Office Investment. A focus on value and risk shaping investor behavior. United States H JLL Research

Transcription

1 Office Investment United States H A focus on value and risk shaping investor behavior JLL Research

2 Under construction (s.f.) Office the Office first half breakdown 2 It s all in the numbers Despite modest volume declines at midyear, foreign share remains elevated Property market month change in total vacancy (bps) 0.7% 12-month net absorption (as % of inventory) 1.3% 12-month completions (as % of inventory) 3.2% 12-month rent growth (p.s.f.) Demand Investment market $58.6 Investment sales (H1, billions of $US) -11.9% H1 investment sales growth 4.2% Average cap rate month change in cap rate (bps) construction starts have now fallen below the long term quarterly average of 11.1 million square feet. Although construction starts have slowed, new deliveries expected by year-end total roughly 65.9 million square feet, 41.3 percent higher than the 2016 total. As the market has realized a portion of these new deliveries over the last year, year-over-year Class A vacancy has increased roughly 50 basis points. Further pressure will be applied to vacancy as preleasing rates through 2018 hover around 50.0 percent. However, average asking rents will continue to rise with little in the way of slowing down, up 3.2 percent this year. As more scheduled office space is delivered in 2017 into 2018, the office market can expect steady increases in vacancy and tempered net absorption, which will in turn normalize development activity across the nation. Construction volumes remain flat at m.s.f. with minimal further growth expected this cycle 160,000,000 Sustained tenant demand and rising rents remain the norm, but office supply pressures are rising As this cycle has matured and the economy has experienced growth, so too have absorption and rents in the office market. Since the second quarter of 2010, office markets posted 29 consecutive quarters of positive absorption. Over that same period, CBD Class A rents have appreciated by 35.7 percent. Year-to-date absorption in 2017 totals 9.9 million square feet, healthy but below the previous levels of growth seen in 2014, 2015 and Poised to benefit from this rapid growth early in this cycle, developer activity has spiked. Currently standing at million square feet, construction levels remain near the cycle high reached in the fourth quarter of 2016 and are slightly higher than the previous cycle high in As markets have reacted to this supply cycle, development and financing markets have begun to pull back and 140,000, ,000, ,000,000 80,000,000 60,000,000 40,000,000 20,000,000 0 Source: JLL Research

3 Transactions Top transactions what s happening and where 3 Continued investor selectivity softening volumes and paralleling a drop in large transaction activities After a nearly 20.0 percent year-over-year decline in the first quarter of 2017, office volumes are rising as we progress through the year. Volumes made a resurgence this quarter, falling just 3.6 percent year-over-year and reaching $31.5 billion. With this activity, the profiles of transactions are beginning to shift beyond conventional, single-asset transactions: Of-single-asset transactions in the first six months of the year, roughly 24.0 percent were joint ventures a significant increase compared to the 16.1 percent average over the last two years. From a portfolio perspective, transaction volumes are down modestly, representing 17.7 percent of overall activity compared to a roughly 20.0 percent average during the past three quarters. The largest portfolio closed this quarter was a $512 million portfolio recapitalization of Phoenix Tower and Greenway Plaza in Houston; in the transaction, Parkway Inc. sold a 49.0 percent stake to Silverpeak, TH Real Estate and CPPIB. Since this deal, CPPIB announced plans to acquire Parkway Inc. in its entirety and will assume any remaining interest Parkway has in the portfolio. However, transactions larger than $500 million are down across the office sector. Since 2013, markets have averaged 20 trades greater than or equal to $500 million each year, amounting to $17.3 billion annually. In 2015 and 2016, we saw 25 and 19 transactions, respectively. At midyear 2017, only eight such deals have closed, totaling $7.7 billion. Now, continued capital demand and plateauing fundamentals are spurring selectivity. With this, we are seeing a slowing of capital appreciation, and instead the income component of investments is driving returns. This is spurring more defensive strategies from domestic and offshore institutional investors. Pricing levels remain stable broadly, with market averages for institutional product ranging between 3.6 and 4.9 percent across the primary markets and 4.1 and 7.8 percent across the secondary markets. Market uncertainty, investor selectivity and current pricing dynamics will continue to put a damper on full-year volumes, forecasted to decline as much as 10.0 percent this year. However, the latter half of 2017 is expected to see modest gains in office activity levels. Notable primary market transactions, Q Market Property Buyer Seller Price ($) Size (s.f.) Price (p.s.f.) New York 245 Park Avenue HNA Group Brookfield Properties / Clarion $2,210,000,000 1,778,249 $1,243 Partners / NYSTRS Los Angeles 1999 Avenue of JMB Financial Advisors Blackstone $860,000, ,000 $1,042 the Stars LLC New York 825 Eighth Avenue New York REIT George Comfort & Sons / DRA $686,125,000 2,049,618 $671 Advisors / RCG Longview New York 85 Broad Street Ivanhoe Cambridge MetLife / Beacon Capital Partners $652,000,000 1,119,813 $582 Notable secondary market transactions, Q Market Property Buyer Seller Price ($) Size (s.f.) Price (p.s.f.) Dallas 7900 Windrose Ave Liberty Mutual KDC $350,000, ,884 $353 Orange County 1920/2010 Main St Emmes Realty Services Shorenstein Properties $200,000, ,000 $307 Silicon Valley Winchester Blvd King Asset Management Sand Hill Prop Co $200,000, ,899 $767 Atlanta th Street Lionstone Investments CBRE Global Investors $182,000, ,870 $341 Notable portfolio transactions, Q Market Property Buyer Seller Price ($) Size (s.f.) Price (p.s.f.) Houston Parkway Inc Houston TH Real Estate & Parkway Inc $512,050,000 4,977,052 $103 Portfolio Silverpeak / CPPIB Boston Boston PGIM Portfolio Blackstone (20%) PGIM Real Estate $363,957, ,000 $1,300 Washington, DC G Street Portfolio UNIZO Westbrook Partners / TIER REIT $193,500, ,941 $681 Seattle-Bellevue 90 East Portfolio Kennedy Wilson Talon Capital / Cerberus Capital $153,000, ,000 $267

4 New York Boston Los Angeles Washington, DC San Francisco Chicago Seattle-Bellevue 50.4% decline Markets Mixed signals across markets, with leading secondary 4 markets positioned for continued growth In the first half of 2017, year-over-year volumes decreased 11.9 percent. During this time, primary and secondary markets accounted for $14.9 and $7.9 billion in volume, respectively. While the prevalence of larger transactions is down and partly responsible for volume declines, large deals are skewing figures in select markets. This is notably happening in New York and Houston, the most active primary and secondary markets this quarter. In New York, HNA Group and 181 West Madison acquired 245 Park Avenue from Brookfield Property Partners, NYSTRS and Clarion in a deal valued at $2.2 billion. This accounted for 51.5 percent of New York volumes this quarter. In Houston, the $512 million portfolio recapitalization of Phoenix Tower and Greenway Plaza accounted for 74.8 percent of volumes. pricing appreciation of 90.0 percent since Put in perspective, the average secondary market change over that period was just 8.5 percent. Like many Sun Belt markets, these markets continue to benefit from demographic shifts and employment growth, and thus office demand. Generally speaking, however, pricing in office markets across the U.S. is plateauing. Markets with stable demand, disciplined construction activity and high barriers to entry can expect to maintain stable liquidity and pricing in the near term. New York dominates volume, but significant year-over-year decline partly responsible for national decline Transaction volume (billions $US) H H Unsurprisingly, primary markets following New York were Los Angeles, Boston, Washington, DC and Seattle. Of these, Seattle is the only market experiencing year-over-year declines in volume. Houston, in this instance, is beginning to benefit from improving liquidity as the market seemingly begins to bottom out. Continuing the trend of Sun Belt growth, six of the ten most active secondary markets were in this region. Dallas, for that matter, has seen significant activity over past quarters, accounting for $10.9 billion of activity since During that period, per-square-foot pricing has appreciated by 94.3 percent. In addition to Dallas, Charlotte has also seen significant per-square-foot Source: JLL Research

5 5 National Office CBD Class A cap rate map San Francisco 4.00% % SF Bay Area 6.50% % Silicon Valley 5.00% % Portland 4.50% % Seattle 4.25% WA % OR Sacramento 5. 50% % Oakland / East NV Bay 5.00% CA % Los Angeles 4.00% % Orange County 5.00% % San Diego 5.00% % ID AZ MT Salt Lake City 6.00% % UT Phoenix 6.25% % WY Denver 4.50% % CO NM ND MN VT Minneapolis NH Boston WI Detroit NY SD 5.75% % MA 4.50% % 8.00% % Pittsburgh CT New York Chicago Cleveland MI 6.50% % 4.50% % 4.50%- 5.50% 8.00% % Philadelphia IA New Jersey NE NJ Indianapolis Columbus 6.00% % 6.00% % 8.50% 8.00% % IL IN % OH St. Louis Cincinnati PA Washington, DC WV Kansas City 4.50% % 4.0% % KS 6.25% % MO Louisville VA Richmond KY 4.50% % 7.50% % Nashville Charlotte NC Raleigh-Durham TN 6.0%-8.0% 6.50% % OK AR Atlanta SC 4.75% % Dallas MS AL GA 4.60% % Austin TX 5.00% % San Antonio 7.00% % Houston 5.50% % LA Orlando FL 6.00% Tampa 5.00% % Miami 4.50% % ME National Office Suburbs Class A cap rate map SF Bay Area 7.00% % Silicon Valley 5.00% % % % % % % % % 9.00% + Seattle 5.50% WA % Portland 5.40% % OR Sacramento 6.75% % Oakland / East Bay NV 6.50% CA % Los Angeles Orange County 5.50% % San Diego 5.00% % ID AZ MT Salt Lake City 6.25% % UT Phoenix 5.75% % ND MN VT NH Boston Minneapolis WI NY MA SD 6.50% % Detroit WY 8.00% % Pittsburgh CTNew York MI Chicago Cleveland 6.50% % Philadelphia IA NE 9.00% % NJ New Jersey Indianapolis Columbus 6.00% % 7.50% % Denver St. Louis IL 8.00% -IN9.00% OH 8.00% % Washington, DC PA 5.50% WV CO % Cincinnati 6.00% % Kansas City 7.50% % Richmond KS MO VA 6.25% % Louisville KY 7.50% % Nashville Charlotte NC TN Raleigh-Durham 6.50% % OK 7.00% % NM AR SC Atlanta Dallas MS AL 4.75% -GA 5.75% 4.60% % Austin TX 6.00% % LA San Antonio Houston FLOrlando 7.00% % 7.00% % 6.50% % Tampa 6.50% % Miami ME

6 6 Sources capital of Elevated foreign investment remains the norm for primary office markets With geopolitical uncertainty and the relative liquidity of U.S. real estate, the office sector continues to see the outsized benefit of foreign capital. Year-to-date, foreign investment as a percentage of total volumes reached 18.1 percent, unchanged from 2016 but an increase compared to 13.0 and 16.4 percent in 2014 and 2015, respectively. Interestingly, 77.9 percent of all foreign investment came from five countries: China, Singapore, Canada, Germany and Japan. This marks a major diversion from prior years as these countries combined haven t accounted for more than 60.0 percent of foreign activity since Continuing a trend of Asian investor preference for coastal gateway markets, Chinese investment in the first half of 2017 was almost entirely located in New York at 68.7 percent of volume. Cross-border investors remain focused on primary office markets and high-quality assets. Although overall foreign investment is down slightly at midyear, primary markets continue to see the bulk of cross-border office acquisitions at 73.9 percent of total volume. On the other hand, foreign investment into secondary markets remains highly selective. An Asian investment of note was a Singaporean acquisition of a near-fully occupied, 11-story office tower in Northern New Jersey for $115 million. Although technically a secondary and non-cbd market, the office building is located just three miles from New York City. While best-in-class assets in high-growth secondary markets may see this capital, the current ratio between primary and secondary markets is not likely to shift further in these markets favor given the risk profile of the capital. Five most active countries of origin account for 77.9 percent of foreign investment in first half of 2017 All Others 52.5% 2016 China 13.0% Germany 15.9% Canada 11.2% Japan 7.4% Germany 8.9% All Others 22.1% Japan 10.3% H Singapore 15.3% China 24.3% Canada 19.2% Source: JLL Research, Real Capital Analytics (Transactions larger than $5.0M)

7 2013 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q2 7 Sources irisk of A pullback in risk-seeking investor behaviors reemerging in early 2017 As the cycle has progressed with growth now beginning to plateau, the risk appetite and thus investment preferences of investors is shifting across markets and transaction profiles. As pricing has appreciated and returns compressed, the universe of active capital has continued to expand. This remains evident in the first six months of 2017, with value add fundraising up nearly 60.0 percent year-over-year. In fact, 2017 thus far has been the most active first half for value add fundraising of the past 15 years, with the potential to surpass 2007 s historic highs. This value add capital is notably benefiting urban submarkets as well as secondary and even tertiary markets, where there are opportunities. As the liquidity for value add transactions has remained strong and even expanded in recent quarters, a disciplined and conservative approach to underwriting from core institutional investors has simultaneously impacted capital demand for core transactions. However, as these groups adopt a more defensive approach to capital markets activities, markets are beginning to see a pullback in risk-taking behaviors. This is evidenced by the steady increase in Class A and Trophy transactions over the past 18 months: at the height of activity in 2015, elevated riskseeking behavior paralleled increased levels of Class B and C acquisitions, having driven between 30.0 and 45.0 percent of overall activity. This paralleled a period of strong demand and diversified growth in fundamentals across most markets. Since this time, however, Class B and C investments have declined to less than 25.0 percent of activity, as Class A and Trophy activity s share increased by 21.4 percent. This presents an interesting dichotomy in today s office investment market: risk-seeking, value add capital continues to increase and maintain elevated dry powder levels, yet the market fundamentals and investment activities are exhibiting a flight to quality. This storyline is further complicated by increased barriers to entry and pricing in primary markets and even high-growth secondary markets, leaving some groups in limbo. For the markets, this tug-of-war will continue to apply pressure on pricing in the near term and should benefit value add opportunities given outsized capital demand. However, this also may present opportunities for those on the lowerrisk, core end of the spectrum. Class A and Trophy assets as a percentage of total volume increase significantly on 12-month trailing basis since month average Class A and Trophy share (%) Flight to quality? 76.4% 77.9% 75.4% 79.3% 80.4% 78.7% 77.2% 71.6% 62.9% 54.0% 64.0% 67.5% 74.3% 79.1% 75.4% Source: JLL Research

8 Investor Research: Sean Coghlan Director, Investor Research Sean Kane Manager, Investor Research Office: Industrial: Multifamily: David Hoebbel Peter Kroner Michael Morrone Retail: Arielle Einhorn Net Lease: Sean Coghlan Debt & Equity: Ronak Sheth About JLL JLL (NYSE: JLL) is a leading professional services firm that specializes in real estate and investment management. A Fortune 500 company, JLL helps real estate owners, occupiers and investors achieve their business ambitions. In 2016, JLL had revenue of $6.8 billion and fee revenue of $5.8 billion and, on behalf of clients, managed 4.4 billion square feet, or 409 million square meters, and completed sales acquisitions and finance transactions of approximately $145 billion. At the end of the second quarter of 2017, JLL had nearly 300 corporate offices, operations in over 80 countries and a global workforce of nearly 80,000. As of June 30, 2017, LaSalle Investment Management had $57.6 billion of real estate under asset management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit ir.jll.com. 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.