Leasing Still Solid Across Major Office Markets in Q3 2018

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1 U.S. Research Report TOP OFFICE METROS SNAPSHOT Q Leasing Still Solid Across Major Office Markets in Q New Deliveries Fall but Construction Still Growing and Will Challenge Occupancy Rates in 2019 Featured Highlights >> Nine of the top 10 U.S. office markets posted positive absorption in Q3 2018, though absorption declined in the five markets relative to Q Manhattan posted its strongest leasing in four years, but net absorption actually fell as major tenants consolidated space and vacated existing premises to occupy new construction. >> Construction fell markedly this quarter versus last, with less product coming to market in seven of the 10 metros. Still, construction continues to be a concern in some markets as building area under construction continues to rise and new supply is undercutting occupancy gains, even where leasing activity is quite strong. >> Rents rose at least 1% compared with Q in six of the 10 metros, led by 2.4% in New York, but fell significantly in the San Francisco Bay Area. >> With coworking accounting for a large and growing share of leasing in key markets, traditional property metrics like vacancy rates are becoming less reliable and less meaningful. >> The San Francisco Bay Area continues to power ahead, with leasing activity well above long-term averages, fueled primarily by large tech firms. Although the weighted rent in San Francisco declined in the third quarter after multiple second quarter large leases at unusually high rents, rents for the region overall rose by 3.6% in the quarter while vacancies dropped. The Silicon Valley giants continue to urbanize its Northern California footprint. >> Manhattan leasing surged to a four-year high last quarter, up 20% over Q3 2017, driven by the FIRE (financial services, insurance and real estate) sector. Still, net absorption for the quarter declined as several major tenants consolidated and/or vacated premises to lease new locations. METRO CORE CBD INVENTORY (SF) CORE SUBMARKETS Manhattan 503,295,206 Manhattan Midtown; Midtown South; Downtown -110,632 $ % Washington, D.C. 187,283,309 CBD (DC), East End (DC), Capitol Hill (DC), NoMa (DC), Capitol Riverfront (DC), Carlyle (DC), R-B Corridor (NOVA), Tysons Corner (NOVA), Bethesda (SubMD) 760,763 $ % Chicago, IL 132,663,788 West Loop, Central Loop River North, East Loop 209,160 $ % Houston, TX 117,406,006 CBD, Katy Freeway, West Loop (Galleria), Westchase 247,591 $ % Los Angeles, CA 115,131,800 Dowtown Los Angeles, West Los Angeles, Tri-Cities 459,800 $ % Atlanta, GA 102,287,405 Midtown, Buckhead, Central Perimeter, Cumberland/Galleria 21,311 $ % San Francisco Bay Area, CA 100,352,373 Financial District (North Financial District & South Financial District), SOMA (West SOMA & East SOMA), Palo Alto, Mountain View, Sunnyvale 222,207 $ % Dallas, TX 76,672,796 Uptown, Preston Center, Far North Dallas 909,342 $ % Boston, MA 69,811,985 Back Bay, Financial District, Charlestown, Crosstown, Fenway/ Kenmore, South Station, North Station, Seaport 200 $ % Seattle, WA 62,490,177 Seattle CBD, Lake Union, Pioneer Square, Belltown, Queen Anne, Ballard 515,070 $ % ABSORPTION (SF) AVG RENT VACANCY ($)* RATE^ * A quarterlyw rent change of +/-1% or less, is judged to be flat. ^ A quarterly vacancy rate change of +/- 20 basis points or less is deemed to be flat

2 > > After a stellar start this year, vacancies in Boston increased in Q3 2018, rising to 9.5% in the core areas covered by this report, but still, the fourth-lowest vacancy rate of the 10 markets in this report, and rents still rose more than 1% over the quarter. East Cambridge continues to be fueled by biotech. > > The worst may be over for Washington, D.C. Vacancies dropped 20 basis points (bps) in the quarter despite a doubling of new supply delivered, but space under construction declined by almost 20%. Demand for Class A space grew for the fifth consecutive quarter. > > Los Angeles continues to face supply pressures, though vacancies dipped in Q and rents rose modestly as new demand kept pace with deliveries. New supply delivering in West LA is mostly vacant while Downtown LA will face a large influx of new space in early 2019 with more on the way though the tech corridor is still strong. > > Chicago s central business district (CBD) suffered a disappointing quarter, with vacancies climbing 150 bps to 14.8%, its highest rate in years, as tenants vacate older offices to lease in the new construction being delivered. Even so, Chicago is seeing a major influx of coworking firms and other tenants from outlying areas, so absorption is still positive. > > Seattle s office market continued to shine in Q as strong leasing caused vacancy to drop to 7.7% in the areas covered by this report. Amazon remains a primary absorption driver, along with WeWork, now the city s second largest occupier. Rents continue to climb to new records. > > Houston continues to struggle but is making some progress. Though vacancies dropped by 10 bps in the quarter, its vacancy rate remains by far the highest among the top 10 markets at 21.5%. Still, construction is relatively modest by Houston standards and absorption is positive, so the occupancy trend should strengthen. > > With net absorption in its core areas of more than 900,000 square feet, Dallas saw vacancies drop 70 bps, the most of any top 10 metro. A key reason: more than 30 leases of 10,000+ square feet were signed in the quarter. With the pickup in occupancy and absorption, rents also rose strongly over the quarter. > > Atlanta tread water this quarter, with no new supply added and net absorption essentially zero, so the vacancy rate stayed at 13.7% for the core submarkets tracked for this report. Nonetheless, rents trended up by more than 1%. Washington, D.C. Manhattan LOCAL INSIGHTS > > Manhattan had a very strong quarter with leasing volume reaching a four-year high. At million square feet, quarterly leasing was up 10% and improved by 20% from Q Leasing activity was 25% ahead of Manhattan s five-year historical average. > > Leasing activity between January-September 2018 of 29.3 million square feet outpaced any such period since Year-to-date leasing has already surpassed full-year leasing every year from Nearly half of Manhattan s leasing activity during Q took place in just two of the 18 submarkets: Plaza District (2.8 million square feet) and Grand Central (2.4 million square feet). > > Still, the vacancy rate rose 20 bps to 6.3% and net absorption actually fell by 110,000 square feet as major tenants consolidated space and vacated existing premises to occupy new construction. However, Amazon s decision to locate half of its new headquarters across the East River in Queens should be a boost for the entire metro. > > Manhattan s FIRE sector accounted for the majority (53%) of Q leasing. Slightly more than one-fourth of all FIRE tenant deals (15% of Manhattan s total leasing volume) in the third quarter were leases by coworking companies. Leasing by the health services industry followed at 13%. > > Asking rents increased for the third consecutive quarter to an average of $75.65 per square foot, a new Manhattan quarterly record. Asking rents gained 2.3% since June 2018, the largest quarterly increase in three years. The average was up 4.1% since Q Pricing rose quarter over quarter in eight of Manhattan s 18 submarkets. Midtown s $84.33 per square foot quarterly asking rent average was still 8.4% below the record high of $92.04 per square foot set a decade ago. > > JP Morgan Chase had the largest lease this quarter with their renewal on 855,000 square feet at 277 Park Avenue. Pfizer led the market with almost 1.1 million square feet combined of new leasing at Park Avenue > > Conditions improved in Washington, D.C. Even as 1.1 million square feet of office product delivered and outpaced new demand by 48%, the vacancy rate fell 20 bps to 14.6%. Several demolitions and adaptive reuse conversions removed more than 500,000 square feet of vacant space from the market. The largest were in the District proper and included th Street, NW and 2030 M Street, NW. In Tysons Corner, the conversion of 1764 Old Meadow Road from office to self-storage commenced, which further reduced vacancy from the office market. > > Tenants continue to be attracted to high-end office product. Demand for Class A office space grew by 1.6 million square feet during the quarter the fifth consecutive quarter of growth. Demand for high-end product grew at the expense of commodity space. Almost 850,000 square feet of lower-cost space was returned to the market in Q Q U.S. Top Office Metros Snapshot Colliers International 2

3 Chicago > > Capitol One generated the most new demand in the market. The financial institution s new headquarters building delivered, adding 975,000 square feet of new space to the market, all of which constituted net new demand. As with New York, Amazon s decision to locate half of its new headquarters in northern Virginia should be a boost for the entire metro. > > Rental rates continued to increase across the Greater Washington, D.C. region, driven mainly by the delivery of new space. During the quarter, the average asking rate increased by 1.7% to $49.12 per square foot. The largest increase occurred in Class B space, driven by large blocks of space returned to the CBD and East End submarkets. Even as rents continue to rise, landlords aggressively competed to attract and retain tenants by offering generous concessions packages, especially in Class A product. > > Federal and local government renewals dominated third quarter leasing activity in the District. The Federal Communications Commission s 602,350-square-foot renewal and extension at th Street was the largest lease executed metro-wide. The District government signed the next two largest leases with the U.S. Attorney s Office of the District of Columbia and the Washington, D.C. Department of Transportation signing for 345,776 and 165,000 square feet, respectively. > > Virginia s leasing activity was highlighted by the second significant tenant in the last two quarters signing at 7950 Jones Branch. Airline Pilots Association signed for 103,711 square feet. Additionally, shared office space providers continued to be active in the market. Most notably, WeWork leased 65,000 square feet at 1201 Wilson Boulevard in Rosslyn. In suburban Maryland, leasing was hot in downtown Bethesda, where two significant preleases were signed at the currently under construction trophy building, the Wilson. > > Chicago s downtown office market posted a relatively slow quarter of demand throughout the third quarter of the year, reporting 209,000 square feet of positive net absorption in the portion of the CBD tracked by this report. Even with no new supply hitting the market this quarter, the vacancy rate increased by 1.5% to a total of 14.8%, reflecting tenant space consolidations. > > With approximately four million square feet under construction in the prime Chicago submarkets three times the amount at this time last year occupancy looks to slip further next year. > > In one positive emerging trend, coastal tech firms, such as Facebook, are expanding their presence in Chicago to take advantage of the city s strong talent pool, thereby increasing demand for high-quality efficient space. Professional service firms have also contributed to the absorption of newer product as tenants consolidate and densify their existing office footprint while seeking higher-quality, efficient space, offsetting higher asking rents while attracting top tier talent. > > By mid-2019, market fundamentals will hinge on which tenants move into the Old Main Post Office and what space they leave behind, as the shadow space accumulated will determine the elasticity of the market shift in favor of tenants throughout Los Angeles Houston > > Houston s office market is still weak but made more progress in the third quarter than it has in the past two years. The core Houston submarkets covered in this report have now posted two consecutive quarters of positive absorption for the first time since Still, vacancies in the core area covered by this report remain at 21.5%, down just 10 bps from last quarter, though off from a peak of 22.3% in Q > > Houston s core office market posted 248,000 square feet of positive net absorption in Q3 2018, on top of 768,000 square feet in the prior quarter. Among the tenants that relocated during the third quarter include the Harris County Veterans Service, moving into 118,800 square feet at 500 Jefferson in the CBD submarket. > > Rents in the prime areas covered by this report continued to nudge up, reaching $35.51 in Q3 2018, from $34.96 last quarter and the highest since $35.79 in Q > > 3.2 million square feet of office space is under construction in the metro, which is relatively modest by Houston standards, of which 60% is situated in the core submarkets. Encouragingly, almost half of space is pre-leased. Build-to-suit projects make up 26% of the space under construction and the remaining 74% is spec office space, of which 28% is pre-leased. > > Los Angeles continues to face supply pressures, though vacancies dipped in Q by 10 bps and rents rose modestly. New supply delivering in West LA is mostly vacant while Downtown LA will face a large influx of new space in early Though less than half a million square feet was delivered in these prime LA areas last quarter, another 2.8 million square feet is still under construction. > > Vacancy in the West Los Angeles market rose by 10 bps, as absorption gains in Marina Del Rey/Venice and West Hollywood helped buoy the market against partially vacant spec deliveries. Rents continued their ascent at a more measured pace than the market had seen in past quarters, rising by $0.48 to $55.13 per square foot full service gross (FSG), a growth of 4.6% year over year. Concentrated mainly in technology tenant-dense submarkets, leasing efforts for 1.1 million square feet of new projects currently under construction will go a long way in determining whether vacancy ebbs or flows in the coming quarters. > > The Downtown Los Angeles office market recorded positive absorption for the fifth straight quarter as vacancy dipped below 19%. At a macro level, Downtown Los Angeles current vacancy hasn t changed appreciably from the five-year historical average of 19.3%. Leasing volume recorded 590,500 square feet due primarily to new deals by Honey, Arizona State and accounting firm, BDO. Asking rents in the CBD have continued growing by 2.5% year over year. In the face of rising build-out costs and high asking rents in creative conversion space, landlords in the CBD have kept rates high, choosing to compete for tenants with larger concession packages, like abatement and higher tenant improvement allowances. Q U.S. Top Office Metros Snapshot Colliers International 3

4 Atlanta San Francisco > > Demand in the Tri-Cities market was negative for the third time in four quarters. Minimal gains in Monrovia, Arcadia and Burbank were surpassed by losses in Glendale and Pasadena. After last quarter s inertia, rents managed to climb incrementally in the third quarter. Subleases dominated leasing velocity for the quarter, particularly in Burbank. > > Atlanta s overall office market experienced its second consecutive quarter of negative absorption in Q largely due to several large tenants vacating premises. But the prime areas covered by this report saw a gain of 21,000 square feet absorbed, after a decline of 156,000 square feet in the prior quarter. In all, the core areas have seen slightly more than 576,000 square feet of positive absorption year to date. > > While Atlanta s overall office vacancy rate rose 10 bps in the quarter, vacancies in the prime submarkets showed no change from last quarter, remaining flat at 13.7%. Average rents increased yet again as well, reaching $30.02 in the areas covered by this report, up more than 7% from $27.95 one year ago the biggest percentage jump among the top 10 markets. > > Construction activity picked up this quarter with eight buildings breaking ground in the region. The largest of these was the 330,000-square-foot office building at The Battery, which will be anchored by Thyssenkrupp s North American headquarters. Space under construction rose by more than 750,000 square feet over 28% in the core submarkets during the last quarter. > > Large anticipated vacancies are having their effect on Atlanta s overall office performance. Because of this, 2018 absorption is not expected to change much from its current year-to-date level. > > Vacancies in prime San Francisco Bay Area submarkets overall fell another 50 bps to 4.4%. In San Francisco, the core market rate edged down 30 bps to 5.8%. The vacant sublease rate was flat this quarter at 0.8% and continues to be well below the high-water market of 5.1% reached in 2002, meanwhile the City s direct vacancy rate shrunk 30 bps to 5%. > > San Francisco experienced strong leasing activity during the third quarter, which translated into nearly 2.3 million square feet of transactions well above the quarterly 18-year average of 1.8 million square feet. Tenant demand for space in San Francisco continued to grow over the past three months with technology tenants accounting for over half of that demand. > > San Francisco posted more than 341,000 square feet of positive net absorption. Year-to-date absorption exceeded 3.4 million square feet in the core CBD submarkets. The North Financial District was the key contributor for the positive net absorption for the City, posting more than 374,000 square feet. Dallas > > Demand for office product in Silicon Valley overall continues to outpace supply. The most noteworthy deals of the quarter involved projects which have not yet completed construction. The largest deal was forged by Roku, taking 472,000 square feet at Coleman Highline in San Jose, most of which has not yet broken ground. Third quarter leasing activity in the office sector reached 2.4 million square feet, roughly half the volume compared to the previous quarter, which contained several unusually large deals. > > Despite the drop, net absorption remained positive with 337,000 square feet in Silicon Valley overall. Absorption fell by 67,000 in the core Silicon Valley submarkets, and vacancies nudged 20 bps higher, but to just 1.6%, by far the lowest in this survey. > > Another trend fueling the Valley s momentum is the transformation of Downtown San Jose. The Google effect has sparked a chain reaction of investors betting on the revitalization of the region in a big way, with more than $1.4 billion invested in the region over the last 12 months. > > Asking rates in the core locations of Mountain View and Palo Alto are on a par with those in downtown San Francisco. Average Class A asking rates in Palo Alto are the highest in the Bay Area approaching $100 per square foot. Valley-wide, asking rates average $53 per square foot, up 1% from the period last year. > > After posting negative absorption last quarter, the prime Dallas markets bounced back strong with 909,000 square feet of positive absorption this quarter. Average asking rental rates had an uptick as well, rising almost $0.30 to $ This is an increase of more than $5.00 per square foot over the past 5 years. > > Leasing demand was strong over the last quarter with more than 30 new leases signed of at least 10,000 square feet. WeWork is adding a sixth location to the market and will bring their total occupied space to more than 320,000 square feet. Other notable leases that were signed this quarter include CyrusOne, which signed close to 50,000 square feet in the Uptown submarket. > > Construction in Dallas, while cooling off slightly, did see another speculative office building kicked off in the Far North Dallas submarket. At 220,000 square foot, the Headquarters II office building developed by Heady Investments brings the total construction to almost two million square feet of office space in the markets covered by this report. Nonetheless, the pace of construction has slowed considerably, down by 65% from a year ago, so the market should have sufficient time to absorb this space and reduce vacancy, which rose slightly over the past several quarters to 14.8%. > > After reaching an all-time high effective weighted rent during the second quarter, overall weighted rents softened this quarter by nearly 10% to $82.34 per square feet. The drop in the overall weighted rents can be attributed to multiple large leases with effective rents of $95 or higher that closed in the second quarter. Q U.S. Top Office Metros Snapshot Colliers International 4

5 Boston > > One issue facing the Dallas Ft. Worth (DFW) market is the Amazon HQ 2 effect. There are several substantial deals likely to be signed now that Amazon has decided not to locate any of their new facilities in DFW. Job growth is expected to continue to be strong. The metroplex added more than 110,000 jobs over the past 12 months, making it, once again, one of the top markets in the country. > > After a stellar start this year, Boston s vacancies increased in Q3 2018, rising to 9.5% in the core markets covered by this report, but still the fourth-lowest vacancy rate of the ten markets. This third quarter lull has been rather typical of this economic cycle: In most years, the third quarter has either continued a second quarter trend of negative absorption or posted weaker growth. Yearto-date absorption is up sharply at 1.5 million square feet, triple the pace at the same time last year. > > Investors were very active, setting pricing records and keeping office properties trading with cap rates in the low-to-mid 4%. Meanwhile, a number of large tenants are ready to transact, and rents continue to rise up more than 1% over the second quarter. > > With a still-strong tenant pipeline, owners continue to invest in their assets. In the Financial District, several landlords are repositioning their lobbies, including 99 High Street, 260 Franklin and 110 High Street. Rockpoint is adding a food hall to 160 Federal Street/100 High Street, while One Post Office Square plans to re-skin the building, adding a whole new glass façade while increasing its footprint. > > Space banking is a nascent marketplace trend. Tenants are leasing space for future needs, but unlike in the dot-com era, they are taking the extra space and then subleasing it. Three recent examples of this include DataXu in the Financial District and Cengage and PTC in the Seaport. Meanwhile, those who are unsure of their longer-term needs or want others to manage it for them are turning to coworking. ezcater is considering all of WeWork s space at Congress Square. Seattle > > The Puget Sound Region s office market continued to shine as strong leasing caused vacancy to drop 30 bps to 7.7% in the areas covered by this report. Absorption has been maintaining a strong, if declining, trend this year, achieving 515,000 square feet in Q3 2018, down from a recent high of 932,000 square feet in the first quarter of this year, bringing the year-to-date total to just over two million square feet. > > Amazon remains a primary absorption driver, occupying 157,000 square feet at 9th and Thomas in the Lake Union submarket this quarter. The expansion of the city s second-largest occupier, WeWork, will continue to be a topic of discussion in this market, as the company closes in on occupying more than 1.2 million square feet by the end of this year. WeWork occupied 100,000 square feet of its 108,000-square-foot lease at th Avenue. Leasing was strong in recently-delivered Seattle properties like Madison Centre, which will lead to higher absorption in future quarters. > > Companies and job seekers from San Francisco were also major demand drivers as they seek to capitalize on the still-booming tech market and lower cost of living. Oracle, Stripe and Uber are just a few Bay Area firms that have recently expanded in the Puget Sound. > > Class A rental rates increased in both the Seattle and Bellevue CBDs, as full-floor availabilities remained at a premium. The overall Class A rental rate rose to $49.51 per square foot in Q3 2018, driven largely by a 15% increase in Pioneer Square/ Waterfront and a 14% increase in Lake Union. > > The quarter saw no new construction deliveries, but this will likely change over the next few months, with more than 4.7 million square feet of space still under construction. Skanska s 2 & U development in the Seattle CBD is progressing and should see pre-leasing soon. Though outside of the core area covered in this report, Block 16 of The Spring District in Bellevue was the only property to break ground in Q Kilroy Realty s 333 Dexter is the most notable Seattle project under construction, with an expected delivery in early OFFICE SERVICES contact Cynthia Foster President, National Office Services cynthia.foster@colliers.com RESEARCH contacts Pete Culliney Director of Research USA pete.culliney@colliers.com Andrew Nelson Chief Economist USA andrew.nelson@colliers.com Colliers International 666 Fifth Avenue New York, NY colliers.com Copyright 2018 Colliers International. The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.