Forecast 18% % 14% 12% Percent Vacant % % Millions of Square Feet As of August Source: RREEF Research and CBRE-EA. NAIOP. Do not distribute or reproduce without permission. 11

12 Office: Vacancy Rates Northeast and West Coast to Outperform, But Large Gaps Need to be Filled in Many Metros U.S. Office Vacancy Rates 30% Yr Avg Vacancy 25% 20% 15% 10% 5% 0% Source: RREEF Research. As of July NAIOP. Do not distribute or reproduce without permission. 12

13 Office: Most Markets are at Bottom or Beginning Recovery, Led by Tech, Wall Street, Federal Government and Energy Sectors Forecast Rental Growth Rate 2011 San Francisco San Jose New York City Washington DC Austin Denver Philadelphia US - Wtd Avg Houston Dallas Chicago US - Unwtd Avg Boston Miami Sacramento Oakland / East Bay Phoenix Seattle Los Angeles San Diego Fort Lauderdale Portland New Jersey Atlanta Charlotte Minneapolis Orange County Riverside Source: RREEF Research. As of July % -2.5% 0.0% 2.5% 5.0% 7.5% NAIOP. Do not distribute or reproduce without permission. 13

14 Office: CBD Outlook Stronger than Suburban 10.0% Average Annual CBD Office Rental Growth Comparison 2008 to 2010 Historical, 2011 to 2016 Forecast RREEF CBD RREEF Suburban 7.5% 5.0% 2.5% 0.0% -2.5% -5.0% -7.5% -10.0% -12.5% -15.0% -17.5% F = Forecast. Source: RREEF Research, CBRE-EA, Rosen, and REIS. As of July NAIOP. Do not distribute or reproduce without permission. 14

15 Core properties are moving upward while distressed are moving downward Overall, property values hit a new low in April. Moody s/real CPPI January 2000 = 100 CPPI 6-city Trophy Distress '01 Apr-01 Jul-01 Oct-01 '02 Apr-02 Jul-02 Oct-02 '03 Apr-03 Jul-03 Oct-03 '04 Apr-04 Jul-04 Oct-04 '05 Apr-05 Jul-05 Oct-05 '06 Apr-06 Jul-06 Oct-06 '07 Apr-07 Jul-07 Oct-07 '08 Apr-08 Jul-08 Oct-08 '09 Apr-09 Jul-09 Oct-09 '10 Apr-10 Jul-10 Oct-10 '11 Apr-11 Jul-11 6-City Trophy = prior sale < $10M; NY,DC,BO,CH,LA,SF; excludes distress Distress = properties where second sale was sold due to a distressed situation CPPI = Moody's/REAL National All Property Types Source: RCA/Geltner& Associates As of September 2011 NAIOP. Do not distribute or reproduce without permission. 15

16 Important Notes Copyright 2011 Deutsche Bank AG, Frankfurt am Main. All rights reserved. RREEF is the brand name of the real estate division for the asset management activities of Deutsche Bank AG. In the US this relates to the asset management activities of RREEF America L.L.C.; in Germany: RREEF Investment GmbH, RREEF Management GmbH, and RREEF Spezial Invest GmbH; in Australia: Deutsche Asset Management (Australia) Limited (ABN ) Australian financial services license holder; in Japan: Deutsche Securities Inc.*; in Hong Kong: Deutsche Bank Aktiengesellschaft, Hong Kong Branch (for Direct Real Estate business), and Deutsche Asset Management Hong Kong (for Real Estate Securities Business); in Singapore: Deutsche Asset Management (Asia) Limited (Company Reg. No N); and in the United Kingdom: Deutsche Alternative Asset Management (UK) Limited, Deutsche Alternative Asset Management (Global) Limited, and Deutsche Asset Management (UK) Limited; and in Denmark, Finland, Norway and Sweden: Deutsche Alternative Asset Management (UK) Ltd and Deutsche Alternative Asset Management (Global) Ltd; in addition to other regional entities in the Deutsche Bank Group. (*) For DSI, financial advisory (not investment advisory) and distribution services only. Key RREEF research personnel are voting members of various RREEF investment committees. Members of the investment committees vote with respect to underlying investments and/or transactions and certain other matters subjected to a vote of such investment committee. Additionally, research personnel receive, and may in the future receive incentive compensation based on the performance of a certain investment accounts and investment vehicles managed by RREEF and its affiliates. This material is intended for informational purposes only and it is not intended that it be relied on to make any investment decision. It does not constitute investment advice or a recommendation or an offer or solicitation and is not the basis for any contract to purchase or sell any security or other instrument, or for Deutsche Bank AG and its affiliates to enter into or arrange any type of transaction as a consequence of any information contained herein. Neither Deutsche Bank AG nor any of its affiliates, gives any warranty as to the accuracy, reliability or completeness of information which is contained in this document. Except insofar as liability under any statute cannot be excluded, no member of the Deutsche Bank Group, the Issuer or any officer, employee or associate of them accepts any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage whether direct, indirect, consequential or otherwise suffered by the recipient of this document or any other person. The views expressed in this document constitute Deutsche Bank AG or its affiliates judgment at the time of issue and are subject to change. This document is only for professional investors. This document was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. No further distribution is allowed without prior written consent of the Issuer. An investment in real estate involves a high degree of risk and is suitable only for sophisticated investors who can bear substantial investment losses. The value of shares/units and their derived income may fall as well as rise. Past performance or any prediction or forecast is not indicative of future results. The forecasts provided are based upon our opinion of the market as at this date and are subject to change, dependent on future changes in the market. Any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets is not necessarily indicative of the future or likely performance. I NAIOP. Do not distribute or reproduce without permission. 16

17 James Street Co-Head, Dispositions Prudential Real Estate Investors NAIOP. Do not distribute or reproduce without permission. 17

18 PREI Office Dispositions Challenges for underwriting include: current effective market rent, projected rent growth, and tenant credit. Negative global economic news and uneven U.S. job growth have impacted net absorption forecasts. Private capital has been the most active buyer type for PREI office dispositions in NAIOP. Do not distribute or reproduce without permission. 18

PREI Metro DC Office Sales CGI Office - Fairfax, VA (259,000 sf) Target Strike Price (June, 2011): $75 million ($285 psf) Target Cap Rate: Low 6 s # of Offers Received: 6 Highest Offer vs.

However, many of the tenants are private companies with government contracts.

19 PREI Metro DC Office Sales CGI Office - Fairfax, VA (259,000 sf) Target Strike Price (June, 2011): $75 million ($285 psf) Target Cap Rate: Low 6 s # of Offers Received: 6 Highest Offer vs. BOV: 2.1% higher Comments: 91% Occupied building with long term leases and limited rollover in a mixed-use environment. However, many of the tenants are private companies with government contracts. Executive Plaza Bethesda, MD (331,000 sf) Target Strike Price (June, 2011): $69 million ($208 psf) Target Cap Rate: in place, 13.5%, projected stabilized (2017), 7.5% # of Offers Received: 6 initial, 3 best and final Highest Offer vs. BOV: 2.8% lower Comments: National Cancer Institute will vacate the entire building as of 9/13. NAIOP. Do not distribute or reproduce without permission. 19

Dallas Intellicenter Dallas, TX (200,000 sf) Targeted Price Range: $34m to $35m ($175 - $180 psf) Targeted Cap Rate: mid-8 s Comment: 90% leased, with early

20 PREI Sunbelt Office Sales PetSmart Headquarters Phoenix, AZ (366,000 sf) Strike Price: High $200 s psf Strike Price approximately equal to BOV. Comments: A newer property with a long-term lease to a stable tenant. Dallas Intellicenter Dallas, TX (200,000 sf) Targeted Price Range: $34m to $35m ($175 - $180 psf) Targeted Cap Rate: mid-8 s Comment: 90% leased, with early termination options for the two majors (89%) in 2015 and LEEDS certified, but that has not helped much regarding lease premiums to market rent, or attracting investor interest away from North Dallas Tollway. NAIOP. Do not distribute or reproduce without permission. 20

21 Bill Rogalla Senior Vice President Director of Acquisitions - Central Region KBS Realty Advisors NAIOP. Do not distribute or reproduce without permission. 21

KBS by the Numbers Market value of assets under management..$7.4 Billion Number of Equity Assets under management.153 Number of Debt Assets under management.25 Total square feet under management.44.

22 KBS by the Numbers Market value of assets under management..$7.4 Billion Number of Equity Assets under management.153 Number of Debt Assets under management.25 Total square feet under management.44.9 Million* Since 2006, KBS REIT I, KBS REIT II, KBS REIT III, KBS Strategic Opportunity REIT, and KBS Legacy Partners Apartment REIT have raised approximately $4.0 Billion. * Not including debt assets NAIOP. Do not distribute or reproduce without permission. 22

Beach More than 2.5 million SF 1 million to 2.

23 KBS Asset Distribution (By square feet, not including debt investments. As of 6/30/11) Boston New York San Francisco Washington DC Long Beach Newport Beach More than 2.5 million SF 1 million to 2.5 million SF 500,000 to 1 million SF Less than 500,000 SF 0 SF NAIOP. Do not distribute or reproduce without permission. 23

24 Regional Structure Boston San Francisco New York Washington D.C. Long Beach Newport Beach KBS Offices KBS Target Markets NAIOP. Do not distribute or reproduce without permission. 24

25 Discussion and Questions? Remember to Rate this Session using: The Development 11 App on your iphone, BlackBerry or Android The Session Evaluation Form you received upon enter this session room. NAIOP. Do not distribute or reproduce without permission. 25

Struggling to Escape the Fallout of the Great Recession MARISA Di NATALE, MANAGING DIRECTOR

Struggling to Escape the Fallout of the Great Recession MARISA Di NATALE, MANAGING DIRECTOR FROM MOODY S ECONOMY.COM Broad-Based Slowing Across the Nation Total employment excluding federal government,