E-commerce. E-commerce in the Bay Area. United States Year End How consumer demand for expedited deliveries is driving real estate

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1 1 E-commerce in the Bay Area United States Year End 2016 How consumer demand for expedited deliveries is driving real estate

2 2 Last-mile delivery and a new era for industrial Introduction real estate Adjusting to consumer demand for speedy deliveries in the San Francisco Bay Area Gone are the days that customers patiently await for online orders to be processed and delivered. The growth of an on-demand culture centered on immediate gratification has rapidly shifted consumer expectations and prompted market responses from online retailers. As retailers aim to retain and maximize their market capture, increasingly flexible delivery options such as same-day shipping, and in some cities one or two-hour shipping, will continue to proliferate the online marketplace. As these last-mile efforts grow, so will their ripple effects on companies real estate selection strategies. What will be the impact on the industrial landscape, and what are the implications for occupiers and owners? Three important factors should be considered: Demographics are key Consumer surveys reveal that Millennials and Gen Xers are more likely to shop online and demand speedy delivery options. The Bay Area has the perfect demographic mix of density, affluence, and population growth. Distributors will prioritize last-mile delivery over cost Industrial users are prioritizing proximity to metropolitan areas despite widespread competition for limited space and steep real estate costs. Landlords maintain the upper hand Such a tight industrial market will likely continue to push landlord favorable conditions and force tenants to seek alternatives. These include infill and redevelopment opportunities, in addition to product in emerging submarkets. Spillover demand is occurring in Richmond, Livermore, and the Central Valley.

3 3 Demand Millennials and Gen Xers drive e-commerce and same-day delivery demand E-commerce sales reached 8.4 percent of all retail sales, or $1.0 trillion, as of 2016 and by 2019, sales are projected to reach $3.4 trillion. Not only does the option to receive online goods faster, positively influence a consumer s likelihood of purchasing items, but a substantial proportion of consumers now expect same-day delivery options. A survey conducted by Coldwell Banker found that Millennials (ages 18-34) are the most influenced by fast delivery options when considering whether or not to make online purchases, followed by Gen Xers (ages 35-49). Similarly, JLL s 2016 holiday forecast retail survey found that Gen Xers, followed by Millennials, are the most likely to shop online. 1 Throughout the Bay Area, these two age groups exhibited growth rates of roughly 10 and 15 percent between 2010 and 2015, and comprise over 43 percent of the population, combined. 2 With about 70 percent of Bay Area household incomes exceeding $50,000, and 45 percent of household incomes exceeding $100,000, 3 the region presents an attractive market opportunity. On a national basis only about 55 percent of household incomes exceed $50,000, and only 25 percent of household incomes exceed $100,000. Gen Xers and Millennials are the most likely to shop online 70% 60% 50% 40% 30% 20% 10% 0 Millennials Gen Xers The potential to capture more online sales incentivizes e-retailers to provide speedy delivery options to consumers. Baby Boomers >70 years old Source: JLL Research 1 JLL s 2016 Holiday Forecast Retail Survey found that 58.8 Millennials and 64.1 percent of Gen Xers preferred to shop online, compared to only 53.7 percent of Baby Boomers and 45.6 percent of those over 70 years old. 2 Due to limited available data, persons between 20 and 49 years old were used as an estimate. As of 2015, this demographic comprised 43.2 percent of the Bay Area population (American Community Survey, 2015). 3 Source: American Community Survey, 2015

4 4 Demand With a population base of 7.6 million people, and a growth rate that outpaces the national average, the Bay Area s population density and substantial spending power provides a strong consumer base. San Francisco Bay Area s population growth rate outpaces national average in every age bracket ( ) 20% Population percentage growth ( ) 15% 10% 5% 0% 19 and under % Bay Area Total United States Total Population age brackets Source: JLL Research, American Community Survey, 2015 The region s affluence further contributes to its strength as a retail market. About 70 percent of Bay Area household incomes exceed $50,000 compared to a only 45 percent, nationally, and 45 percent of Bay Area household incomes are over $100,000 compared to only 25 percent, nationally. Proportion of annual household incomes over $50,000 and $100,000 in the Bay Area exceed total U.S. 80% 70% 60% 50% 40% 30% 20% 10% 0% Percent of total household incomes> $50,000 Percent of total household incomes> $100,000 Bay Area Total U.S. Source: JLL Research, American Community Survey, 2015

5 5 Trends occurring in the Bay Area E-commerce is shaping a new era for industrial real estate E-retailers striving to provide faster deliveries to their consumers have reshuffled their real estate strategies. Last-mile focused tenants increasingly target proximity to metropolitan areas and have a willingness to pay premium rents. Deal velocity has picked up in the last two years, with about 53 percent of all Bay Area lastmile deals since 2011 occurring either during or after The additional market demand from these less pricesensitive users has fueled upticks in lease rates, which have risen between 29.7 percent and percent since the market trough in 2011, and between 29.8 and 73.7 percent in the last two years alone. Uptick of Bay Area last-mile distributor leases despite heightened lease rates ( ) $1.40 $ % Asking lease rates per s.f. (on a monthly, NNN basis) $1.00 $0.80 $0.60 $0.40 $ $ North Bay East Bay Silicon Valley Mid Peninsula Bay Area deals (count) Source: JLL Research

6 6 Trends occurring in the Bay Area Fast facts on Bay Area facility leases in 2016 On average, 2016 leases were within 5 mile radii of: 278,000 people 94,000 households ~100,000 housing units Within 30-minute drive of almost half of the Bay Area population 1 location boasts proximity to 81 percent of the region s population The map below highlights the shift of e-commerce delivery hubs targeting proximity to metropolitan areas despite substantial competition, limited options, and high rental rates. Population density with plotted e-commerce distribution hubs leased in San Rafael Richmond Farifield Tracts 2016 Population Density More than 161,000 7,510-10,000 5,010-7,500 2,010-5, Alameda Hayward Fremont 5 5 Less than 2000 Sunnyvale San Jose Last-mile Distribution Centers 5 mile radius ± Sources: JLL Research, ESRI 2016

7 7 So what? Occupiers should consider: The growing demand from e-commerce related sectors will add to the already substantial competition among users for limited space. Occupiers will need to plan ahead and act swiftly in order to capitalize on viable opportunities. The additional demand will further contribute to landlord favorable conditions. Tenants will need to prioritize Bay Area proximity, real estate costs, and flexibility as they face limited concessions and longer lease terms when making deals. Infill locations, redevelopment opportunities, and new construction buildings, all present potential options for space in the tight market. Additionally, emerging markets such as Richmond, Livermore, and the Central Valley, offer the space and availability that is lacking in many of the core submarkets. Landlord and investors should consider E-commerce driven requirements for space will continue to add to the existing +/ million s.f. of tenant demand targeting the Bay Area markets. While growing rents have out priced some users, that gap has been filled with less price-sensitive tenants. These new-to-market e-commerce users must locate near metropolitan areas to provide service to their customers. What else are last-mile users looking for? It depends. While size and building specification requirements vary depending on a hub s intended functionality, three general priorities include: 1) favorable traffic conditions such as minimal existing congestion and a lack of trucking restrictions; 2) high building door count; 3) access to a qualified and reliable labor force. Neighboring markets, such as Richmond, Livermore, and the Central Valley will also benefit from the growth of the e-commerce sector and owners there will experience ongoing spillover of Bay Area tenant demand. Asking rental rates throughout the Bay Area have grown consistently since 2011, and the recent growth of e-commerce demand will continue to drive pricing. Industrial space in Silicon Valley and the Mid-Peninsula exhibited average annual growth rates (AAGR) of 15.3 percent and 9.2 percent, between 2011 and 2016, respectively. The East Bay and North Bay markets illustrated AAGR of 11.5 percent and 5.3 percent growth during the same period.

8 About JLL JLL (NYSE: JLL) is a leading professional services firm that specializes in real estate and investment management. A Fortune 500 company, JLL helps real estate owners, occupiers and investors achieve their business ambitions. In 2016, JLL had revenue of $6.8 billion and fee revenue of $5.8 billion and, on behalf of clients, managed 4.4 billion square feet, or 409 million square meters, and completed sales acquisitions and finance transactions of approximately $136 billion. At year-end 2016, JLL had nearly 300 corporate offices, operations in over 80 countries and a global workforce of more than 77,000. As of December 31, 2016, LaSalle Investment Management has $60.1 billion of real estate under asset management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit For more contact information Katie Olson Kenny Research Manager Katie.OlsonKenny@am.jll.com Crystal Tseng Analyst Crystal.Tseng@am.jll.com Amber Schiada Director, Northern California Research Amber.Schiada@am.jll.com About JLL Research JLL s research team delivers intelligence, analysis and insight through market-leading reports and services that illuminate today s commercial real estate dynamics and identify tomorrow s challenges and opportunities. Our more than 400 professional researchers track and analyze economic and property trends, and forecast future conditions in over 60 countries, producing unrivaled local and global perspectives. Our research and expertise, fueled by real-time information and innovative thinking around the world, creates a competitive advantage for our clients and drives successful strategies and optimal real estate decisions. Copyright Jones Lang LaSalle IP, Inc This publication is the sole property of Jones Lang LaSalle IP, Inc. and must not be copied, reproduced or transmitted in any form or by any means, either in whole or in part, without the prior written consent of Jones Lang LaSalle IP, Inc. The information contained in this publication has been obtained from sources generally regarded to be reliable. However, no representation is made, or warranty given, in respect of the accuracy of this information. We would like to be informed of any inaccuracies so that we may correct them. Jones Lang LaSalle does not accept any liability in negligence or otherwise for any loss or damage suffered by any party resulting from reliance on this publication.