Savills Studley Report
National office sector Q1 2015
Savills Studley Research
National
SUMMARY
Market Highlights
AVAILABI...
02
Savills Studley Report | National
Talent, Cost and Demographics
Talent has been appropriately heralded as the
new globa...
savills-studley.com/research 03
Q1 2015
Tenant Sq Feet Address Market Area
US Marshal Service 332,964 1215 S Clark St, Arl...
Savills Studley Report | National
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Submarket Total
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Last
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National 1Q15

Published on: Mar 3, 2016
Source: www.slideshare.net


Transcripts - National 1Q15

  • 1. Savills Studley Report National office sector Q1 2015 Savills Studley Research National SUMMARY Market Highlights AVAILABILITY NUDGES UP As leasing slows in many of the largest markets, and new construction activity intensifies the national overall availability rate rose from 16.9% to 17.0%. The rate increased in seven markets and was unchanged in four others. Houston, which has the nation’s largest office development pipeline, posted a 2.7 pp quarter-on-quarter increase in its availability rate, rising to 20.5%. Dallas/Fort Worth’s availability rate rose by 0.6 pp to 22.3%. Orange County, down by 1.6 pp to 13.0%, was the only market with a notable decline. The national Class B and C availability rate was unchanged at 15.8% but the Class A rate rose by 0.2 pp to 18.1%. ASKING RENTS CONTINUE INCREASE The national overall rental rate rose for the 14th consecutive quarter, ticking up by 0.9% from the prior quarter. The national average Class A rent jumped by 1.5% to $36.52. New construction in several markets including New York and a limited supply of big blocks of quality space in others such as San Francisco and Denver have contributed to the steady growth. Class A rents posted quarter-on-quarter increases of 3.6% in New York City to $79.47 and 3.4% to $61.07 in San Francisco. “The unbridled pursuit of talent by rapidly expanding tech and media firms captured most of the headlines in 2013 and 2014. Of late, though, more businesses are chasing the American consumer – adding employees and office space in lower-cost markets that have a strong demographic upside.” Keith DeCoster, Savills Studley Research
  • 2. 02 Savills Studley Report | National Talent, Cost and Demographics Talent has been appropriately heralded as the new global currency. The unbridled pursuit of employees with specialized skills, particularly by TAMI companies, solidified the “most- favored market” status of a handful of cities – San Francisco, Manhattan, Boston and Austin. With the exception of Austin, these are all high-cost markets with exorbitant costs to hire employees and lease space to house them. As the U.S. recovery has gained traction in the last several quarters, though, a wide cross-section of businesses have started to follow the bread and butter of the $14-trillion U.S. economy – the American consumer. In turn, the markets winning the biggest corporate site selections in roughly the last four to eight quarters have a relatively even mix of three key assets – they have a deep pool of talent, lower costs and promising demographics. Sunbelt Markets Rebounding Setting aside the weak March report, the U.S. has added roughly 3.0 million new jobs in the last year, the strongest stretch of job growth since the 1990s. Household income growth is still tentative and uneven but there are some initial signs that wage growth is spreading beyond a few specialized "skill-starved" sectors such as tech. Households have been spending more on durable goods such as electronics, automobiles and of late, perhaps housing. An extended period of gas prices well below $3.00/gallon should provide even more impetus to household spending. Sunbelt markets such as Atlanta, Dallas/Fort Worth, Austin, Phoenix and Tampa Bay/Orlando, as well as the Mountain West, stand to gain most from lower gas costs. They also have the strongest upside in terms of population growth, household formation and consumption. As a percentage of inventory, net absorption of office space is accelerating rapidly in many of the aforementioned Sunbelt markets. Annual net absorption as a percentage of inventory averaged 1.7% to 3.0% in these markets, well above the national average of 1.1%. Pent-up demand in auto sales, household consumption and housing sales has the strongest upside in the South and West and these areas also stand to benefit most from falling gas prices. In contrast, most Northeast markets (with the exception of Boston) and those in the Midwest are lagging, with net absorption as a percentage of inventory often falling short of 1.0%. Auto Sales - A Good Road Map The release of pent-up demand in auto and housing sales has been the basis for optimistic Source: Bureau of Labor Statistics 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 -6.0% -5.0% -4.0% -3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% 4.0% 25 26 27 28 29 30 31 Millions National Office Emp. U.S. - % Annual Change Office-Using Employment Trends $31.77 $36.52 $24.84 $28.49 $0 $10 $20 $30 $40 1Q10 1Q11 1Q12 1Q13 1Q14 1Q15 ($/sf) Class A Class B & C Asking Rent Trends 18.1% 20.8% 15.8% 17.6% 0% 5% 10% 15% 20% 25% 1Q151Q141Q131Q121Q111Q10 (%) Class A Class B & C Availability Rate Trends
  • 3. savills-studley.com/research 03 Q1 2015 Tenant Sq Feet Address Market Area US Marshal Service 332,964 1215 S Clark St, Arlington, VA Northern Virginia Markit North America 141,832 5 Manhattan West, New York, NY New York Harland Clarke Corp 141,332 240 America Pl, Jeffersonville, IN Louisville Harman Professional Inc 128,974 8760 S Sandy Pky, Sandy, UT Salt Lake City Sharp HealthCare 100,000 16909 W Bernardo Dr, San Diego, CA San Diego New Advisory LP c/o PJT Partners LP 98,740 280 Park Ave, New York, NY New York American Imaging Management Inc 93,678 540 Lake Cook Rd, Deerfield, IL Chicago Apttus Corporation 90,128 1400 Fashion Island Blvd, San Mateo, CA San Francisco US General Services Administration 84,606 250 E Street SW, Washington, DC Washington, DC McGladrey LLP 83,200 80-100 City Sq, Charlestown, MA Boston forecasts of stronger growth going back to 2012. Auto sales are now nearly even with pre-recession trends and are expected to push as high as 17.0 million vehicles in 2015. A stronger auto sector is benefitting a lot of different markets, supporting expansion at ad and media agencies in expensive talent-laden cities such as New York and Los Angeles. Many carmakers are also renewing their push to compete with Apple and Google in the race to develop “connected car technology.” It is no surprise that BMW and Tesla are basing some of these R&D operations in Silicon Valley, but they also have development groups in Chicago and Detroit, respectively. Even some of the most cash-rich companies are starting to show concerns about costs, pushing them to tap into deeper and less expensive talent pools in the Midwest. Sunbelt markets seem to be gaining the most from resurgent auto sales though. They have ample lower-cost talent and unlike the Midwest, Northeast and Southern California, a strong demographic upside. In Orange County, Hyundai Capital recently leased 178,000 sf, snaring one of the last big blocks in the Airport Area. Mercedes Benz USA’s decision to move its headquarters from Bergen County, New Jersey to the Central Perimeter in Atlanta is just the latest case of an automaker relocating from a high-cost market to a lower-cost one. Mercedes Benz's relocation, which is yet another body blow for Northern New Jersey, was motivated in part by Atlanta’s lower cost of real estate and taxes, as well as proximity to Mercedes' production plant in Alabama and shipping in South Carolina. However, the company's CEO ultimately highlighted talent, saying the move would position them to be competitive for the next 50 years. Housing Still a Road Block The auto sector is critical to the U.S. economy – even to office markets – because of its spillover effects on finance, advertising and engineering. No sector has as potent a spillover effect as the U.S. housing market though. Moody's estimates that every new home built creates two other jobs in fields that feed off housing such as finance, home goods stores and local retail. The U.S. housing sector is still stumbling a bit. New homes sales rose sharply in February to an annualized pace of 539,000 but this was still was less than half of the pre-recession peak of 1.2 million per year. Some Investors Stick to the Straight and Narrow Path While manufacturers of consumer staples and durable goods are following the American consumer, most institutional investors are still a bit wary of many of these high-growth/low cost markets. They continue to focus much of their attention on the core gateway markets. Investors acquired $120 billion in U.S. office properties during 2014, but the so-called big six metros (New York City, San Francisco, Boston, Washington, DC, Los Angeles and Chicago) captured $42 billion of the sales. Buildings in these “most-favored markets" are selling for $200 to $300/psf higher than in nearly all other markets. A bit of a shift could be at hand though as more value-add/opportunistic investors buy properties in markets that are seen as having an upside. Rental rates – both asking and effective – are back to their pre-recession norm in only five of the 35 largest markets. There is more room for rental rate appreciation in the balance of the markets, creating a strong upside for value-add/opportunistic investors. Investors willing to take on somewhat more risk are venturing out of the gateway markets, and they are hoping to hit a trifecta. They want to spend big, capture a higher yield and add assets that align with shifting demographics. The bigger the deal, the more interest it draws from investors who need to get out a lot more capital. Investors are showing strong interest in specialty properties that offer higher yields - a 7%-plus cap is a big deal in today's environment. Investors are not only seeking out assets with higher yields, but also properties that align with demographic shifts. This made multi-family the darling of investors (and developers) early on in the cycle. More recently, the vast increase in the number of people over age 65 has investors targeting medical office space and outpatient clinics. It is estimated that in the next 10 years the number of people over 65 in the U.S. will increase by 17 million. Medical offices and assisted living facilities often offer higher yields and have the added advantage of aligning with an aging U.S. population. Veritas paid $2.6 billion for a portfolio of medical and assisted living properties that included 78 medical offices and 46 senior living facilities. American Capital Realty Trust sold the buildings at a 6.3% cap rate. Availability Rate Comparison Rental Rate Comparison Major Savills Studley Transactions $70.53 $59.32 $49.53 $39.22 $34.57 $33.15 $31.02 $30.67 $29.65 $29.55 $27.84 $26.76 $25.88 $25.20 $23.95 $22.10 $21.54 $21.17 $0 $20 $40 $60 $80 New York City San Francisco Washington, DC Silicon Valley Chicago CBD US Index Los Angeles Region Northern Virginia Houston Region San Diego South Florida Philadelphia CBD New Jersey Orange County Denver Region Dallas/Ft Worth Region Atlanta Region Tampa Bay ($/sf) Overall Rental Rate Comparison 7.7% 10.6% 10.7% 13.0% 13.6% 14.3% 15.9% 16.3% 17.0% 17.4% 17.6% 17.8% 18.0% 20.5% 21.2% 22.2% 22.3% 26.4% 0% 10% 20% 30% San Francisco New York City Silicon Valley Orange County Washington, DC Philadelphia CBD Chicago CBD Denver Region US Index Tampa Bay San Diego South Florida Los Angeles Region Houston Region Atlanta Region Northern Virginia Dallas/Ft Worth Region New Jersey (%) Availability Rate Comparison
  • 4. Savills Studley Report | National 04 Submarket Total SF (1000's) Last 12 Months This Quarter % Change from Last Qtr. Year Ago This Quarter pp Change from Last Qtr. (1) Year Ago This Quarter % Change from Last Qtr. Year Ago Atlanta 155,847 6,406 33,044 -1.1% 35,292 21.2% -0.2% 22.6% $21.54 1.4% $20.63 Atlanta - Class A 93,432 4,730 17,031 -1.6% 19,471 18.2% -0.3% 20.8% $24.70 1.9% $23.25 Chicago CBD 144,596 7,198 23,011 2.3% 24,493 15.9% 0.4% 17.0% $34.57 -0.9% $33.49 Chicago - Class A 66,381 2,990 9,981 1.0% 10,555 15.0% 0.1% 16.1% $38.21 -1.6% $37.67 Dallas/Fort Worth 207,535 12,846 46,350 2.8% 44,300 22.3% 0.6% 21.4% $22.10 1.4% $21.03 Dallas/Fort Worth - Class A 104,666 7,964 24,705 3.1% 22,225 23.6% 0.7% 21.3% $24.70 1.5% $23.48 Denver 115,580 6,269 18,888 0.8% 19,655 16.3% 0.1% 17.0% $23.95 0.9% $23.16 Denver - Class A 46,290 3,061 7,485 -1.2% 8,034 16.2% -0.2% 17.4% $28.27 -0.1% $27.30 South Florida 112,796 6,262 20,129 -3.5% 22,284 17.8% -0.7% 19.8% $27.84 0.2% $27.19 South Florida - Class A 51,718 3,196 8,926 -6.1% 10,352 17.3% -1.1% 20.0% $32.54 1.0% $31.55 Houston 187,023 12,666 38,381 16.4% 31,860 20.5% 2.7% 18.0% $29.65 4.1% $26.48 Houston - Class A 99,388 6,604 21,105 24.8% 14,666 21.2% 3.9% 16.3% $36.24 2.1% $33.69 Los Angeles 213,024 16,968 38,260 0.1% 39,691 18.0% 0.0% 18.6% $31.02 1.7% $29.29 Los Angeles - Class A 155,245 13,516 29,755 -1.7% 31,046 19.2% -0.3% 20.0% $32.12 1.5% $30.48 New Jersey 147,756 7,877 38,954 0.1% 39,349 26.4% 0.0% 26.6% $25.88 -0.3% $25.87 New Jersey - Class A 116,607 7,280 29,688 -0.7% 30,259 25.5% -0.2% 25.9% $26.95 -0.2% $27.16 New York 435,024 31,293 46,306 -1.8% 49,222 10.6% -0.2% 11.4% $70.53 1.7% $65.10 New York - Class A 202,388 15,491 25,781 0.7% 27,292 12.7% 0.0% 13.2% $79.47 3.6% $70.99 Orange County 94,531 9,456 12,297 -10.8% 14,305 13.0% -1.6% 15.1% $25.20 1.1% $23.63 Orange County - Class A 50,060 5,821 8,639 -10.2% 10,117 17.3% -2.0% 20.2% $26.78 2.3% $24.81 Philadelphia CBD 46,863 2,695 6,714 -0.1% 6,393 14.3% 0.0% 13.6% $26.76 0.6% $25.80 Philadelphia - Class A 29,162 1,459 4,158 -0.8% 3,979 14.3% -0.1% 13.6% $28.99 0.6% $28.16 San Diego 65,992 6,326 11,602 2.9% 13,121 17.6% 0.5% 20.2% $29.55 2.3% $28.27 San Diego - Class A 28,467 2,829 4,135 1.5% 5,034 14.5% 0.2% 18.2% $34.98 1.6% $33.80 San Francisco 81,401 8,734 6,302 -4.4% 7,366 7.7% -0.4% 9.2% $59.32 5.9% $50.97 San Francisco - Class A 49,179 5,612 4,252 -2.5% 4,413 8.6% -0.2% 9.3% $61.07 3.4% $53.64 Silicon Valley 71,349 7,662 7,603 1.5% 8,762 10.7% 0.2% 12.4% $39.22 4.2% $35.86 Silicon Valley - Class A 18,256 2,872 2,212 5.1% 2,221 12.1% 1.6% 11.6% $41.92 1.2% $42.88 Tampa Bay 53,313 3,343 9,266 -0.6% 10,927 17.4% -0.1% 20.5% $21.17 1.5% $20.45 Tampa Bay - Class A 23,675 1,756 3,311 2.8% 4,358 14.0% 0.4% 18.4% $25.09 1.8% $23.40 Northern Virginia 168,582 9,381 37,349 1.1% 35,910 22.2% 0.3% 21.3% $30.67 -0.5% $30.63 Northern Virginia - Class A 97,094 6,081 23,458 2.2% 21,510 24.2% 0.5% 22.2% $32.35 -0.4% $32.30 Washington, D.C. 130,518 11,949 17,792 -3.2% 18,592 13.6% -0.5% 14.2% $49.53 -0.1% $49.55 Washington, D.C. - Class A 73,527 8,810 10,204 -2.0% 11,101 13.9% -0.3% 15.1% $55.21 0.0% $54.44 Savills Studley Major Markets Total 2,565,948 173,868 437,297 0.9% 447,801 17.0% 0.1% 17.6% $33.15 0.8% $31.78 Savills Studley Major Markets - Class A 1,384,815 104,643 250,359 1.2% 252,918 18.1% 0.2% 18.4% $36.52 1.5% $34.82 Leasing Activity Available SF Availability Rate Asking Rents Per SF @SavillsStudleywww.savills-studley.com Please contact us for further information (1) Percentage point change for availability rates. Unless otherwise noted, all rents quoted throughout this report are average asking gross (full service) rents psf. Statistics are calculated using both direct and sublease information. Short-term sublet spaces (terms under two years) were excluded. The information in this report is obtained from sources deemed reliable, but no representation is made as to the accuracy thereof. Statistics compiled with the support of The CoStar Group. Copyright © 2015 Savills Studley Savills Studley 399 Park Avenue New York, NY 10022 (212) 326-1000 Chairman & CEO Mitchell S. Steir msteir@savills-studley.com (212) 326-1000 Corporate Research Contact Steve Coutts - SVP, National Research scoutts@savills-studley.com (212) 326-8610

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