Americas Office Trends Report Summary The overall U.S. office market picked up the pace in the second quarter of 2016 despite continued global economic and financial market uncertainty. While the Brexit vote at the end of Q2 created a new source of uncertainty for the global economy, it should not have any significant impact on U.S. office leasing. Tech companies continued to drive growth across the nation, although a slowdown in venture capital (VC) funding and tech IPOs has tempered demand in some markets. Energy-dominated markets slowed further due to sustained low oil prices. Many companies continued to seek creative space in vibrant downtown and suburban areas near public transportation in order to attract millennial talent desiring a live/work/play environment. With continued office-using employment growth and limited new supply expected in 2016, rents will likely increase. We continue to keep a close eye on any potential impact on office market fundamentals from financial market volatility and global risk factors.
Perspectives This report reflects current observations and sentiments from more than 1,500 CBRE Office Advisory & Transaction and Investment professionals in the Americas. U.S. TENANT / USER PERSPECTIVES Many tenants are still focused on downtown and highly amenitized suburban markets with transit access and live/work/play environments. Tightening in the Class A market has tenants exploring well-located Class B properties and creative space. Tenants across geographies and industries are exploring alternate workplace strategies to maximize efficiencies and collaboration. The most active industries are technology and healthcare. The energy sector has slowed due to low oil prices. Tech companies continue to look for creative, renovated warehouse space, but also are migrating to Class A space with ample amenities. U.S. LANDLORD / OWNER PERSPECTIVES Developers are renovating Class B buildings due to a shortage of Class A space. A lack of new supply is causing a shortage of large, available blocks of Class A space in an increasing number of markets. Landlords continue to push rental-rate increases and reduce concessions in many markets. Speculative construction is increasing slowly, but rising construction costs are restraining development activity outside of the strongest markets. Most markets are witnessing positive net absorption. U.S. CAPITAL MARKETS PERSPECTIVES U.S. office investment, including entity-level acquisitions, totaled $31.9 billion in Q2 2016 a 10.2% decline from Q2 2015. Virtually unchanged from Q1 2016 and 2015, 54% of the total investment (as measured in dollar value) was for CBD assets vs. 46% for suburban. The top six markets for H1 2016 investment (New York City, Los Angeles, Boston, San Francisco, Seattle and Chicago) represented more than half of the U.S. total. After an annual decline in Q1 2016, crossborder office investment increased by 39% year-over-year to $6.7 billion in Q2 2016, led by Canada, Saudi Arabia and Germany. CBRE s semi-annual North American Cap Rate Survey H1 2016 found slight widening of office cap rates, with a larger increase for suburban properties than for CBD assets. Office Services CBRE Research 2016 CBRE, Inc. 2
REGIONAL PERSPECTIVES U.S. NORTHEAST REGION Tech tenants are expanding in Brooklyn and Downtown Manhattan, partially due to a shortage of high-quality space in Midtown South. Large tenants are exploring New York City s outer boroughs for proximity to Manhattan at a lower cost. Boston s Seaport continues to attract tenant interest, including small and mid-sized tech firms from Cambridge. Development interest in Philadelphia is focused on the tight University City submarket. Government agencies and contractors continue to consolidate in Northern Virginia. Owners who upgrade their assets are benefiting from a flight-to-quality in the Stamford CBD. The Northern and Central New Jersey markets have been tightening, partially due to the state s jobs tax incentive program. Rising construction costs are preventing the conversion of suburban Class C space in Albany to other uses. U.S. SOUTHEAST REGION Investor capital is targeting strong markets offering higher yields than prime gateway cities, such as Atlanta, Raleigh and Nashville. In contrast with the national trend, Miami s suburban market is tighter than the CBD. Savannah s Westside is tight due to demand from port-related businesses. Legal, financial and insurance firms dominate leasing activity in Tampa. Call centers have absorbed large blocks of space in suburban Greenville. Tenant interest remains steady in Charlotte, one of the nation s tightest office markets. Conversions of Class B office buildings to apartments are lowering Norfolk s vacancy rate. Demand in Richmond s CBD remains low despite a large amount of quality space and falling rents. U.S. MIDWESTERN REGION Several major tenants announced plans to relocate from Chicago s suburbs to the CBD, continuing a trend. Many tenants in Dallas are seeking low-rise campuses with high parking ratios. Houston s availability rate reached a 20-year high due to energy industry weakness. Tech companies continue to drive healthy net absorption in Austin. Energy companies are giving back floors of Class A space in Downtown Fort Worth. Tenants and new residents are driving demand for office and residential space in downtown Cleveland. Strong demand for CBD office space in Detroit is creating parking challenges. Kansas City office product is seeing interest from investors seeking a hedge against potential volatility in coastal markets. U.S. WESTERN REGION Rising sublease space in San Francisco is providing options for tenants seeking short-term, plug-and-play space. Robust growth of established tech firms has fueled a large amount of construction activity in Seattle. Los Angeles South Bay is a tale of two markets, with El Segundo leading and the rest of the market lagging. The anticipated fall 2016 completion of the Golden 1 Center is driving investment and interest in downtown Sacramento. Office Services CBRE Research 2016 CBRE, Inc. 3
REGIONAL PERSPECTIVES (CONT.) Portland has not seen a pullback in techtenant activity. Orange County tenant demand is strong and diversified, including tech, healthcare and finance. A large amount of old, in-fill product is maintaining an elevated overall vacancy rate in Las Vegas. An active construction pipeline in Salt Lake City will alleviate the shortage of large blocks of space. CANADA Q2 2016 economic growth was hampered by the Fort McMurray wildfires and the slowdown of oil production. Demand in the office market was unchanged, driven primarily by business services, technology and the public sector. New office supply will outstrip demand during the next few quarters, driving up the office vacancy rate. Projects currently under construction remain high, with the majority in Toronto, Calgary, Vancouver and Montreal. Tenant inducements are on the rise in certain markets. MEXICO Net absorption in Mexico City totaled 1.79 million sq. ft. in H1 2016, 19% above the H1 2015 total of 1.5 million sq. ft. Class A office inventory has reached 57.7 million sq. ft. with a 14.1% vacancy rate in Q2 2016. Class A projects under construction totaled 18.6 million sq. ft. at the end of Q2 2016, while completions registered 2 million sq. ft. in the second quarter. Office Services CBRE Research 2016 CBRE, Inc. 4
To learn more about CBRE Research, or to access additional research reports, please visit the Global Research Gateway at www.cbre.com/ researchgateway. Additional U.S. Research from CBRE can be found here. FOR MORE INFORMATION, PLEASE CONTACT: Edward J. Schreyer President Agency and Asset Services, Americas +1 214 863 3042 ed.schreyer@cbre.com Spencer G. Levy Americas Head of Research +1 617 912 5236 spencer.levy@cbre.com Follow Spencer on Twitter: @SpencerGLevy Whitley Collins Global President Occupier Advisory and Transaction Services +1 310 363 4842 whitley.collins@cbre.com Andrea Cross Americas Head of Office Research +1 415 772 0337 andrea.cross@cbre.com Follow Andrea on Twitter: @AndreaBCross Disclaimer: Information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. It is your responsibility to confirm independently its accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE.