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We are pleased to share this 19 th annual edition of TrendLines: Trends in Washington Commercial Real Estate , a collaborative effort of Delta Associates and Transwestern’s research group. In this report, we review the results of 2015 and shed light on the forces and issues that we anticipate will shape the region’s economy and commercial real estate markets in 2016 and beyond.
As expected, 2015 was a year of economic expansion in the Washington area, due in no small part to the stabilization of federal government employment and procurement after several years of cutbacks. The private side of the regional economy — particularly the professional and business services sector — picked up the slack and the region recorded the most signicant job growth in a decade. In response to a growing economy, market conditions improved for all major property types during 2015 — trends that are poised to continue during 2016.
Though market fundamentals in the Washington area are strengthening, we detect a transition in forces that will power economic and real estate market growth in the future. Historically, the federal government drove growth in the Washington area, through its employment, leasing, and contracting activity. But the federal presence in the region, although stabilized, is unlikely to grow signicantly in the foreseeable future as a share of the overall economy. As a result, the private sector will lead the current expansion cycle, relying more than ever before on innovation, international trade, and regional cooperation.
The region’s public and private sector leaders have already identied the need to change the way that business is done in the Washington metro area. Two
Foreword
To our friends, clients and colleagues:
major efforts emerged in 2015 that will help guide the conversation about how the region will grow and prosper in the future: the Roadmap for the Washington Region’s Economic Future led by George Mason University and the 2030 Group; and the Global Cities Initiative by the Metropolitan Washington Council of Governments, the Greater Washington Board of Trade, and the Consortium of Universities of the Washington Metropolitan Area. These initiatives, if widely embraced by local jurisdictions and the private sector, can change the approach to economic development and improve the region’s chances of fostering sustainable economic growth and a ourishing real estate market.
Overall, we expect 2016 to be a year of continued growth, but also a year of rapid change. To succeed in the marketplace, real estate developers, owners, and investors must understand how these changes will inuence investment and development opportunities. This report highlights major changes afoot not just in the Washington region, but nationally and globally as well. With this in mind, we have subtitled this report A Region in Transition.
Over the years, we have been fortunate to work with the individuals and organizations contributing the success of the Washington area’s economy and its real estate markets. Thank you for your business. We appreciate your interest in our consulting and other services — including brokerage, property management, investment sales, and development — and we look forward to being your real estate service partner in the period ahead. Best wishes for a successful 2016.
PHILLIP M. MCCARTHY
KEITH A. FOERY
DAVID WEISEL, CRE
Section 2 The National Economy 18
Section 3 The Washington Area Economy 28
Section 4 The Washington Area Ofce Market 35
Section 5 The Washington/Baltimore Regional Flex/Industrial Market 44
Section 6 The Washington Area Apartment Market 50
Section 7 The Washington Area Condominium Market 60
Section 8 The Washington Area Retail Market 70
Section 9 Capital Markets and Investment Trends 78
Section 10 2016 TrendSetter Award Recipients 87
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Acknowledgments: The editor, David Weisel, CRE, wishes to acknowledge and thank the TrendLines team at Delta Associates: David E. Versel, AICP, Senior Vice President; David Parham, Senior Vice President; William Rich, Senior Vice President; Jonathan Chambers, Associate; and Dylan Jones, Associate. Special thanks are due to Elizabeth Norton, Transwestern’s Managing Research Director—Mid-Atlantic Region, who authored and reviewed sections of the report. The entire Delta Associates team made valuable contributions in various ways. Ji Chang and his creative design team at Transwestern who made the report visually attractive have our gratitude. Finally, we greatly appreciate the dozens of industry leaders who contributed their insights about the future of the commercial real estate industry in the Washington area. Representations: Although the information contained herein is based on sources that Delta Associates (DA) and Transwestern (TW) believe
to be reliable, DA and TW make no representation or warranty thatsuch information is accurate or complete. All prices, yields, analyses, computations, and opinions expressed are subject to change without notice. Under no circumstances should any such information be considered representations or warranties of DA or TW of any kind. Any such information may be based on assumptions that may or may not be accurate, and any such assumption may differ from actual results. This report should not be considered investment advice.
A Region in Transition
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A Region in Transition
While the overall economic news is positive, it comes with a major caveat: the forces that will drive economic growth in the Washington region in the future will differ from those that have driven growth in the past. Where past growth cycles in the region were led mostly by Federal employment and
procurement, all signs point to at or declining Federal spending in the region over the next several years. Consequently, the impetus for growth in the Washington economy and real estate market must come from the private sector. There are several nascent efforts aimed at fostering better conditions for starting and growing businesses in the Washington area. To succeed, these efforts must capitalize on the dramatic political, economic, and cultural changes that are reshaping how the region will grow and prosper. With this in mind, we believe that Washington is a region in transition . Our research for this year’s TrendLines highlights several ways in which the Washington area is changing.
We think that change in the Washington area will be shaped in part by these four MegaTrends:
1. THE FEDERAL GOVERNMENT IS AT A CROSSROADS. The inuence of the Federal government over the Washington metro area’s economy – direct employment, procurement, and related activity – has waned dramatically over the past several decades. The region’s economic prospects
going forward will necessarily depend far more on the performance of the private sector. 2. THERE IS A MISMATCH BETWEEN HOUSING SUPPLY AND DEMAND IN THE REGION. At recent
construction rates, the Washington metro area is producing 13,000 fewer housing units per year than would be justied by job and household growth. Undersupply is helping fuel appreciation growth that increasingly prices households out of the market. Two huge demographic cohorts – Baby Boomers and Millennials – are driving the housing market, but with different and often contradictory preferences. The mismatch between overall supply and demand and between selection/price and household preference/budgets will be key issues for the region in the coming years.
3. THE SHARING ECONOMY LOOKS A LOT LIKE LEASING OR BUYING.Today, it is possible to take a vacation that includes driving a shared car, staying in a private room or home, using some-
one else’s bicycle or golf clubs that you rented, eating a meal in a home with a local family whilewearing someone’s clothing that you rented, and then returning to work in your shared ofce space. These are examples of the sharing economy – one of today’s hottest economic topics. We take a look at two sharing economy examples that directly affect real estate: Airbnb and the hotel industry; and coworking space and its relation to the conventional ofce market.
4. COMMERCIAL REAL ESTATE MUST BECOME MORE RESILIENT. Catastrophic events, both natural and man-made — oods, storms, droughts, terrorism, cyber-attacks, and even economic shocks — require preparation and a new way of looking at the world. The term that has emerged to describe these efforts is resilience . The commercial real estate community – planners, developers, architects, engineers, construction companies, owners, and managers -- will need to be more proactive in order to make their assets more resilient and protect their investments.
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Federal Employment Washington Metro Area| 1950 – 2015*
Source: BLS (Not Seasonally Adjusted), GMU Center for Regional Analysis, Delta Associates; February 2016.
Federal Procurement Washington Metro Area| FY1980 – 2015
Source: GMU Center for Regional Analysis, Delta Associates; February 2016.
This year is likely to be one of transition for the Washington metro area’s economy and commercial real estate market. We are likely to see a transition from weak job growth to stronger, from excess apartment deliveries to more equilibrium conditions, and from experiential real estate as a new niche to a full-edged template of how to develop and operate real estate.
Yet, for all the change in our market, we see a lot of the constants enduring, qualities of the region that have underpinned our successful market for decades: The highest-paid and best-educated
workforce in the country; the presence of the Federal government that lends stability and which appeals to long-term investors; and the entrepreneurial spirit that is creating jobs and attracting Millennials. Savvy investors can capitalize on this blend of transition and consistency to yield successful real estate results.
We hope the information in this report assists you in making informed decisions to meet your business objectives in 2016 and beyond. Best wishes for success in the period ahead.
Megatrend #1: Federal Government at a Crossroads STILL IMPORTANT, BUT NOT AS DOMINANT, THE FEDERAL GOVERNMENT FACES CHANGES For better or worse, the Washington metro area economy has long been dominated by the Federal government. While the conventional wisdom remains that Washington is recession-proof, the truth is much less optimistic. In fact, the inuence of the Federal government over the Washington metro area’s economy has waned dramatically over the past several decades. In 1950, 38% of all jobs in the region were provided by the Federal government; today, government workers account for just 12% of the region’s jobs. While the number of Federal jobs has uctuated over the past 20 years, there are presently about 365,000 people in the region’s Federal workforce – the same as in 1994.
Equally important to the region’s economy is the inuence of Federal procurement. Between 1980 and 2010, the amount of annual Federal procurement spending in the region increased from $4.2 billion to $82.4 billion. From 2010-2015, though, procurement spending decreased by 14%, and is not expected to approach its 2010 peak anytime soon.
The combination of at Federal employment and declining procurement is contributing to a dramatic decline in the inuence of the Federal government on the Washington area’s economy. In 2010, the Federal Government sector accounted for about 40% of the region’s Gross Regional Product (GRP). According to the George Mason University Center for Regional Analysis, by 2020 Federal spending will represent only 27% of the Washington area’s GRP.
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2015: $71.1B
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The negative impacts of Federal cutbacks on the region’s ofce market have been exacerbated by the actions of the General Services Administration (GSA). During the current cycle, GSA has consolidated more Federal agencies in owned space, reduced the amount of square footage per employee, and relocated several agencies to lower-cost spaces. As a result, from 2012-2015 the total amount of ofce space leased by GSA in the region declined by three million square feet and the average rent for GSA leases dipped by about $4.50/SF. The GSA is expected to continue these trends – this will
further depress ofce demand and rental rate growth in the region’s ofce market. Looking ahead, several factors could have profound effects on the role of the Federal government in the Washington area’s economy:
• The 2016 presidential election is shaping up to be the most unpredictable race since at least 1968, and the results of the election could result in a fundamental reshaping of the government’s footprint in the region. Or not — cataclysmic changes anticipated ahead of previous changes in administration and parties often did not pan out.
• Pressure is building in Congress to pursue another round of Base Realignment and Closure (BRAC) activity. The 2005 BRAC process resulted in a shift of millions of SF of ofce space from leased buildings to GSA-owned properties, and between submarkets within the region.
• The heightened threat of terrorist attacks is likely to lead to higher security standards for government agencies, which would favor GSA-owned properties over leased space.
• The potential for an international military con ict would ramp up defense spending, which would drive procurement spending for defense and cybersecurity contractors.
Regardless of how these factors play out, it is clear that the Federal government will not dominate the Washington region’s economy in the future as it has in the past. The region’s economic prospects going forward will necessarily depend far more on the performance of the private sector.
Share of Gross Regional Product By Source Washington Metro Area| 2010 & 2020
GSA Leasing Trends: Downsizing Washington Metro Area
2010 2020
Non-Federal 60.2%
Non-Federal 70.2%
& Salaries 6.7%
Procurement 12.8%
f S F L e a s e
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Source: GSA, Delta Associates; February 2016.
• Approx. 40% of expiring GSA leases will be downsized and moved to smaller/consolidated space
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Megatrend #2: Housing Market Mismatch NOT ENOUGH HOUSING TO MEET DEMAND, AND NOT ALWAYS THE RIGHT TYPES At recent construction rates, the Washington metro area is producing 13,000 fewer housing units per
year than would be justied by job and household growth. As of 2011 there were 2.12 million housing units in the Washington metro area. Of these, 675,000 (32%) were multi-family units. According to the George Mason University Center for Regional Analysis, housing demand in the region between 2011 and 2023 will total 410,000 additional housing units, an average of 34,000 per year. Of this demand, 155,000 units (38%) will be for multi-family units.
While expected job growth will sustain demand for housing in the region, in practice, the region’s housing production has not kept pace with demand during this cycle. During the last expansion cycle from 2000-2005, the region added an average of 37,000 housing units per year – by compar- ison, the region only added an average of 21,000 units per year from 2010-2014. With demand projected to average 34,000 units per year, this recent construction pace amounts to an undersupply of
13,000 units per year. The repercussions of this undersupply include individuals sharing housing or delaying household formation, and households nding homes outside the metro area and enduring long commutes. Partly due to the slow pace of housing construction, the median home sale price in the Washington metro area increased by 24% between June 2010 and June 2015.
The undersupply of housing in the region has also had a dramatic effect on the rental market, particularly for low-income renters. From 2009-2015, Delta Associates’ research shows that the average effective apartment rent in the Washington area increased by 20%. The Washington area has become of the most cost-burdened rental markets in the U.S.– as of 2014, 81% of households in the region that earn less than $45,000 per year spent more than 30% of their incomes on housing.
As with the rest of the U.S., the Washington area’s housing market is primarily being inuenced by the wants and needs of two generations: Baby Boomers and Millennials. The divergent – and often
contradictory – preferences of these two generations will shape the region’s housing market overthe next decade and beyond.
Demand for Housing: Type of Housing Washington Metro Area
New Building Permits for Privately Owned Residential Units Washington Metro Area
Source: Census Bureau, Delta Associates; February 2016 .
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As with the rest of the U.S., the Washington area’s housing market is primarily being inuenced by the wants and needs of two generations:
Baby Boomers and Millennials.
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Demand for Housing: Washington Has One of Highest Cost Burden for Lower Income Renters Largest Housing Markets| United States
Note: Cost-burdened households pay more than 30% of income for housing. Source: JCHS tabulations of US Census Bureau ACS Data, Delta Associates; February 2016.
Baby Boomers: Postponing Retirement and Aging in Place Labor Force Participation Rate and Housing Mobility
Source: Census Bureau Decennial Census, ACS, and Current Pop. Survey, Delta Associates; February 2016.
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63% 57% 56%
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Boomers are bucking the patterns of previous aging generations in two key ways. First, they are working longer – the 2014 national labor force participation rate among the 65+ population was 17%, up from 15% in 2010 and from 12% in 1990. Second, Boomers more likely to stay in their homes and age in place than prior generations, with the mobility rate for individuals age 65 and older dropping from 5.0% in 1990 to 4.1% in 2014. Even with many Boomers aging in place, the sheer size of this generation contributed to Boomers accounting for about half of all new renter households in the U.S. over the past 10 years. So, contrary to popular notions, Millennials are not the only force behind apartment demand.
Millennials nd themselves in a very different position. Only about one-quarter of young adults in the U.S. are married and living in their own households, compared with 43% in the 1980s and 56% in the 1960s. Many Millennials have yet to even form their own households: as of 2015, 35% of those age 18-34 live with their parents – this gure has historically hovered around 30%. Among those who are living on their own, most are renting their homes, and a growing share is living in central cities or close-in suburbs.
The critical question for the housing market as it relates to Millennials is this: Will they start buying homes in large numbers and, if so, where will they buy? Like prior generations, Millennials do want to be homeowners: Trulia reports that 93% of adults age 18-34 plan to buy a home in the future. More critically, as documented in a recent ULI survey, a signicant number of Millennials actually want to live in the suburbs. With median single-family prices in excess of $500,000 in most of Washington’s close-in suburbs, however, most young buyers will either need to settle for condos or townhouses, or seek homes in outlying areas.
Megatrend #3: The Sharing Economy and Real Estate THE SHARING ECONOMY: SEEMS LIKE LEASING OR BUYING The sharing economy is one of today’s hottest economic topics. What began as a cottage industry
focused on lending, borrowing, and trading now has the potential to generate at least $335 billionin revenues by 2025, according to estimates from PwC. The sharing economy has denitely become big business.
From forerunners such as Couchsurng and Craigslist that were based on exchanging excess or un- used goods and services between individuals, sometimes for free, the sharing economy has explod- ed since the 2008 recession. Known by a variety of terms — Collaborative Economy, Gig Economy, On-Demand Economy, Collaborative Consumption, Peer Economy, among other — it now comprises hundreds of large and small companies and organizations that are selling, lending, or giving away just about anything imaginable. It has become monetized and depends on technology to maximize convenience to users, and it increasingly relies on branding as the measure of quality and trustworthi- ness. Signicant ly, some companies are growing in part through service expansion. For example, Uber not only gives rides but it has also started food delivery (UberEATS) and a messenger service
(UberRUSH).
Source: Goldman Sachs, Trulia, Delta Associates; February 2016.
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Airbnb Uber Chegg Freelancer Lending Club
HomeAway Lyft Ebay Instacart Funding Circle
Love Home Swap ZIpcar Craigslist Task Rabbit Prosper
Onenestay RelayRides Rent the Runway Angie’s List Kick Starter
Wework Zimride Etsy Elance Go Fund Me
Regus Car2Go Cookening Bidwilly Zopa
Today, it is possible to take a vacation that includes driving a shared car from Turo or Getaround, staying in a private room or home that you found through Airbnb or HomeAway, using someone else’s bicycle or golf clubs that you rented through Spinlister or GearCommons, and eating a meal in a home with a local family that you discovered through BonAppetour or Cookening while wearing someone’s clothing that was listed on Rent the Runway or Vinted. And during your vacation, a pet sit- ter from DogVacay or Rover.com can take care of your dog. You can facilitate all of these transactions
through a website or an app on your smartphone, and when you return to work in your shared ofce space at WeWork or Cove, you can write an electronic review of your experiences for others to read, helping them to decide if this is for them. By the way, you will also be rated for your desirability as a customer or a guest, so if you broke your Airbnb host’s best china without offering to replace it or pay for it, you may want to look for a different service the next time around.
Perhaps you have noticed that none of these t ransactions involved any real sharing – all of them require a monetary payment. In other words, sharing is actually very similar to those conventional concepts of buying and renting.
So how is the sharing economy affecting the real estate industry? We will try to answer that by looking at two sectors where the sharing concept has had direct consequences for real estate: the lodging and ofce sectors.
Sharing and the Hotel Industry Airbnb does not own any hotels, but it has more accommodations (listings) than the newly-merged Marriott/Starwood and Hilton combined, according to The New York Times, and it is by far the largest sharing economy service in the lodging sector. Since its founding in 2008, Airbnb says it has grown to over two million listings serving 60 million guests in more than 34,000 cities and 190 countries. It has a current market capitalization of $25.5 billion; only Marriott/Starwood and Hilton Worldwide are more valuable. Airbnb’s revenue grew 106% in 2015 — far outpacing Choice Hotels and Hilton, the next-closest hotel chains, each of which saw about 9% growth.
In the District of Columbia, Airbnb’s inventory is only about 12% as large as the hotel room inventory, but this gure is growing. Given that the District’s hotel occupancy rate has risen since 2010, even as the room supply has grown, it appears that Airbnb may be helping to expand the market instead of cannibalizing existing market share. Its pricing may be affecting the composition of hotel demand, particularly in the economy sector. The $118 average price of an Airbnb accom- modation in the District in 2015 is about 43% less than the average daily rate for a hotel room, indicating that Airbnb is primarily serving the leisure travel sector, rather than business travelers, and perhaps inducing new demand from guests who would not otherwise pay for a hotel.
This could change, however, with the introduction of serviced apartments through Airbnb for Business, a new division offering rentals with business class hotel amenities through a partnership with Bridg- eStreet, which has more than 50,000 mid-range and luxury rentals in about 60 countries. Additionally, the Wall Street Journal reports that Airbnb has discussed arrangements with national apartment operators
to allow tenants to rent out their units in exchange for a share of the revenue. However, it remains to be seen if Airbnb will succeed in con- vincing local governments, tenant organizations, and property owners and managers that increasing the number of apartments on Airbnb will not cut the rental housing supply overall (affordable housing in particular has been a sensitive political topic), out existing zoning regulations, affect tax revenues, or compromise security and safety — issues that have been raised in several cities already. Looking ahead, Airbnb is expanding into new services that will improve the experiences of both its hosts and their guests and is expected to broaden its strategic partnerships with apartment operators and perhaps even hotel companies.
Airbnb does not own any hotels, but it has more rooms (listings) than the new Marriott/Starwood and Hilton combined. At $25.5 billion in market capitalization, it is the third-largest
hospitality company in the U.S.
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Sharing and the Ofce Real Estate Industry The same shifts in consumer attitudes fueling the growth of Airbnb and other sharing economy companies are driving changes in the commercial ofce market. In addition, there are basic differ- ences in the types of ofce jobs being created today, with independent contractors supplanting some permanent, full-time employees. These changes are affecting how and when ofce space is used and thus how it is designed and leased. New coworking concepts such as WeWork are offering coworking space with a new set of design, leasing, and occupancy parameters that are better-suited for today’s workers in sectors of the economy where the work is more demand-based. By 2020 up to one million professionals will work in coworking facilities, according to Emergent Research.
In the case of WeWork, their business model involves renting large blocks of ofce space and building them out as fully furnished coworking spaces that range from unassigned desks in a large open area to enclosed, lockable, private ofces that can accommodate one or more people, and leasing them on a month-to-month basis.
Today there are over 70 coworking or on-demand ofce space locations of various types in the Wash- ington area. Variations include Cove, MakeOfce, Carr Workplaces, Metro Ofces, Regus, and Liquid- Space (which is an online matchmaking service to list and nd workspaces). The principal opportu- nity in the on-demand ofce space sector is that owners and managers can maximize their rents. For
example, it has been estimated that a typical coworking space in the Washington area averages 55 square feet per person and an average membership cost of $500 per month — equating to more than $90 per square foot in rent to the operator. Of course, this premium rent is offset by higher operating expenses, and occupancy rates typically are lower than in the conventional ofce market. But the lure of making productive use from otherwise vacant or under-utilized space is appealing.
While we expect coworking to continue to grow and to be a useful component of the ofce market, it is not likely to replace the vast majority of conventional ofce space demand.
Megatrend #4: Resilience: Commercial Real Estate Must Adapt PREPARING FOR PROBLEMS, DESIGNING FOR RECOVERY The specter of climate change and sea level rise is having a dramatic effect on the real estate and urban development world. In the wake of Hurricane Katrina, Superstorm Sandy, and other natural disasters, public and private interests alike have identied the need to plan and prepare for future catastrophic events.
The term that has emerged to describe these efforts is resilience . This term, as commonly used, re- fers to preparations for all types of catastrophic events, both natural and man-made: oods, storms, droughts, terrorism, cyber-attacks, and even economic shocks. Business and political leaders around the world are rapidly embracing the notion that, unless cities and buildings are made more resilient to such events, the losses could be dire in both human and economic terms.
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The uptick in catastrophic weather events over the past 20 years is real and increasingly alarming. From 1950 through the 1990s, there was an average of about two natural catastrophes per year in the U.S. The average over the past decade has been eight per year; in 2011 alone there were 14 such events. In terms of economic damage, the two costliest types of natural catastrophes are hurricanes/tropical storms and tornadoes. Between 1950 and 2013, these two types of events caused more than $300 billion in damages (in 2014 dollars), representing 80% of the total damage nationwide.
A wide variety of responses have been advanced to address the mounting threat from both natural and man-made catastrophes. The Federal government now requires local governments to prepare hazard mitigation plans in advance of disasters in order to qualify for FEMA funding. Congress has passed several new laws aimed at improving the National Flood Insurance Program. Numerous state and local governments have undertaken adaptation plans that ensure that infrastructure and buildings are protected from rising sea levels. The nonprot community has taken on many initiatives, most notably the Rockefeller Foundation’s 100 Resilient Cities program that is building a dialogue among peer cities facing similar issues.
Professionals in the planning, engineering, and design elds have been devising new approaches to resilience. This is exemplied by RELi, a resiliency standard created by the design rm Perkins + Will that is modeled on LEED (the Leadership in Energy & Environmental Design rating system of the U.S. Green Building Council) and measures how effectively buildings are designed to respond to different types of hazards and events. RELi is envisioned as a standard that can be used by under- writers to measure the mitigation of risk for structures built in vulnerable locations.
Catastrophe Costs by Type United States| 1950 – 2013
Source: Munich Re, Delta Associates, February 2016.
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Hurricanes/Tropical Storms $161.2
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The commercial real estate community has been somewhat slower to respond to the rapidly increasing need for resilience, though. The conventional wisdom in the real estate development and nance world is that resiliency requires enormous upfront capital outlays with no increase on return. The challenge is that future damages from oods and other natural disasters are typically not measured in development pro formas, so there is no way to know the potential costs of ignoring
resilience measures. There are several recent projects that are challenging this mindset – mainly located in oodplains or coastal areas. While these have mainly been l arge-scale mixed-use projects such as The Wharf here in Washington, there have been some smaller scale developments in other cities that have begun to incorporate resilience into their designs. As the threat of catastrophic events rises, the real estate community will need to be more proactive in order to protect their investments.
The Washington area is, in spite of its low-lying location and prevalence of oodplain, well posi- tioned to thrive in a resilience-focused world. A recent study by Grosvenor examined the vulner- ability and adaptability of cities in the U.S. and globally. While this study found that Washington was moderately at risk for future catastrophes, particularly ooding, it also found that Washington was among the most prepared cities in the world in terms of its ability to respond to hazards. This adapt-
ability should be a great asset for Washington real estate in the years to come.
Resilient Building Design Strategies
• Super-insulated building envelopes
• Green roofs
• Reduce soil compaction
• Material speci cation
• Tornado safe room
• Reduce water use—indoor
• Reduce water use—landscape
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LEAST VULNERABLE MOST ADAPTIVE
1. Chicago 1. New York 2. Pittsburgh 2. Los Angeles
3. Atlanta 3. Washington, D.C.
4. Boston 4. Chicago
7. Seatlle 7. Boston
Source: Grosvenor International, Delta Associates; February 2016.
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The National Economy THE NATIONAL ECONOMY OVERCAME A SLOW START AND EMERGED FROM 2015 IN GOOD CONDITION, BUT CONCERNS LINGER
After a sluggish start, the national economy ended 2015 on a high note with strong job gains and respectable GDP growth. Through November 2015, the U.S. economy marked 70 consecutive months of job gains and added more jobs in the past two years than in any two-year period since 1998-2000. The unemployment rate is low, new claims for unemployment insurance are at cyclical lows, and home prices rose. Still, some indicators have been only tepid and economic and political troubles around the globe reverberate through the U.S. economy, leading to the feeling that things are not quite stable yet.
Here are some highlights from 2015:
• Payroll job growth was strong, with 2.71 million jobs added during 2015; job growth was led by the Professional/Business Services sector, which is among the highest paying employment sectors. In addition, the Federal government nally posted a net job gain in 2015, ending
several consecutive years of reductions. • The unemployment rate continued to decline through the year, and stood at 5.0% at December
2015.
• After a sluggish start to 2015, GDP growth resumed in the 2nd quarter of 2015 and remained healthy throughout the balance of the year.
GDP growth was primarily driven by increased consumer spending, though inventory cutbacks and a slowdown in net exports prevented stronger growth. Strong employment growth over the year pushed the national unemployment rate down throughout the year, even as the labor force participation rate increased. Despite the healthy job increases, much of the growth has come in lower paying industries, leading to weak wage growth. This should change over the next couple of years, as higher-wage industries add more jobs and the low unemployment rate forces businesses
to compete for top talent. Another encouraging sign for the national economy is continued growth in consumer buying power from increases in both household net wealth and revolving credit. These trends reect the upside of historically low interest rates, which have encouraged consumers to invest their cash in riskier assets and reach for their credit cards. With the national economy having weathered a scare in the international markets in August, the Federal Funds Rate was increased for the rst time in nearly a decade at the December 2015 meeting of the Federal Open Market Committee (FOMC). The increase was just one quarter of a percent and will likely slow consumer spending and revolving credit somewhat, but will strengthen the dollar even further.
Moving forward, the U.S. economy is poised to continue gaining strength through 2016 and beyond. Major economic indicators are moving in a positive direction, although wage growth, international
trade, and economic turbulence in China and Europe remain areas of concern. The timing and size of additional increases to interest rates also bear watching over the coming year.
*12-month percentage change through November 2015, seasonally adjusted. Source: Federal Reserve Board, Delta Associates; February 2016.
Revolving Credit United States| 1999 – 2015
*As of 3rd Quarter 2015. Source: Federal Reserve Board, Delta Associates; February 2016.
Change in U.S. Household Net Worth United States| 2005 – 2015
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Now, for a look at major U.S. economic indicators:
Payroll Jobs Job growth was robust throughout 2015 with the national economy adding 2.71 million new payroll jobs over the year. Nearly all job growth was in the private sector, with 2.6 million private jobs added over the 12-month period. After several years of job reductions, public sector employment began to pick up in 2015, especially in the latter half of the year, with 110,000 new jobs added during the year. The pace of public sector hiring is currently at its highest level since early 2010.
Net monthly job growth for the last three months of 2015 averaged over 275,000 jobs; this resurgent job growth has helped dispel concerns that the economic recovery was faltering after recording two consecutive months of net job additions below 200,000 in August and September. Month-to-month gains (seasonally adjusted) from January to December 2015 has averaged approximately 221,000 jobs per month:
• October 2015: 307,000
• November 2015: 252,000 (Preliminary)
• December 2015: 292,000 (Preliminary)
The rebound in public sector hiring has been driven largely by the state and local government subsectors, though there has nally been some recent growth at the Federal level. Following 47 consecutive months of year-over-year declines, Federal employment increased in every month of 2015 except for January.
Overall, the public sector has now added jobs (year-over-year) for 18 consecutive months after shedding jobs over the previous several years. Federal employment is expected to continue growing over the next couple of years, especially now that the Federal government nally approved a budget in November after ve years of turmoil and continuing resolutions. The agreement increases discretionary spending by $80 billion over the next two years, and will go a long way towards easing uncertainty in economic sectors relying on Federal spending.
During the 12-month period ending November 2015 the top four sectors in job gains were Education/ Health Services, Professional/Business Services, Leisure/Hospitality, and Retail Trade. These four sectors alone added about 2 million new jobs, accounting for 73% of net job growth. Job gains were positive across all major super sectors, and seven of the 13 sectors added at least 100,000 payroll jobs over the year. A healthy Professional and Business Services sector is especially important for commercial real estate markets, since these jobs typically boost both retail spending and ofce demand.
Note: Data are not seasonally adjusted. Source: Bureau of Labor Statistics, Delta Associates; February 2016.
Payroll Job Growth United States| Year-Over-Year
Payroll Job Growth United States| 12 Months Ending December 2015
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Note: Seasonally adjusted; shaded bars represent recessions. Source: Bureau of Labor Statistics, Delta Associates; February 2016.
Unemployment Rate United States| 1980 – 2015
Labor Force and Wages Overall, initial unemployment claims have steadily decreased since peaking in March 2009. As of the rst week of January 2016 initial cl aims were 275,750, based on a four-week seasonally-adjusted moving average. This is 5.8% below the same week in 2015, and 27.2% below the 15-year average of 348,794. Unemployment claims should continue to erode into 2016 as the nation approaches full employment and cyclical unemployment approaches zero.
The unemployment rate (seasonally adjusted) declined to 5.0% as of December 2015, down from 5.6% one year earlier, and marking its lowest level since before the Great Recession. This decline occurred despite the labor force increasing 1.9% during the same time period. As the nation’s economy has returned to a healthy state, unemployed persons are becoming more condent in being able to nd full-time jobs. The unemployment rate should continue to decline in 2016, but at a slower rate, as the number of cyclically unemployed persons dwindles.
An ongoing area of concern for the national economy is the national average hourly wage , which has increased at a slow rate since the end of the recession. Over the past ve years, the growth rate of average hourly wages has hovered around 2.0%. Prior to the recession, from 2007 to 2009, the hourly wage growth rate averaged 3.1%. This is a pressing issue for many aspects of the economy, including price levels and consumption patterns.
There are multiple competing theories that may explain the weak wage growth. One is that slow growth in wages is an indicator that the jobs being created are in lower-paying industries. Even if people are nding jobs, they are likely to be underemployed, meaning job seekers are taking jobs that are below the education and experience levels they have achieved. Another theory has to do with the changing composition of the workforce. The average age of workers has remained relatively constant over the last few years, which indicates that younger workers are entering the workforce at a faster pace than other age cohorts. These younger workers tend to start with lower salaries, which may partly explain depressed average wage growth.
A third theory is that, due to slow moving wage adjustments, known as “sticky” wages, rms could not adequately reduce wages to offset lower demand during the Great Recession, and we are witnessing a slow correction in wages or “pent-up wage cuts” as workers become more accepting of reduced nominal wages. Wage growth tends to be a lagging indicator of an economic recovery, and
the current recovery has progressed much slower than most. The combination of low unemployment and continued employment growth should lead to stronger wage growth in 2016 and beyond.
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*Data available starting March 2007. Source: Bureau of Labor Statistics, Delta Associates; February 2016.
Average Hourly Earnings 12-Month Percentage Growth| 2007 – December 2015
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Note: Data are seasonally adjusted. Source: Bureau of Labor Statistics, Delta Associates; February 2016.
Employment Levels by Job Status United States| 2010 – 2015
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Number of Unemployed vs. Job Openings 12-Months Average Ending November 2015
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The past year has been an auspicious time for underemployed workers seeking full-time employment. As recently as 2011, the U.S. economy was adding more part-time than full-time jobs. Since 2014 , though, the gap (seasonally adjusted) between full-time and part-time employment growth has grown along with the overall workforce. In August 2015, the gap between the 12-month net gain in employment for full-time and part-time jobs reached a post-recession high of 4.03 million. The gap narrowed somewhat in the fall, and was 2.69 million as of December 2015. Full-time positions translate to more hours worked and higher paychecks. Recent trends in full-time employment seem to also indicate that any negative effects of Obamacare on full-time hiring have been blunted by the need for more ful l-time workers.
Another positive indicator is the declining job availability ratio — the relationship between potential applicants and the number of jobs available. The national job availability ratio was 1.2 as of November 2015, down from 1.6 in November 2014. The Professional/Business Services sector had the greatest number of job openings as of November 2015, with 1,074,000 jobs, and had the lowest job opening ratio at 0.8, tied with the Education and Health Services sector.
Gross Domestic Product (GDP) Real GDP growth for the 3rd quarter of 2015 was estimated at 2.1%, somewhat below the expected growth rate of 2.7% for the quarter. GDP growth in 2015 was largely driven by consumer expendi-
tures, state and local government spending, and exports, but was held back by restrained inventory accumulations by businesses. After starting 2015 on a sour note, with 1st quarter GDP coming in at a paltry 0.6%, GDP quickly recovered, recording a very healthy 3.9% growth rate in the 2nd quarter. The economy shook off many of the weaknesses during 2015 including harsh weather, declining oil prices, a sell-off in international markets (mainly China), and accelerated appreciation of the dollar, which sent net exports plunging.
Looking forward into 2016, strong consumer spending will continue to be the main engine of economic growth, but steady improvements in the housing market, Federal and state/local government spending, and business investments will move the economy forward as well.
The most recent report from the Federal Reserve Bank of Philadelphia’s Survey of Professional Forecasters projects real GDP growth to be 2.8% in the 4th quarter of 2015 and 2.4% for all of 2015.
Looking further ahead, real GDP is predicted to average 2.6% in 2016, 2.5% in 2017, and 2.8% in 2018. Corporate Prots U.S. corporate prots totaled $2.06 trillion during the 3rd quarter of 2015 on an annualized basis, down very slightly from $2.08 trillion in 2nd quarter of 2015 and from $2.20 trillion in the 3rd quarter of 2014. Corporate prots have largely plateaued in recent years as more companies are taking a cautious approach of buying back shares and slowly increasing dividends. Companies are continuing to weigh options on how to best deploy earnings and prots and, in many cases, are showing a preference for mergers and acquisitions over riskier, capital intensive projects that could rock the boat for shareholders. However, the recent increases in hiring indicate that corporate leaders are becoming more condent about consumer demand.
Note: Quarters are seasonally adjusted at annual rates.
Source: Bureau of Labor Statistics, Delta Associates; February 2016.
GDP Percent Change United States| 2007 – 2015
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Note: *Through Sept. 2015, seasonally adjusted at annual rates. Yearly data are not seasonally adjusted. EPS reect operating earnings as of Sept. 2015. Source: Bureau of Economic Analysis, Standard and Poor's, Delta Associates; February 2016.
U.S. Corporate Pre-Tax Prots 2008 – 2015
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Note: Data reect 20-city composite index. Source: S&P/Case-Shiller, Delta Associates; February 2016.
Annual Change in Existing Home Sale Prices United States| 2008 – 2015
Housing Market Home prices in the 20 major metro areas covered by S&P/Case-Shiller increased 5.5% during the 12 months ending October 2015, the most recent data available. This is up from the September 2015 gure of 5.4%. The growth rate of home prices largely stabilized in 2015 as expanding inventories of homes for sale in many metro areas eased pricing pressure. With an interest rate hike just implemented, mortgage rates will almost certainly see a corresponding increase. However,
we expect the housing market to continue to ourish into 2016 with increased construction and higher sales prices.
According to the National Association of Realtors, the annualized pace of existing home sales decreased to 4.8 million (preliminary) in November 2015, down from 5.0 million in November 2014. The average existing home sales price was $263,900 (preliminary) in November 2015, up 4.0% from $253,800 in November 2014.
The Federal Budget The Federal budget decit for the 2015 scal year was $439 billion (2.5% of GDP)--the lowest level since FY 2007, and below the 40-year average. The budget shortfall in FY 2015 marked the sixth consecutive year that the decit’s share of the GDP has decreased since peaking at 9.8% in 2009. The smaller decit is attributed to greater than anticipated tax revenues from businesses and households as a result of the improving economy. In spite of thi s progress, the U.S. is still running a decit – we are not paying down our debt, we are just increasing it at a slower rate.
After years of political wrangling Congress nally passed a budget bill in the 4th quarter of 2015, which was signed by President Obama in November. The budget brought an end (at least for the short term) to the ongoing drama of impending Treasury defaults, Federal government shutdowns, and forced continuing resolutions. Federal discretionary spending caps were raised by $80 billion over the next two years and provide $32 billion in overseas contingency funds to the Pentagon.
While the budget deal provides some scal stability over the next couple of years, there are still many long-term concerns. Without action, the decit would reach $1.0 trillion by 2025, with growth driven by an aging population, rising health care costs, an expansion of Federal subsidies for health insurance, and growing interest payments on the Federal debt. The national elections of 2016 could have a major impact on the long-term picture as well, since the outcome could l ead to profound changes in Federal taxation and spending policies.
While the budget deal provides
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*Data as of November 2015. **Seasonally adjusted annual sales rate. Source: National Association of Realtors, Delta Associates; February 2016.
U.S. Existing Home Sales vs. Sales Price 2006 – 2015
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Baseline budget projections as of August 2015. Source: Congressional Budget Ofce, Delta Associates; February 20 16.
Baseline Budget Projections United States| 2015 – 2025
Interest Rates and Ination There had been a great deal of discussion throughout 2015 about when the Fed would increase the Federal Funds Rate, and by how much. Stock market woes on Wall Street brought about by a faltering Chinese economy and extremely low oil prices led the Federal Open Market Committee to decline to raise rates at it s September meeting. The somewhat disappointing August and Septem- ber job growth numbers furthered the rumor that any interest rate hike would be pushed into 2016.
However, revitalized job growth in October and November, and consumer price increases, provided the FOMC with the condence to implement a slight, 0.25% increase in the Federal Funds Rate target at the December 16 board meeting. The rate hike, which was nearly universally anticipated, is the rst since the recession.
In addition to the December 2015 interest rate increase, the Fed has also indicated its intention to enact further incremental increases to interest rates in 2016. Still, interest rates have been at historically low levels, so the expected modest increases will keep long-term interest rates relatively low.
Global nancial markets are expected to experience continued volatility in the short-term, at least until uncertainty surrounding the Ch inese economy, and the Chinese government’s corrective measures, diminishes. Sudden swings in commodity prices and exchange rates also remain a concern. Sectors that have beneted from record-low borrowing rates will experience the most market
volatility. Commercial real estate and the REIT sphere are experiencing downward pressures as themarket accounts for higher costs of capital, though REITs with solid property fundamentals should be able to weather the storm. As of the end of trading on January 12, 2015, the S&P 500 index stood at 1938.68, down about 4% over the previous 12 months. The Index reached a 2015 high of 2130.82 on May 21, up 13% over 12 months.
Ination remained at during the 12 months ending November 2015, with a strong dollar and lower domestic energy prices keeping prices in check. This is well below the Fed’s benchmark of a 2.0% increase, which had been a contributing factor to the delay in raising the Federal Funds Rate. The personal consumption expenditure price index (PCEPI), which takes into account changes in consumption habits as people substitute some goods and services for others, rose 0.4% during the 12 months ending November 2015. We expect ination to be contained in the near-term due to modest wage growth and a strong dollar, coupled with the fact that price pressure tends to lag economic growth by a year or more. Given these conditions, ination will likely remain in the 0.5% to 1.0% range on an annualized basis through 2016.
Economic Outlook The national economic recovery continued in 2015, with most of the damage done by the Great Recession now in the rear view mirror. GDP growth is projected to be 2.8% in the 4th quarter and 2.4% for all of 2015.
Over the past couple of years the economic recovery has been fueled by healthy employment growth. All major employment sectors have experienced strong job growth, with the high-wage Professional/Business Services sector leading the way. The unemployment rate steadily declined by 60 basis points over the 12 months ending December 2015, and the national economy is now
approaching the point of full economic employment. We expect that the sustained health of theemployment market will lead to improvements to the housing and retail markets in 2016.
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Data are non seasonally adjusted monthly averages. 30-Year Treasury not issued between March 2002-Dec. 2005. Source: Federal Reserve Economic Data (FRED), Delta Associates; February 2016.
Selected U.S. Government Interest Rates 2000 – 2015
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Despite the generally good economic news in 2015, the current recovery has shown a few areas of weakness. The primary area of concern is the lack of signicant wage growth, stemming from job growth in lower-paying sectors and limited competition for quality workers. We expect 2016 to bring improvement in this area, as the pool of unemployed workers looking for jobs continues to dry up and employers increase compensation to attract the best qualied personnel.
Another major concern moving forward in 2016 is international trade. China, one of the largest U.S.
trading partners, is in the midst of a considerable economic slowdown which will likely be a drag onU.S. net exports – bad economic news from China has already caused signicant of economic turbulence in the rst weeks of 2016. In addition, a strong U.S. dollar which saw virtually zero ination in 2015, will also hurt the nation’s trade balance. We do expect ination to return modestly, especially since energy prices have likely hit bottom.
Overall, 2016 will bring another year of sustained, but modest economic growth. The national economy will expand and add jobs over the next year, but growth will continue to be slower than in past economic recovery cycles.
Specically, we believe the economic outlook is as follows:
• Real GDP growth: 2.6% in 2016.
• Payroll jobs: 2.75 million added in 2016.
• Housing: Price appreciation around 5.5% to 6.0% in 2016.
• Unemployment rate: 4.6% at end of 2016. • Federal Funds Rate: At least one incremental increase in 2016, following the 0.25% increase
in December 2015.
• Long-term interest rates: Edging higher during 2016, particularly short-term rates, following the Federal Funds Rate increase. Long-term interest rates will only increase very modestly.
• In ation: 1.5-2.5% for 2016 as consumer demand continues to strengthen, but fuel costs remain low.
National Payroll Job Growth Summary The U.S. economy gained 2.65 million payroll jobs over the 12 months ending November 2015, virtually unchanged compared to all of 2014. This compares to the 25-year annual average of 1.2 million jobs at a 1.0% average growth rate.
Note: *CPI-U and PCEPI through November 2015. Data reects 12-month percentage change. Source: Federal Reserve Economic Database (FRED), Delta Associates; February 20 16.
U.S. Ination and Personal Consumption Expenditure Index 1980 – 2015
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YEA R JO B C HAN GE % C HA NGE
2015 2,707,000 1.9%
2014 2,649,000 1.9%
2013 2,289,000 1.7%
2012 2,262,000 1.7%
2011 1,567,000 1.2%
2010 -958,000 -0.7%
2009 -5,937,000 -4.3%
2008 -766,000 -0.6%
2007 1,538,000 1.1%
2006 2,393,000 1.8%
2005 2,256,000 1.7%
2004 1,431,000 1.1%
2003 -310,000 -0.2%
2002 -1,446,000 -1.1%
Note that BLS has rebenchmarked gures since their initial publication; the gures presented above are the most recent estimates. Source: Bureau of Labor Statistics, Delta Associates, February 2016.
JOB CHANGE JOB CHANGE
METRO AREA # % METRO AREA # %
New York 167,000 1.8% Denver-Boulder 36,600 2.7% LA Basin Portland (OR) 36,500 3.3% Los Angeles/Long Beach/Glendale 73,200 1.7% Austin 36,100 3.9% Orange County (Santa Ana/Anaheim/Irvine) 39,000 2.5% Charlotte 35,500 3.3% Riverside/San Bernardino/Ontario 46,100 3.5% San Antonio 35,300 3.7% Total LA Basin 158,300 2.2% Philadelphia 34,500 1.2% San Francisco Bay Area Detroit (Detroit/Warren/Livonia) 33,800 1.8% San Jose/Sunnyvale/Santa Clara 52,300 5.1% Baltimore 31,600 2.3% San Francisco/San Mateo/Redwood City 42,200 4.1% Minneapolis-St. Paul 30,700 1.6%
Oakland/Fremont/Hayward 18,100 1.7% Indianapolis 30,100 3.0% Total Bay Area 112,600 3.6% Nashville 26,900 3.0%
Dallas/Ft. Worth 101,200 3.0% Sacramento 24,400 2.7%
Atlanta 86,500 3.4% Houston 23,700 0.8% Washington, DC 61,900 2.0% Salt Lake City 23,400 3.5% Seattle 55,100 2.9% Las Vegas 23,100 2.6%
South Florida Columbus (OH) 21,700 2.1% West Palm Beach/Boca Raton 12,800 2.2% Cleveland 18,700 1.8%
Fort Lauderdale 27,000 3.4% Raleigh-Durham 18,300 2.2% Miami/Miami Beach/Kendall 18,100 1.6% Cincinnati 16,800 1.6%
Total South Florida 57,900 2.3% Jacksonville 16,300 2.6% Phoenix 49,600 2.6% Kansas City 12,300 1.2%
Boston (Metropolitan NECTA) 47,900 1.8% Pittsburgh 12,000 1.0%
Chicago 47,000 1.0% Oklahoma City 10,700 1.7% Tampa-St. Petersburg 40,500 3.3% St. Louis 9,700 0.7% Orlando 39,900 3.5% Memphis 5,300 0.8% San Diego 37,800 2.7% New Orleans (1,700) -0.3%
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The Washington Area Economy RESURGENT ECONOMY PRODUCES STRONGEST JOB GROWTH IN A DECADE, BUT IS ENTERING A PERIOD OF TRANSITION
The Washington area’s economy performed very well in 2015, with most economic indicators showing positive trends. Job growth has been particularly strong, with 61,900 net job additions during the 12-month period ending November 2015, and year-end employment growth gures are expected to show the region’s strongest job growth in a decade. The private sector has been the primary source of job growth as it gains inuence on the regional economy, but Federal employment and procurement have stabilized after several years of declines. The Professional/Business Services and Education/Health sectors led the region in job creation, adding 36,400 jobs combined between November 2014 and November 2015.
The region’s labor market is also doing well, with the unemployment rate continuing to decline even as the labor force expands. The regional unemployment rate as of November 2015 was 4.1%, well below the national average of 5.0%. One area of concern is the region’s average wage, which is down substantially from its 2010 peak. Wages are likely to begin increasing in 2016, though, as
growth has resumed in the metro area’s Professional/Business Services sector, which has by far the highest average wage among the region’s top employment sectors. The recent passage of a Federal budget has removed a major source of short-term uncertainty and should help bolster the region’s economic growth prospects. As economic output and labor demand increase, competition among rms for top talent will also drive wage growth.
The Washington metro is still an attractive place to do business, visit, and live. A recent Washington Business Journal article documented how Washington sits at or near the top of many “top 10 best cities” lists covering a range of factors, including: growth in STEM employment (science, technology, engineering, math), women in technology, energy efciency, walkability, gender pay equity, and job opportunities for young professionals. With the region’s fundamentals now back on track as well, all indicators point to sustained economic growth over the next ve years.
2015 Highlights Payroll Employment: 3.2 million at November 2015.
Job Change: Increased 61,900 during the 12 months ending November 2015. Compares to 36,500 in the 12 months ending November 2014.
Unemployment Rate: 4.1% at November 2015, down from 4.6% one year ago, one of the lowest among the nation’s largest metro areas.
Ination: Prices increased 0.6% during the 12 months ending November 2015.
Housing Prices: Increased 2.1% during the 12 months ending September 2015.
Source: Bureau of Labor Statistics, S&P/Case-Shiller; February 2016.
The Washington metro area’s economy performed very well in
2015, with most economic indicators showing positive trends.
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Payroll Jobs Following two weak years, 2015 brought a return to strong job growth for the Washington metro area economy, mirroring national trends. During the 12 months ending November 2015, the metro area added an impressive 61,900 new payroll positions, well above the 20-year annual average of 41,800. Looking ahead to 2016, we expect job growth in the Washington metro area to continue at a pace similar to what it did in 2015. With 3.2 million payroll jobs, the Washington metro area ranks as
the fth largest job market, behind only New York, the LA Basin, Chicago, and Dallas/Ft. Worth. The Washington area’s rebound in 2015 was due in part to a surging national economy – most of the major metro areas also recorded healthy job growth over the year. The New York metro area led the nation in total job growth in during the 12 months ending November 2015, followed by the LA Basin and San Francisco Bay metro areas. During this time period, the Washington metro area ranked sixth in the nation in terms of net job growth. The Professional/Business Services and Education/Health sectors were the leading sources of job growth in most metro areas in 2015, including Washington.
Payroll Jobs by Sector The top four sectors for job growth in the Washington metro area in the 12 months ending November 2015 were Professional/Business Services, Education/Health, State/Local Government, and Construction. These sectors alone accounted for a net gain of 50,900 jobs, representing more than three-fourths of the total employment increase. The most positive development in 2015 was in the Professional/Business Services sector, which rebounded from a net job loss in 2014 to reclaim its place as the primary driver of job growth in the metro area. This is signicant for the regional economy since jobs created in the Professional/Business Services sector tend to pay well and increase demand for ofce space.
Another notable trend in 2015 was the modest gain in Federal Government employment. This sector shed jobs each year from 2011 and 2014 due to Federal budget reductions, so the increase, however slight, is an indication that the recent period of Federal turmoil has been resolved – at least until the 2016 election. The only major sector to shed jobs over the year was Retail Trade, which is one of the region’s lowest-paying sectors.
The stronger performance in the Washington metro area’s job market has been inuenced by a steadily growing private sector share of the regional economy. The private sector has been re- sponsible for the vast majority of the job growth in the Washington region over the past two years, although the waning effects of Federal budget cuts have helped. The bump in Federal employment growth, the recently approved Federal budget, and growing state and local budgets point to a brighter future for public sector employment, but the majority of job growth will continue to be sourced from the private sector.
*12 months ending in November 2015. Source: Bureau of Labor Statistics, Delta Associates; February 2016.
Payroll Job Growth Washington Metro Area| 1994 – 2015
Payroll Job Growth Selected Large Metro Area| 12 Months Ending November 2015
-60
-40
-20
0
20
40
60
80
100
120
140
94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15*
T h o u s a n
d s o
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)
NY LA Basin
S F B ay D FW A tl Wa s S ou th FL
P hx Bo s C hi D e nv er H ou
T h o u s a n
d s o f
l l J o
Payroll Job Growth Washington Metro Area| 12 Months Ending November 2015
*Seasonally adjusted. Source: Bureau of Labor Statistics, Delta Associates; February 2016.
Unemployment Rate Large Metro Areas| November 2014 vs. November 2015
Trends in Employment by Major Sector Washington Metro Area
NOVEMBER 2015
12-MONTH CHANGE
20-YEAR ANNUAL AVE RAG E
Professional/Bus. Svcs. 735.3 24.9 15.6
Education/Health 427.8 11.5 9.1 State and Local Govt. 344.2 8.3 4.1
Construction/Mining 157.4 6.2 1.7
Leisure/Hospitality 304.5 4.2 5.6
Transportation/Utilities 66.8 2.5 -0.1
Information 76.2 0.1 -0.3
Manufacturing 50.0 0.0 -1.0
Total 3,220.6 61.9 41.8
Note: In thousands of payroll jobs. Data are not seasonally adjusted. Source: BLS, Delta Associates; February 2016.
Unemployment Rate The Washington metro area, along with most other major metro areas, saw a marked decline in unemployment in 2015. Although it maintained the lowest unemployment rate among the nation’s large metro areas during the recent recession, the Washington metro area now has the fth lowest unemployment rate among its peer group. Still, the region’s unemployment rate has declined steadily from its post-Recession peak of 7.1% and its November 2014 level of 4.6% to just 4.1% in November 2015. This compares favorably with the national (seasonally adjusted) rate of 5.0%
as of November 2015, which is also down substantially from its November 2014 level of 5.8%.We expect the Washington metro area’s unemployment rate to hover around 4 .0% during 2016.
-5,000 1,000 7,000 13,000 19,000 25,000
Retail Trade Manufacturing
Information Wholesale Trade
Professional/Business Services
0%
1%
2%
3%
4%
5%
6%
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8%
Den S F Bay DFW Bos Was NY Hou Phx S Fl a Atl LA Basin
Chi
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Note: Data is 12 months ending in each period, through November 2015. Source: Bureau of Labor Statistics, Delta Associates; February 2016.
Consumer Price Index (CPI) Washington/Baltimore Region| 2009 – 2015
Note: Seasonally adjusted. Source: S&P/Case-Shiller, Delta Associates; February 2016.
Percent Change in House Prices Washington MSA vs. U.S. 20 MSA Composite| 2001 – 2015
Regional Consumer Price Index Overall ination was relatively at in the Washington/Baltimore region in 2015, but it ticked upward toward the end of the year as the economy grew. During the 12 months ending November 2015, prices in the metro area increased 0.6%, which was higher than the national ination rate of exactly 0.0% over the same period, but still minimal. Both the regional and national rates are far below the 2.0% rate that the Federal Open Market Committee (FOMC) targets. The marginal increase in the
regional ination rate was driven by a 1.8% increase in the cost of housing and 5.6% increase in the cost of medical care, but these were offset by a 7.0% decline in transportation costs. Low oil prices and a strong dollar are holding back signicant gains in the CPI, but this will likely change over the long term. We expect ination to pick up slightly in 2016 as the economy grows. Wage growth in the coming years will also cause ination to pick up.
Housing Prices Home prices increased 2.1% (seasonally adjusted) in the Washington metro area during the 12 months ending September 2015, according to the S&P/Case-Shiller Home Price Index. This compares to a growth rate of 5.5% for the 20-City MSA Composite Index. The region’s price growth has been hampered by a growing inventory of homes for sale and a shift in market share toward condominium units, which priced lower than single-family units. Looking ahead, sustained job growth
should drive increased housing prices over the next few years.
-2%
-1%
0%
1%
2%
3%
4%
5%
10-Year Annual Average = 2.6%
l P r
i c e
C h a n g e
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-15%
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0%
5%
10%
15%
20%
25%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Washington MSA
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Source: George Mason University Center for Regional Analysis, U.S. Conference of Mayors, Delta Associates; February 2016.
Share of GRP Washington Metro Area| 2015 Projections
*Projected Source: George Mason University Center for Regional Analysis, Delta Associates; February 2016.
Annual Change in Federal Procurement Spending Washington Metro Area (Current Dollars)
Region’s Core Industries The Gross Regional Product (GRP) for the Washington metro area is expected to reach $501.7 billion in 2015 – a 5.5% increase from the estimated $475.5 billion in 2014. While the Federal government remains the largest contributor to the Washington area economy, its share of spending is shrinking. Federal government spending currently accounts for approximately 35% of GRP. By 2020, we expect this share to fall to 27%, as private sector economic growth will accelerate while Federal spending will
remain relatively at. A major share of Federal spending in the metro area economy is from procurement – the government’s purchase of goods and services from the private sector. After three years of declines, total procurement spending in the Washington metro area (measured by place of performance) increased 3.0% during 2014 (compared to revised 2013 data), to roughly $71.2 billion (in 2014 dollars). This represents 45% of all Federal funds owing into the area economy. Since these dollars drive private sector investment and job growth, they have a much greater secondary economic impact than do dollars spent on Federal payroll.
As with direct Federal employment, the stabilization of Federal procurement has been a major factor in the region’s economic rebound during 2015. Contractors are nally adjusting to the new economic environment in the region, which now depends more strongly on the private sector than the
public sector. Growth in Professional/Business Services – by far the region’s largest economic sector– bodes extremely well for continued forward momentum in the regional economy in 2016.
The Education/Health Services sector has stayed on its long-term growth trajectory: it was the only non-government sector in the region to gain jobs during the Great Recession, and it has continued to post strong employment gains throughout the recovery. The impact of this sector’s growth is blunted by the fact that most of its growth has occurred in lower-wage occupations, though. This is also a concern for two other sectors: Retail Trade and Leisure/Hospitality.
35%
15%
20%
25%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*
15-Year Annual Average = 6.1%
t C h a n g e
i n S p e n
d i n g
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Washington Area Economic Outlook: A Region in Transition After experiencing slow and inconsistent growth between 2011 and 2014, the Washington metro area nally experienced a sustained economic expansion in 2015 – we expect this positive trend to continue through 2016 and beyond. Net job growth improved from 36,500 during the 12 months ending November 2014 to a solid 61,900 for the 12 months ending November 2015. We expect future years to bring more gains, with 66,400 new jobs expected in 2016 and 57,800 in 2017. Although
employment growth is expected to slow somewhat in 2018 and beyond, the ve-year forecast of 54,500 net new jobs per year represents a higher level of growth than the region has experienced since the middle of the last decade.
This expansion cycle will necessarily be driven by the region’s private sector. The region’s business community and elected leaders have correctly identied that Federal employment and contracting can no longer be relied upon to drive economic growth, although the heavy Federal presence in the region will continue to provide economic stability and shield the area from the worst effects of any national or global economic downturns.
Private sector job growth will in turn depend on expanding businesses already located in the region rather than businesses lured from outside the region. The Washington area’s high wages, property costs, and taxes put the region at a competitive disadvantage for attracting companies that are
looking for low-cost places to do business. Efforts to build on the region’s native assets – a highlyskilled workforce, access to international markets, high quality education, and vast cultural resources – should drive strong employment growth in the Professional/Business Services sector. Growth in this sector will both increase demand for commercial space and create additional jobs in the Education/ Health, Retail Trade, Leisure/Hospitality, and Construction sectors.
The passage of a Federal budget and related appropriation bills at the end of 2015 is critical to the Washington metro area’s economy. Moving forward into 2016, the regional economy is entering a period of transition. While the Federal government’s role in the economy is expected to remain stable, its inuence on the regional economy continues to wane. The region will need to respond to profound changes in the global economy, security, the climate, demographics, the housing market, and other factors. These factors are already reshaping business and real estate in the region and will
continue to do so over the next several years.
“
“
Source: Bureau of Labor Statistics, George Mason University Center for Regional Analysis, Delta Associates; February 2016.
Payroll Job Growth Washington Metro Area
-60
-40
-20
0
20
40
60
80
100
120
T h o u s a n
d s o
l J o
l A v e r a g e
)
20-Year Annual Average = 41,700/Year 5-Year Projected Average = 54,500/Year
0100 02 03 04 0605 07 08 09 1110 12 13 14 1615 17 18 19 20
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The Washington Area Ofce Market This section of TrendLines was p repared by Transwestern’s in-house research team
OFFICE MARKET TURNS THE CORNER IN 2015; VACANCY RATE DECLINES FOR THE FIRST TIME SINCE 2010
On balance, we believe that the Washington metro area ofce market nally turned the corner in 2015, and is beginning a period of sustained improvement on the heels of several subpar years.
During 2015 net absorption totaled 1.9 million SF and the overall vacancy rate declined 40 basis points during the year — the rst decline in the vacancy rate since 2010. Despite these improving conditions, rents remain under pressure and declined 0.5% during 2015, as the vacancy rate remains elevated. However, the pace of decline eased during the year, as generous concession packages leveled off.
We believe performance fundamentals will continue to improve during 2016, as the economy strengthens and tenants become more certain about the economic outlook. Rental rate momentum will appear in some submarkets in 2016, with metro-wide growth slightly positive and below average. There are limited blocks of new Class A space on the market. Given the ight to quality, the pipeline of new or renovated product could expand during 2016.
National Context At 421 million SF of private ofce space, the Washington metro area is the 3rd largest ofce market in the nation, behind New York and Los Angeles.
Net absorption of ofce space in the Washington metro area totaled positive 1.9 million SF during 2015. The San Francisco Bay, Dallas/Ft. Worth, and Houston markets were leaders in net absorption during 2015.
“
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S4 | 37
Largest U.S. Ofce Markets Selected Metro Areas| 2015
Source: CoStar, Transwestern; February 2016.
Ofce Net Absorption Selected Metro Areas| 2015
421
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NY LA Basin W as Chi Bos SF Bay Phil DFW Hou Atl
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The Washington area’s overall vacancy rate is 14.2% at year-end 2015, down from 14.6% one year ago. Still, the Washington metro has the highest overall vacancy rate among large metro areas in the United States. The San Francisco Bay and Boston metro areas have the lowest vacancy rates at 6.2% and 8.4%, respectively.
Net Absorption Net absorption in the Washington metro area totaled positive 1.9 million SF during 2015, compared to negative 1.2 million SF during 2014. This compares to the 15-year average annual absorption of 3.6 million SF.
Each substate area within the Washington metro area had positive net absorption during 2015, withthe District of Columbia leading the way. The region’s positive absorption was driven by a handful of pre-leased deliveries and healthy leasing act ivity. For example, the Department of Justice signed a 336,000 SF deal at 175 N Street, NE in NoMa. In addition, MRP Realty delivered 111,000 SF at 900 G Street, NW in the East End, which was 46% pre-leased at delivery to Simpson Thacher & Bartlett and Herman Miller.
Net absorption was offset during 2015 by a handful of move-outs, including: Freddie Mac vacated 217,000 SF at 8000 Jones Branch Drive in Tysons, LMI vacated 235,000 SF at 2000 Corporate Ridge Road in Tysons, and NIH vacated just over 150,000 SF at 6610 Rockledge Drive in North Bethesda.
2015 Highlights Net absorption: Positive 1.9 million SF during 2015, compared to negative 1.2 million SF during 2014. The ight to quality continues: 2.1 million SF of Class A/Trophy space was absorbed in 2015.
Overall vacancy rate: 14.2%, down from 14.6% one year ago. Compares to 10.6% national rate.
Direct vacancy rate: 13.5%, down from 13.8% one year ago.
Pipeline (U/C and U/R): 7.8 million SF, down from 5.4 million SF one year ago.
Pipeline pre-lease rate: 50%, compared to 38% one year ago.
Effective rents: Effective rents: Down 0.5% during 2015, compared to a decline of 4.1%during 2014.
Investment sales: $6.2 billion ($355/SF) during 2015, compared to $5.8 billi

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