u.s. office market trends: q4 2013

United States

Office Review

Q4 2013

2014 will be the year of a diversifying and expanding office recovery

… Landlord confidence continues to grow; for the 12th consecutive

quarter, asking rents increased and decreased concessions

nationally. Further, when examining tenant leverage ahead

across markets, less than 10 percent of geographies JLL tracks

will be categorized as tenant-favorable in 2015.

Leasing activity • Q4 posted 61.4 million square feet of leasing activity.

• Leasing levels down 6.1 percent from Q3 2013.

• Annual 2013 leasing levels up 6.5 percent from 2012

Absorption

• Absorption levels increase with 15th consecutive quarter of occupancy growth.

• Absorption gains totaled 13.2 million square feet in the quarter and overall in 2013 nearly reached 40.0

million square feet, the highest volume in the recovery so far.

• Throughout the year, New York, Houston, Dallas, the Bay Area and Seattle were the largest contributors to

absorption nationally.

Vacancy

• Vacancy dropped 20 basis points to a recovery low of 16.6 percent during the quarter and dropped from

17.0 percent last year..

• CBD vacancy fell below 14.0 to 13.9 percent and in the suburbs, vacancy levels closed the year at 18.2

percent.

Rents

• Tenants have far less leverage across urbanized, core markets, especially in Trophy and Class A buildings.

• Rents have now increased in 12 of the past 13 quarters.

• Class A rent growth continues to trump Class B rent movement across the board.

• Rents growing over four times faster in CBDs than suburbs.

• Concessions continue to erode and are now at 2008 levels nationally.

Construction • Construction starts no longer dominated by specific geographies.

• Most markets will not see new deliveries enter the market until 2015, presenting challenges for large

tenants, especially in CBDs.

Ending 2013, growth no longer concentrated as strongly

in specific regions or industry niche markets

3

Source: Jones Lang LaSalle Research

Consistent number of markets posting quarterly increases

in leasing activity (45.8 percent of markets)

4

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2011 2012 2013

Up Neutral Down


Leasing activity totaled 61.4 million square feet, down 6.1

percent from Q3

5

0

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

70,000,000

80,000,000

90,000,000

2007 2008 2009 2010 2011 2012 2013

Leas

ing

activ

ity (

s.f.)

26-quarter trailing average


Q4 2013 posted leasing activity 14.0 percent higher than

Q4 2012

6

0 10,000,000 20,000,000 30,000,000 40,000,000 50,000,000 60,000,000 70,000,000 80,000,000 90,000,000

Q4 2007

Q4 2008

Q4 2009

Q4 2010

Q4 2011

Q4 2012

Q4 2013

Leasing activity (s.f.)


Annual leasing activity 6.5 percent higher in 2013 than in

2012, but third-highest during recovery

7

0

50,000,000

100,000,000

150,000,000

200,000,000

250,000,000

300,000,000

2007 2008 2009 2010 2011 2012 2013

Leas

ing

activ

ity (

s.f.)


A wide range of geographies leasing fastest relative

to supply

8

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

New York San Francisco San FranciscoPeninsula

Minneapolis Boston Silicon Valley Fairfield County St. Louis

Leas

ing

activ

ity a

s pe

rcen

tage

of i

nven

tory


Q4 marks 15th consecutive quarter of positive net

absorption, highest since 2007

9

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2008 2009 2010 2011 2012 2013

Qua

rterly

net

abs

orpt

ion

(as

% o

f inv

ento

ry) 15-year trailing quarterly average


-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Net absorption as a percent of inventory

2013 annual net absorption reaches 1.1 percent of

inventory, surpasses 15-year average

15-year trailing annual average

10


-10,000,000

0

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

2010 2011 2012 2013

YTD

ne

t ab

sorp

tion

(s.f.

)

Class A (CBD) Class A (suburban) Class B (CBD)

Class B (suburban) Class C (CBD) Class C (suburban)


Suburban Class A space comprises the majority of

absorption, with Class B presence growing

11

Geographic spread of the recovery and growth in New

York make 2013 the most balanced year of the recovery

12

2010

2011

2012

11.1%

21.6%

22.3%

18.6%

26.4%

2013

NYC and DC

Tech markets

Energy markets

Sunbelt

All other markets

2010: New York and DC comprise 70.0 percent of

absorption.

2011: Tech and energy emerge, comprising 52.5

percent of absorption; New York and DC fall to 5.1

percent.

2012: Sunbelt markets grow to over one-third of

absorption, but tech and energy remain dominant

(58.2 percent of 2012 absorption); New York and

DC both post negative annual absorption.

2013: No sector or region contributes more than

one quarter of annual absorption, all others

contribute 26.4 percent.


Energy, tech and Sunbelt markets all posting above-

average absorption; energy and tech remain ahead

13

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

YT

D n

et a

bsor

ptio

n (%

of s

tock

)

Energy markets Tech markets Sunbelt markets

U.S. average


New York’s strong Q4 performance makes East Coast

largest contributor for the first time since Q2 2011

14

-100%

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

2010 2011 2012 2013

Sha

re o

f qua

rterly

abs

orpt

ion

(%)

East Coast Central West Coast


15

Although a tiny portion of inventory, Atlanta and

Florida contributing disproportionately to recovery

-10,000,000

-5,000,000

0

5,000,000

10,000,000

15,000,000

20,000,000

2010 2011 2012 2013

Ne

t ab

sorp

tion

(s.f.

)

Atlanta Florida Rest of East Coast

7.4% 22.9% 1,261.6% 63.3%

$28

$29

$30

$31

$32

$33

$34

$35

$36

-0.6%

-0.4%

-0.2%

0.0%

0.2%

0.4%

0.6%

0.8%

2010 2011 2012 2013

Cla

ss A

ave

rage

ask

ing

rent

($ p

.s.f.

)

Cla

ss B

YT

D n

et a

bsor

ptio

n (a

s %

of s

tock

)

Class B net absorption Class A rent


Class B absorption has risen in line with Class A rents

as tenants seek affordable space options…

16

…but Class A remains the leader in absorption since 2011

Trophy & Class A net

absorption

83.4 m.s.f.

2011-2013

Class B and C net

absorption

18.4 m.s.f.

2011-2013

17


…with 80.9 of Q4 absorption being Class A space

Source: Jones Lang LaSalle

18

133.5%

93.9%

74.5% 76.3%

295.2%

98.5%

82.0% 78.3%

45.2%

73.4%63.5%

80.9%

0%

50%

100%

150%

200%

250%

300%

350%

2011 2012 2013

Cla

ss A

sha

re o

f qua

rterly

abs

orpt

ion


Even in large block-deprived CBDs, Class A space

responsible for nearly all absorption…

19

166.2%

90.4% 88.8%

80.8%

100.0%106.1%

74.8%

0.0%

88.1% 86.5%

49.6%

92.0%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

2011 2012 2013

Cla

ss A

sha

re o

f qua

rterly

abs

orpt

ion


116.9%

97.9%

62.3%

75.1%

167.8%

102.5%

84.3% 85.3%

43.2%

73.4% 72.8% 70.3%

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

2011 2012 2013

Cla

ss A

sha

re o

f qua

rterly

abs

orpt

ion

…while the percentage has slowly fallen in the suburbs

20


Driving the B market of late? Creative space in

tech hubs

-0.7%-0.5%

1.9%

1.0%

5.4%

0.3%

4.9%

3.4%

3.0%

2.1% 2.0%

0.7%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

Austin Portland Detroit San Francisco Seattle Oakland-East Bay

CB

D y

ear-

end

net a

bsor

ptio

n (%

of s

tock

)

Class A Class B

21


of absorbed space in 2013

has been Class A

per square foot difference

between Class A and B space…

the rate at which Class A rates are

growing compared to Class B

difference between Class A and

Class B total vacancy

Overall, Class A continues to trump commodity

according to most indicators

22


Total vacancy still falling very slowly, but levels now

the lowest since before 2009

10%

11%

12%

13%

14%

15%

16%

17%

18%

19%

20%

Q1

20

09

Q2

20

09

Q3

20

09

Q4

20

09

Q1

20

10

Q2

20

10

Q3

20

10

Q4

20

10

Q1

20

11

Q2

20

11

Q3

20

11

Q4

20

11

Q1

20

12

Q2

20

12

Q3

20

12

Q4

20

12

Q1

20

13

Q2

20

13

Q3

20

13

Q4

20

10

16.6%

23


Still, vacancy levels remain near historical highs

6%

8%

10%

12%

14%

16%

18%

20%

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

16.6%

24


10%

12%

14%

16%

18%

20%

22%

2010 2011 2012 2013

Tot

al va

canc

y (%

)

Class A (CBD) Class A (suburban) Class B (CBD) Class B (suburban) Class C (CBD) Class C (suburban)

B

A

C


Total vacancy down across building classes and

geographies, but with significant variance

25

Office growth being driven by atypical tenant

industries

Industry Employment base Most affected office markets to date State Government Contracting California, Illinois, New Jersey

Federal Government Contracting Washington, DC

Media-print Contracting LA, NYC

Finance / banking Contracting NYC, Charlotte, Chicago, Palm Beach, Pittsburgh

Law firms Contracting (Rightsizing) Washington, DC, NYC, SF, Atlanta, LA

Consulting Contracting (Rightsizing) NYC, Chicago, Washington, DC

Accounting Contracting (Rightsizing) Chicago, NYC, LA

Telecom Stable NJ, Dallas, Atlanta

Retail / consumer goods Stable NYC, Atlanta, Los Angeles

Education Growing Everywhere

Media digital and TV Growing Atlanta, NYC, LA, Philadelphia, Washington, DC

Green energy / clean technology Growing Pittsburgh, Silicon Valley, Denver

Real estate (Residential) Growing Southern CA, Nevada, AZ, FL, GA, Carolinas

Technology Growing Silicon Valley, San Francisco, Austin, Seattle, Portland, Midtown South NYC, Cambridge, MA

Natural Gas / Oil Energy Growing Denver, Houston, Dallas, Pittsburgh

Biotech / pharmaceutical Growing San Francisco, San Diego, NJ/Phil, Boston, RDU

26


27

Demographics and technology are driving productivity

and utilization and the next evolution of office space

use

15%

Space reduction

by U.S. law firms

and financial

services relocating

72%

Of global CREs plan

to aggressively

increase density in

next 3 years

150

SF/employee

average target

density, down from

225 in 2009

50%

Of the U.S.

workforce was

baby boomers in

2010. Gen Y will

be 50% by 2020


28

And as a result, law firms are shifting


15.2% Giveback by law firm

across the U.S. when

relocating


across the top 7 U.S. markets

when relocating


across DC when

relocating

• Going digital

• Elimination of law libraries

• One-sized fits all office

• Higher administrative ratios

• Migration to glass boxes

• Migration to long and lean

• Migration to smaller floorplates

29

Consulting / accounting are shifting


25.0% Giveback by

consulting firms

across the U.S. when

relocating

225 s.f. Average space per consultant

in years past

90 s.f. Average space per

consultant in the most

efficient firms today

• Benching

• Work flexibly and client officing

• Offices gone; collaboration

rooms in

• Increasingly looking at new

construction to meet efficiency

standards

• Industry giving back most space

30

Technology companies are shifting


17.4% Percent increase in

high tech service jobs

since 2009

14.2% Vacancy rate in core tech

markets, compared to

16.8% nationwide

11.2% Growth in core tech

market rents in 2013

• Benching is standard

• Less personal space, more

shared and amenity space

• “Open Hangar” design preferred

• Migration to Class B+ with

character

• Space viewed as core to culture

• Remote work is waning

31

Banks are shifting


86% Percent of banking

transactions that no

longer need a teller

66% Percent of surveyed

banks planning to

reduce their RE

footprint

• Regulation and cost pressures

forcing portfolio consolidation

• Offices shrinking

• Business units competing

• Branch reductions common

• Increasing importance of back

office (2nd / 3rd –tier markets)

• Remote working increasing

10.1% Giveback by average

bank across the U.S.

when renewing (with

headcount flat)

32

Even the federal government is shifting

Source: GSA.gov, Jones Lang LaSalle Research

• Telecommuting

• Benching

• Collocations

• Minimal funds to implement

• Consolidations in low cost

buildings/submarkets

• Migration to off-center locations

• Disposition of underutilized assets.

170 s.f. Target utilization rate

per employee for

federally leased space

$1.7 billion Amount spent annually by

GSA for properties deemed

underutilized

15.9% Average giveback by

GSA across Metro DC

when relocating in FY

2013

After a slowdown earlier in the year, faster office-using

employment growth pushes down vacancy

15.5%

16.0%

16.5%

17.0%

17.5%

18.0%

18.5%

19.0%

26,500

27,000

27,500

28,000

28,500

29,000

29,50020

11

2012

2013

Tota

l vac

ancy

Offi

ce-u

sing

em

plo

yees

(tho

usan

ds)

Office-using employment Total vacancy

33


5%

7%

9%

11%

13%

15%

17%

19%

21%

23%

25%

Tot

al va

canc

y (%

)CBD vacancy drops 30 basis points to 13.9 percent;

suburban down 10 basis points to 18.2 percent

34


0

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

70,000,000

80,000,000

90,000,000

100,000,000

Q2 20

07

Q3 20

08

Q4 20

08

Q1 20

09

Q2 20

09

Q3 20

09

Q4 20

09

Q1 20

10

Q2 20

10

Q3 20

10

Q4 20

10

Q1 20

11

Q2 20

11

Q3 20

11

Q4 20

11

Q1 20

12

Q2 20

12

Q3 20

12

Q4 20

12

Q1 20

13

Q2 20

13

Q3 20

13

Q4 20

13

Sub

leas

e sp

ace

(s.f.

)

Sublease space falls once again to 54.4 million square

feet, nearing recovery low

35


36

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

Q2

2007

Q3

2007

Q4

2007

Q1

2008

Q2

2008

Q3

2008

Q4

2008

Q1

2009

Q2

2009

Q3

2009

Q4

2009

Q1

2010

Q2

2010

Q3

2010

Q4

2010

Q1

2011

Q2

2011

Q3

2011

Q4

2011

Q1

2012

Q2

2012

Q3

2012

Q4

2012

Q1

2013

Q2

2013

Q3

2013

Q4

2013

Qua

rter

ly p

erce

nt c

hang

e

Marketed rents increase 0.4 percent during the quarter,

registering their 12th straight quarter of increases


$10

$15

$20

$25

$30

$35

$40

$45

$50

2010 2011 2012 2013

Aver

age

aski

ng re

nt (

$ p.

s.f.)


A

B C


Rental growth fastest in CBD Class A (+15.3 percent)

and suburban Class C (+7.3 percent) space

37

Peaking

phase

Falling

phase

Rising

phase

Bottoming

phase

U.S. office market moves farther along the clock as

more markets shift into landlord-favorable territory

Miami, San Diego

Austin

Dallas

Cleveland, Cincinnati,

Minneapolis, Oakland-East Bay,

Philadelphia, Portland, San Antonio

Houston, San Francisco

Tampa, United States

Charlotte, Detroit, Fairfield County, Milwaukee,

Sacramento, St. Louis, Westchester County

Orlando, West Palm Beach

Fort Lauderdale, Jacksonville

Washington, DC

Baltimore, New Jersey

Chicago, Columbus, Hampton Roads,

Phoenix, Raleigh-Durham

Atlanta, Indianapolis, Los Angeles,

New York, Richmond

Seattle-Bellevue

San Francisco Peninsula, Silicon Valley

Denver

Boston, Orange County

Pittsburgh


38

Peaking

phase

Falling

phase

Rising

phase

Bottoming

phase

Faster rent growth and declining vacancy in CBDs

contributing to faster movement along clock

Miami

Austin, Houston

Charlotte, Dallas, Jacksonville, Milwaukee,

Raleigh-Durham, San Antonio

Atlanta, Tampa, United States CBD

Cleveland, Cincinnati, Detroit, Los Angeles,

Minneapolis, White Plains CBD

Greenwich CBD, Indianapolis

Midtown (New York),

Portland, Stamford CBD Baltimore, Orlando, Phoenix,

West Palm Beach

Chicago, Columbus, Downtown

(New York), Fort Lauderdale,

Richmond, San Diego. Washington, DC

Midtown South (New York)

San Francisco

Seattle-Bellevue

Pittsburgh, San Jose CBD

Denver

Oakland-East Bay

Boston, Philadelphia

Sacramento

St. Louis


39

Peaking

phase

Falling

phase

Rising

phase

Bottoming

phase

Suburban markets still struggling with elevated

vacancy, with more submarkets tenant-friendly

Miami, Central and Northern New

Jersey, Northern Virginia

Austin, Pittsburgh

Dallas, Houston, San Francisco

Atlanta, Cleveland, Cincinnati, Milwaukee,

Minneapolis, Oakland- East Bay,

Sacramento, San Antonio, St. Louis

Indianapolis, Orange County, Tampa

Chicago, Columbus, Detroit, Fairfield

County, Hampton Roads, Portland

(East, Vancouver), Westchester County

Orlando, West Palm Beach

Northern Delaware, Raleigh-Durham,

Suburban Maryland

Fort Lauderdale

Baltimore, Boston, Lehigh Valley, Philadelphia,

San Diego, United States Suburbs

Charlotte

Seattle-Bellevue

Silicon Valley

Denver, Richmond

Los Angeles, Portland (Westside) Southern New Jersey

Cambridge

San Francisco Peninsula

Jacksonville


40

Since 2010, quarterly rent growth more volatile in

CBD than suburbs, but faster on average

-3.5%

-2.5%

-1.5%

-0.5%

0.5%

1.5%

2.5%

3.5%

Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013

Qua

rterly

rent

cha

nge

(%)

CBD rent growth Suburban rent growth

CBD average:

1.1%

Suburban

average: 0.0%

41


Slightly faster rental growth in suburbs results in rent

gap narrowing by $0.12 in Q4

$20

$22

$24

$26

$28

$30

$32

$34

$36

$38

$40

2010 2011 2012 2013

CBD Suburbs

$11.36

$15.48

42


Similar rental growth rates resulted in the Class A

premium falling slightly for the second time in 2013

$3.00

$3.20

$3.40

$3.60

$3.80

$4.00

$4.20

$4.40

$4.60

$4.80

$5.00

2010 2011 2012 2013

Diff

eren

ce b

etw

een

Cla

ss A

and

ove

rall

rent

s

43


3.5

4.1

5.1

6.16.2

5.7 5.55.3

$22.00

$23.00

$24.00

$25.00

$26.00

$27.00

$28.00

$29.00

$30.00

$31.00

0

1

2

3

4

5

6

7

2006 2007 2008 2009 2010 2011 2012 2013

Average rent abatement (months) Average tenant improvement allowanceMonths $ PSF

Concessions wobbling near end of 2013, but overall

decline in TI allowances and free months vs. 2012

44


As vacancy falls, so does leverage for tenants and tenant

build-out allowances from landlords

15.5%

16.0%

16.5%

17.0%

17.5%

18.0%

18.5%

19.0%

$25

$26

$27

$28

$29

$30

$31

2009 2010 2011 2012 2013

Tot

al va

canc

y

Ave

rage

TI p

acka

ge

Average TI package Total vacancy

45


0

20,000,000

40,000,000

60,000,000

80,000,000

100,000,000

120,000,000

140,000,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

New supply coming to market slowly increasing, but

still well below historic norms

Com

plet

ions

(s.

f.)

Historical average

amount of completions

(s.f.) per year

46


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2010 2011 2012 2013

Und

er c

onst

ruct

ion

(s.f.

)



The majority of new construction is now in suburbs

rather than CBDs

47

0

20,000,000

40,000,000

60,000,000

80,000,000

100,000,000

120,000,000

140,000,000

160,000,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Deliveries in Q4 bring overall construction volumes

down slightly, but geographic spread increasing

Und

er c

onst

ruct

ion

(s.f.

)

Spec construction underway

in many markets, including:

Atlanta

Charlotte

Dallas

Houston

New York

Northern Virginia

Seattle

San Francisco

Silicon Valley

Washington, DC

48


0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

2010 2011 2012 2013

YTD

com

plet

ions

(s.f.

)

Class A (CBD) Class A (suburban)

Class B (CBD) Class B (suburban)

Class C (CBD) Class C (suburban)


The vast majority of new completions are Class A, with

an increasing share in the suburbs

49

27.7 percent of markets reporting an increase in

construction starts…

50

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2011 2012 2013

Up Neutral Down


…and no specific region was home to a majority of

starts

802,500

645,000

465,001

423,331

360,000 358,934

321,000 309,500 300,425

231,733 220,000

168,220

126,652

49,099

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

Con

stru

ctio

n st

arts

(s.f.

)

51


Into 2014 and 2015, the spreading and enhancement of growth

nationally across industries and geographies highly benefits diversified

economies like Dallas, Chicago, Los Angeles, Philadelphia, Atlanta,

Phoenix, among others.

…

>> Access our complete report on the current state of the U.S. market

©2014 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.

http://marketing.am.jll.com/acton/form/3030/00a0:d-0001/0/index.htm?id=00a0



u.s. office market trends: q4 2013

Real Estate

leasing levels

annual leasing activity

posted leasing activity

supply leasing activity

percent higher

vacancy levels

absorption absorption

vacancy vacancy