Raleigh-Durham MARKETBEAT. Office Q Economy. Market Overview TRIANGLE OFFICE

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1 TRIANGLE OFFICE Economic Indicators Q3 16 Q3 17 Triangle Employment 910k 936k Triangle Unemployment 4.3% 3.5% U.S. Unemployment 4.9% 4.4% Market Indicators (Overall, All Classes) Q3 16 Q3 17 Vacancy 14.5% 13.8% Net Absorption (sf) -2k -309k Under Construction (sf) 2M 2.1M Average Asking Rent* $22.54 $23.26 *Rental rates reflect gross asking $psf/year Overall Net Absorption/Overall Asking Rent 4-QTR TRAILING AVERAGE Month Forecast 12-Month Forecast $24.00 Economy The metropolitan area continues to see strong migration to the area and meaningful corporate relocation announcements extending strong growth across the region. Recent figures from the U.S. Census Bureau rank Raleigh and Durham 4th and 5th respectively for their share of adults with bachelor degrees, a direct result of s status as one of only seven cities in the US that serve as home to three separate Tier-1 Research Universities and underscoring the long-held notion that a large part of the Triangle s business appeal is its highly educated and skilled workforce. The Bureau of Labor Statistics indicated employment growth in the Raleigh metropolitan area was higher than any other large-sized metro, with employment climbing 3.5% in the period spanning from August ( 16) to August ( 17). After hitting record lows in unemployment last quarter, North Carolina continues to stay steady at 4.1% unemployment rate, while the Triangle MSA also remained steady at 3.7%. 400 $ $ $ $ $ Q3 17 Net Absorption, sf Asking Rent, $ psf Overall Vacancy 20% 18% 16% 14% Historical Average=15.2% 12% 10% 8% Q3 17 Market Overview Vacancy rates and net absorption in the office market signaled a notable pause from the frenetic pace seen in the first half of the year, but both statistics were impacted by large blocks of space that while vacant, remained under lease until the recent quarter when they finally expired and officially impacted market supply. As a result, vacancy increased from 7% to 9.2% and net absorption went negative (-194,705 sf), something not seen since the first quarter of Net absorption in Q3 was disproportionately impacted by Allscripts lease at Forum office park (in multiple buildings) that expired, officially bringing back a little more than 300,000 sf of supply. Allscripts relocation to Midtown Plaza occurred earlier in the year, registering 250,000 sf of absorption at the time of the move. Even without this large expiration, net absorption still would not have been consistent with the quarterly average seen over the previous year. Still, most cushmanwakefield.com I 1

2 experts believe that aside from the typical summer slowdown attributed to vacations, there was substantial activity in the quarter. First Citizens Bank and A2Z Wireless both signed 50,000 sf leases in the vacated Colonnade II building in Six Forks but were not accounted for in the absorption numbers given they backfilled existing leases terminated in conjunction with their commencement (thus, the space never technically hit market supply), further making the argument that the quarter demonstrated reasonable demand activity than the numbers seem to suggest. In Q4, the market should see the new construction deliveries that include Carolina Square and Wade IV, which represent another 262,499 sf. Currently the projects are preleased at 75% and 56% respectively, which precluding any additional leasing in the quarter, would result in nearly 100,000 sf in new supply to come to market. According to the latest Triangle Business Journal s Space survey, as much as 300,000 sf of vacant space is set to expire by years end. As a result, Q4 could look similar to Q3 with negative net absorption and continue the upward pressure on vacancy rates although this projection relies heavily that market demand in the final quarter, which is typically the strongest, does not offset new construction and 2 nd generation supply in the coming quarter. Class A Asking Rates DIFFERENCE FROM THE TRIANGLE MEAN $3.75 $2.75 $1.75 $0.75 $(0.25) $(1.25) $(2.25) $(3.25) Falls of Neuse US 1 / Capital Blvd Cameron Village RTP/I-40 Corridor Cary South Durham West Raleigh US 70 / Glenwood Ave Downtown Raleigh Orange County Six Forks Downtown Durham YoY Market-Wide Asking Rate Growth CLASS A VOLUME CONTINUES TO OUTPERFORM SAME PERIOD % 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% Class A Overall Regardless, the statistics are a clear indicator that we may finally be seeing enough development in this upcycle to satiate current market demand. Despite the statistics that suggest a weakening market, asking rates have continued their upward climb, with overall and Class A asking rates rising 3.3% and 4.5% respectively year-over-year, a reflection of the momentum associated with multiple quarters of strength and rising construction costs for new deliveries translating to top of market rental rates. Rents are also being supported by continued strength in investment sales, which has high-bidders and new owners pushing higher rents to achieve pro forma underwriting. cushmanwakefield.com I 2

3 The Triangle s recent economic development victories have come in the form of significant job announcements. Following up on their commitments to bring jobs to the Triangle, large leases were inked by Relias Learning, INC Research and Infosys for a combined 466,090 rsf. Another notable transaction in the quarter with perhaps the most meaningful impact on the office market is the 80,000 sf WeWork deal at One Glenwood, which will offer space serving the Triangle s thriving class of solopreneurs and startups. WeWork s entry into the market would seem to be a real achievement for Raleigh as one of the fastest growing, most desirable office markets in the country. In New York City, WeWork is now the largest lessee (by square footage) as it continues to drive its high-end hoteling concept into commercial office markets, something worth watching now that it plans to enter the Triangle market. Investment Sales Investment transaction volume amounted to $270 million in Q3, which brings the YTD total to $653 million, the highest Q1-Q3 volume of the past 5 years aside from Volume in the quarter was driven by three separate portfolio sales, totaling 13 buildings in aggregate which included a portion of Perimeter Park (Office Portfolio), Situs I, II, III and Parkwest One and Two. Investment sales volume for the remainder of the year is expected to continue to be very healthy with several assets expected to trade in the fourth quarter. Cumulative Monthly Investment Sales Volume, $ Millions 1H 2017 SALES VOLUME UP SLIGHTLY FROM 1H Outlook J F M A M J J A S O N D New supply coupled with a handful of looming lease expirations will continue to pressure office vacancy rates, but may not impact asking rates as the market still digests these new deliveries and record breaking rental rates. The Triangle market may lead to a near-term period of equilibrium, which would welcome relief for tenants. PWC s MoneyTree report suggests that investment activity in the state fell slightly from levels observed during the first two quarters of 2017, but sales activity of approximately $126 million still represents an 11% increase over the trailing 15-year quarterly average. The activity would continue to suggest a positive outlook as the market benefits from clear rent growth and delayed speculative supply, which has finally impacted the Q3 leasing numbers. Investors in the Triangle should also feel confidence given the persistent flow of meaningful job announcements in the area over the past six months. cushmanwakefield.com I 3

4 MAJOR SUBMARKETS TOTAL BLDGS INVENTORY DIRECT VACANT VACANCY RATE Q NET 4-QTR NET UNDER CONSTRUCTION AVERAGE ASKING RENT CLASS A+B+C* AVERAGE ASKING RENT CLASS A* Cary 127 6,486, , % 52, ,300 - $23.19 $24.51 Downtown Durham 65 3,885, , % (7,335) 240, ,265 $26.87 $29.85 Downtown Raleigh 58 4,467, , % 76, , ,354 $25.68 $26.57 Falls of Neuse 74 3,033, , % 8,930 89,776 - $20.44 $22.95 North Durham 33 1,345, , % 1,798 36,197 - $16.06 N/A Orange County 36 1,483, , % 4,711 39, ,428 $26.60 $27.82 RTP/I-40 Corridor ,857,747 3,347, % (88,051) 815, ,000 $22.17 $24.15 Six Forks 65 4,012, , % (285,654) (26,575) - $25.90 $29.80 South Durham 40 1,956, , % 938 (9,947) - $21.94 $25.17 US 1/Capital Boulevard 48 2,381, ,936 13% (74,836) (98,107) - $21.85 $23.82 US 70/Glenwood Avenue 66 3,966, , % 11,470 31,408 - $23.88 $25.93 West Raleigh 91 5,972, , % (10,039) 151, ,071 $24.58 $25.81 TOTALS ,848,276 7,621, % (309,380) 1,639,728 1,180,118 $23.26 $26.03 SUMMARY BY CLASS *Rental rates reflect gross asking $psf/year Key Lease Transactions Q TOTAL BLDGS INVENTORY DIRECT VACANT VACANCY RATE Q NET 4 QTR NET UNDER CONSTRUCTION AVERAGE ASKING RENT DIRECT* Class A ,806,577 3,199, % (194,705) 914,927 1,180,118 $25.78 Class B ,500,667 4,250, % (102,814) 784,683 - $19.39 Class C 91 2,201, , % 9,970 51,718 - $15.32 PROPETY SF TENANT TRANSACTION TYPE SUBMARKET Perimeter VI 135,000 Relias Learning BTS RTP/I-40 One Glenwood 81,032 WeWork Prelease Downtown Raleigh Legacy at Brier Creek 60,000 Infosys Prelease US 70/Glenwood Brier Creek VI 55,000 RBC New US 70/Glenwood Colonnade II 53,214 First Citizens New Six Forks Colonnade II 51,363 A2Z Wireless New Six Forks Key Sales Transactions Q PROPERTY SF SELLER/BUYER PRICE / $PSF SUBMARKET Golden Belt 144,613 Scientific Properties/LRC Properties $19,500,000 / $135 Downtown Durham Situs/Park West (Portfolio) 251,545 Highwoods Properties/Adler Kawa $38,950,000 / $155 West Raleigh / Cary Concourse Lakeside I & II 155,375 Perimeter Park (Portfolio) 582,244 Lake Boone Tower 41,394 Banyan Street JV Oaktree/Foundry JV Hart Realty Advisors Starwood JV Vanderbilt Partners, Trinity/Goldman Sachs Blue Ridge Realty Inc./Gateway Three Realty Associates $25,200,000 / $163 RTP / I-40 $105,500,000 / $163 RTP / I-40 $4,500,000 / $109 West Raleigh cushmanwakefield.com I 4

5 OFFICE SUBMARKETS RALEIGH DURHAM 1. Orange County 2. North Durham 3. Downtown Durham 4. South Durham 5. RTP / I-40 Corridor 6. Cary 7. Southern Wake County 8. Eastern Wake County 9. West Raleigh 10. US 70 / Glenwood 11. Six Forks Road 12. Falls of Neuse Road 13. US 1 / Capital Blvd 14. Downtown Raleigh Cushman & Wakefield 3015 Carrington Mil Blvd, Suite 410 Morrisville, NC For more information, contact: Josh Chiles, Research Analyst Tel: josh.chiles@cushwake.com About Cushman & Wakefield Cushman & Wakefield is a leading global real estate services firm that helps clients transform the way people work, shop, and live. Our 45,000 employees in more than 70 countries help occupiers and investors optimize the value of their real estate by combining our global perspective and deep local knowledge with an impressive platform of real estate solutions. Cushman & Wakefield is among the largest commercial real estate services firms with revenue of $6 billion across core services of agency leasing, asset services, capital markets, facility services (C&W Services), global occupier services, investment & asset management (DTZ Investors), project & development services, tenant representation, and valuation & advisory. To learn more, visitwww.cushwakecentennial.com, or on Twitter. Copyright 2017 Cushman & Wakefield. All rights reserved. The information contained within this report is gathered from multiple sources considered to be reliable. The information may contain errors or omissions and is presented without any warranty or representations as to its accuracy. cushmanwakefield.com I 5