June JLL Research Report. Snapshots. Capturing real-time trends and commercial real estate insight

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1 June 2018 JLL Research Report s Capturing real-time trends and commercial real estate insight

2 Dallas Comparing home costs in top-rated school districts Starting price of homes in good school districts, top 20 metros Most comparisons of home prices look at city averages, but do not answer the question of what a family-sized home costs in an area with good schools -- within commuting distance of a major city. If you consider the top 20 metro areas (MSAs), which include suburbs, what is the starting price range for a standard three-bedroom, two-bathroom house in a great school district? These types of neighborhoods averaged 28 miles from the downtown area, representing a significant commute from some of the key employment hubs. Using GreatSchools ratings filter in Zillow, we filtered for single family home listings within the attendance zones of schools that rate 9/10 or 10/10, for elementary, middle, and high schools combined. We then looked at the cheapest available single family homes in those areas that were built less than 35 years ago, excluding fixer-uppers, teardowns, auctions, and foreclosures -- to consider conventional listings that were essentially or close to in move-in condition. Dallas fares well alongside other top metros, and remains affordably priced considering that it is the fourth-largest metro area by population. Source: Zillow, JLL Research Analysis Steven McCord steven.mccord@am.jll.com

3 East Bay Industrial jobs grow as unemployment hits a new low # Employed in the East Bay 350, , , , , ,000 50, % % % 2.7% Manufacturing Trade, Transportation & Utilities East Bay Unemployment Rate CA Unemployment Rate 2018 YTD 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Unemployment Rate In May 2018, the Oakland-Hayward-Berkeley Metropolitan Division s unemployment rate hit a 20-year low of 2.7 percent. This rate marks the tenth straight month of declining unemployment, and beats the previous low of 3.3 percent in The East Bay is below the state average, which is at 4.3 percent. Although total employment in manufacturing and trade, transportation, and utilities is down from levels, both industries have recovered significantly with 45,000 jobs created since peak unemployment in A total of 5,400 jobs were created between April 2018 and May Although 300 jobs were lost in manufacturing during this time period, employment in the industry is up 3.3 percent from last year. A total of 1,000 jobs were created in trade, transportation, and utilities, which is an increase of 1.8 percent from May Job growth in these industries could translate into increasing demand for industrial spaces as businesses look to expand their production and facilities.. Joel Woodmass Joel.Woodmass@am.jll.com Source: JLL Research, CA EDD

4 Indianapolis Northeast Indy office inventory pushes into Fishers Completions (s.f.) 800, , , , , , , ,000 - Historical Completions 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000, ,000 - Total Inventory (s.f.) South of 96th St. North of 96th St. Total Inventory Historically, the Northeast office submarket was concentrated in the Castleton area of Indianapolis. But in the past two decades, the inventory has stretched up the I-69 corridor into Fishers. In fact, since 1990 all but two new construction projects have occurred north of 96 th Street. This trend has accelerated recently with the redevelopment of Downtown Fishers and will continue into In the past few weeks alone, three developers have announced plans to build office product in the area. This will add an additional 101,000 square feet of office space to the Downtown Fishers market. The demand for Fishers office space is evident in the asking rents they are able to command. Asking rents for office buildings north of 96 th Street have risen by nearly $4.00 since Q an increase of nearly 25.0 percent! The average asking rent for Fishers is $21.30 while the rate for the Northeast submarket overall is $ Mike Cagna mike.cagna@am.jll.com Brianna Marshall brianna.marshall@am.jll.com Source: JLL Research

5 Los Angeles As the trend grows, the Westside remains home to the bulk of co-working space Total square footage Los Angeles currently ranks third in the country in terms of total inventory occupied by co-working companies. Co-working operators account for almost 2.8 million square feet of office space in the Los Angeles metro market. While co-working operations can be found across the metro area, over 1.2 million square feet is located within the tech-heavy and venture-capital rich Westside submarket. Shared workspace operators have also been drawn to Downtown s urban vibe and rich amenity base. WeWork has seen significant growth since opening its first LA location in 2014, and currently has 16 locations, 8 of which are in Westside and Hollywood markets. Other operators such as Spaces, Industrious and Serendipity Labs have seen significant growth in the market. EQ Offices, the US office portfolio company owned by Blackstone s real estate fund, announced that it will be partnering with Industrious to directly manage 110,000 square feet of flexible office suites in the Howard Hughes Center in Culver City. While co-working spaces have always been places for incubating the next generation of companies, the market is increasingly seeing traditional tenants and even local government agencies drawn to co-working operators who are able to offer flexible lease terms and creative build-outs which will serve their employees growing desire to work in creative environments. Source: JLL Research Devon Parry devon.parry@am.jll.com

6 Manhattan New York City s economy continues to diversify this cycle Jobs added since 2007 (thousands) New York City office-using employment has increased 12.8% since 2007, to 1.4 million YTD +37.3% +176K jobs +30.3% +143K jobs +12.4% +59K jobs +0.7% +3K jobs -1.5% -7K jobs -100 Finance Legal Tech PBS Healthcare Recent labor market diversification is causing seismic changes in local office fundamentals. Employment in financial activities has barely recovered to its pre-recession levels, and the legal services sector has been on a slow but steady decline. Traditionally, these two sectors have been the primary drivers of New York s economy. In the same period, the technology, healthcare, and professional business services sectors have all experienced massive growth in employment, with commensurate increases in office occupancy. These industries are now at the forefront of New York s economy, and are increasingly shaping demand for office product. Technology in particular has had significant influence on the office market, with competition over a relatively small pool of highly skilled talent steering firms towards employee-friendly, new and newly renovated product in Midtown South. This development has caused an explosion in rents and new development in that market. Bennett Heller Bennett.Heller@am.jll.com Note: PBS refers to Professional & Business Services Source: JLL Research, BLS, Moody s Analytics

7 Northern Virginia Net effective rents are down across Northern Virginia versus a decade ago as concessions reach new highs Net effective rent ($ p.s.f.) $45 $40 $35 $30 $25 $20 $15 $10 $37.63 $33.13 $41.21 $37.87 $ $30.40 $29.11 $27.73 $23.67 $22.25 $28.32 $24.33 $5 $0 Crystal City/Pentagon City RB Corridor Tysons Toll Road Route 28 South Suburban office parks Net effective rents have declined across every major submarket in Northern Virginia over the last decade as strike rents have seen flat to modest growth, but concessions have reached record highs. In Crystal City/Pentagon City, net effective rents are 12% lower than taking rents today. Over the last decade, taking rents have increased only 1%, while concessions have ballooned: on average, a tenant relocating 10 years ago captured five months of rental abatement and $45 p.s.f. in tenant improvement (TI) allowance, while that same tenant in 2018 would be likely be able to negotiate 16 months of rental abatement and $80 p.s.f. in TI, with some private-sector tenants striking deals for longer terms garnering TI packages of $100 p.s.f. and higher. While this market has seen an increase in demand in the past two years due largely to these concessions, these levels are likely to remain at or near current levels to drive increased activity from out of market. Michael Hartnett michael.hartnett@am.jll.com Source: JLL Research

8 In the RB Corridor, net effective rents are 12% lower than taking rents today and 8% lower than 2008 rates. Over the last decade, while direct vacancy surged from 6% in 2008 to 19% in 2018, taking rents stabilized, but concessions jumped: rental abatement tripled, from six months in 2008 to 18 months today, while TI have nearly doubled, from $55 p.s.f. to record highs of $100 p.s.f. or higher, led by new construction. We believe these levels have peaked due to vacancy significantly declining in new construction and deals in the active pipeline that will push vacancy down significantly over the next 24 months. In Tysons, net effective rents are 9% lower than taking rents today and down 11% since While concessions are averaging $60 p.s.f. with 12 months of rent abatement, new construction is moving at another pace: with mid- $50s p.s.f. taking rents versus $39.04 p.s.f. for relet Class A space. With those new construction Metro-centric building, tenants have been able to negotiate $100 p.s.f. and higher TI in some cases. We believe those levels have peaked, but due to the discrepancy in both demand and vacancy from on-metro to off-metro, there is more room for concessions to grow off Metro. Due to more consistent demand the past decade due to fiber, tech talent and the expansion of the Silver Line, the Toll Road has fared slightly better than peer markets: net effective rents are 12% lower than taking rents, but also only 5% lower than 2008 levels. In this node ahead, concessions for new construction will be on par with other Metro-centric submarkets, with TI reaching $100 p.s.f. and higher. With Metro being such a driver ahead due to the walkability and amenities nearby, concessions off-metro (farther than ½ mile from Metro station) will likely trend into the upper $60s p.s.f. to $70 ps.f. with months of rental abatement. Michael Hartnett michael.hartnett@am.jll.com Source: JLL Research

9 Philadelphia Philly fast casual concepts are a growing export for the city, with more than twice as many locations in expansion markets as within the city itself La Colombe honeygrow minigrow Federal Donuts HipCityVeg Pizzeria Vetri Dizengoff Goldie Number of locations Move over, Rita s Water Ice and Wawa. These major Philadelphia brands may have the broadest reach today, but a growing cohort of Philly-founded mid-market concepts are gaining ground in largely urban markets coast to coast. A survey of new or newly expanding Philadelphia brands reveals that while Philadelphia still contains more of its own concepts than any other market (25), other major cities are enjoying what we have to offer. Honeygrow (in conjunction with its recent spinoff, minigrow) is Philly s most proliferated concept thus far, with 32 operating locations. La Colombe follows close behind with 30 and is the one concept with more locations in expansion cities than its hometown (New York, Chicago, and DC contain a lot of draft latte fans, apparently). In fact, these three markets contain more Philly-born outposts (30 in all) than Philly itself (25). With ongoing growth in food halls and a trend toward convenience and experience, Philadelphia brands are likely to continue their national spread, which can in turn help to position Philly as a trendsetter. Eat your hearts out! Clint Randall clint.randall@am.jll.com Source: JLL Research

10 Phoenix Southwest multifamily housing affordability $1,000 $1,500 $2,000 $2,500 $3,000 $3,500 $4,000 $4,500 $5,000 $5,500 $6,000 $6,500 $7,000 $7,500 $8,000 $8,500 $9,000 $9,500 10,000 10,500 11,000 11,500 12,000 12,500 13,000 13,500 14,000 14,500 15,000 15,500 16,000 16,500 17,000 17,500 18,000 18,500 19,000 19,500 20,000 20,500 21,000 21,500 22,000 22,500 23,000 23,500 24,000 24,500 25,000 25,500 26,000 26,500 27,000 27,500 28,000 28,500 29,000 29,500 30,000 30,500 31,000 31,500 32,000 32,500 33,000 33,500 34,000 34,500 35,000 35,500 36,000 36,500 37,000 37,500 38,000 38,500 39,000 39,500 40,000 40,500 41,000 41,500 42,000 42,500 43,000 43,500 44,000 44,500 45,000 45,500 46,000 46,500 47,000 47,500 48,000 48,500 49,000 49,500 50,000 50,500 51,000 51,500 52,000 52,500 53,000 53,500 54,000 54,500 55,000 55,500 56,000 56,500 57,000 57,500 58,000 58,500 59,000 59,500 60,000 60,500 61,000 61,500 62,000 62,500 63,000 63,500 64,000 64,500 65,000 65,500 66,000 66,500 67,000 67,500 68,000 68,500 69,000 69,500 70,000 70,500 71,000 71,500 72,000 72,500 73,000 73,500 74,000 74,500 75,000 75,500 76,000 76,500 77,000 77,500 78,000 78,500 79,000 79,500 80,000 $500 $0 Average 2-bedroom rent vs. median household income Phoenix Salt Lake City Denver San Diego Los Angeles $56,081 $64,659 $70,077 $67,600 $64,214 $1,041 $1,129 $1,462 $2,010 $2,304 Median Household Income 2-Bedroom Rent The southwest region s hottest destinations continue to command a broad spectrum of both rental rates and median incomes. Phoenix and Salt Lake City command the best deals on a monthly basis, taking only 22% and 21% of monthly income, respectively. On the other end of the scale, Los Angeles residents are partitioning around 43% of their monthly income for rent. On the other hand, New multifamily developments in Phoenix s hottest submarkets continue to raise rents, as Phoenix holds the highest annualized rent growth rate of all surveyed areas at 5.2%. A multitude of variables are directly affected with an increase in the rent to monthly income ratio such as overall savings. A survey by Go Banking Rates states that 57% of survey respondents had less than $1,000 saved, with around 39% of respondents having $0 in savings. $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $- Jennifer Farino Jennifer.farino@am.jll.com Rudolph Perez Rudolph.perez@am.ll.com Source: JLL Research, Axio Metrics, ESRI, GOBanking

11 San Francisco San Francisco Leasing Activity 2018 YTD In 2018 (YTD), 214 leases have been signed. The average lease size is just over 20,000 SF. 79% of the transaction volume has taken place in the CBD with 36% in North Financial District and 43% in South Financial District. Average effective rent for San Francisco are just under $75 psf, with an average of about 3 months in free rent and $55 in tenant improvements. Park Tower (250 Howard), signed in May, set the record for largest single lease in the history of San Francisco at 755,914 SF. Tech tenants continue to dominate the San Francisco real estate market. Real Estate companies currently sit in second, largely due to outbreak of coworking companies and their rapid expansion/growth. Philip Alimam philip.alimam@am.jll.com Source: JLL Research

12 U.S. Industrial The top ten markets at a glance: the link between industrial real estate and population growth Population growth rate from Population vs. Industrial market growth 6% Atlanta 5% Chicago 4% South Florida Dallas 3% Seattle 2% E & C Penn. 1% Houston Inland Empire 0% Los Angeles 0% 5% 10% 15% -1% New Jersey Market size growth from 2015 to Q Inland South New EmpireFlorida, Jersey 3.6% New Jersey, 4.0% Inland Empire, 4.3% Chicago, 2.9% Where are people moving and is the logistics market keeping pace? Since 2015, the Sunbelt region, especially markets like Texas, Inland Empire and Atlanta are a clear winner attracting domestic and international migration the industrial market size in these regions have grown by nearly 10.0 percent. In our comparative analysis, our research shows major population hubs and land constraint coastal markets like Los Angeles, New Jersey and South Florida are positioned in the lower left quadrant. Given the challenges of near all-time-high rents, pricier land options and lack of readily available buildable land all combined have led to slower inventory growth in the past few years. How will population trends impact the logistics market? Based on 2022 projections population is expected to increase by nearly 10.0 percent in Dallas & Houston providing investors opportunities to expand their industrial real estate footprint to accommodate for increased demand. Aaron Ahlburn aaron.ahlburn@am.jll.com Source: JLL Research, US Census Bureau, ESRI