1. Savills Studley Report
National office sector Q1 2015
Savills Studley Research
National
SUMMARY
Market Highlights
AVAILABILITY NUDGES UP
As leasing slows in many of the largest
markets, and new construction activity
intensifies the national overall availability
rate rose from 16.9% to 17.0%. The rate
increased in seven markets and was
unchanged in four others. Houston, which
has the nation’s largest office development
pipeline, posted a 2.7 pp quarter-on-quarter
increase in its availability rate, rising to
20.5%. Dallas/Fort Worth’s availability
rate rose by 0.6 pp to 22.3%. Orange
County, down by 1.6 pp to 13.0%, was
the only market with a notable decline. The
national Class B and C availability rate was
unchanged at 15.8% but the Class A rate
rose by 0.2 pp to 18.1%.
ASKING RENTS CONTINUE INCREASE
The national overall rental rate rose for the
14th consecutive quarter, ticking up by
0.9% from the prior quarter. The national
average Class A rent jumped by 1.5% to
$36.52. New construction in several markets
including New York and a limited supply of
big blocks of quality space in others such as
San Francisco and Denver have contributed
to the steady growth. Class A rents posted
quarter-on-quarter increases of 3.6% in New
York City to $79.47 and 3.4% to $61.07 in
San Francisco.
“The unbridled pursuit of talent
by rapidly expanding tech and
media firms captured most of the
headlines in 2013 and 2014. Of
late, though, more businesses are
chasing the American consumer –
adding employees and office space
in lower-cost markets that have a
strong demographic upside.”
Keith DeCoster,
Savills Studley Research
2. 02
Savills Studley Report | National
Talent, Cost and Demographics
Talent has been appropriately heralded as the
new global currency. The unbridled pursuit of
employees with specialized skills, particularly
by TAMI companies, solidified the “most-
favored market” status of a handful of cities –
San Francisco, Manhattan, Boston and Austin.
With the exception of Austin, these are all
high-cost markets with exorbitant costs to hire
employees and lease space to house them. As
the U.S. recovery has gained traction in the last
several quarters, though, a wide cross-section
of businesses have started to follow the bread
and butter of the $14-trillion U.S. economy –
the American consumer. In turn, the markets
winning the biggest corporate site selections
in roughly the last four to eight quarters have
a relatively even mix of three key assets – they
have a deep pool of talent, lower costs and
promising demographics.
Sunbelt Markets Rebounding
Setting aside the weak March report, the U.S.
has added roughly 3.0 million new jobs in the
last year, the strongest stretch of job growth
since the 1990s. Household income growth is
still tentative and uneven but there are some
initial signs that wage growth is spreading
beyond a few specialized "skill-starved"
sectors such as tech. Households have been
spending more on durable goods such as
electronics, automobiles and of late, perhaps
housing. An extended period of gas prices
well below $3.00/gallon should provide even
more impetus to household spending. Sunbelt
markets such as Atlanta, Dallas/Fort Worth,
Austin, Phoenix and Tampa Bay/Orlando, as
well as the Mountain West, stand to gain most
from lower gas costs. They also have the
strongest upside in terms of population growth,
household formation and consumption.
As a percentage of inventory, net absorption of
office space is accelerating rapidly in many of
the aforementioned Sunbelt markets. Annual
net absorption as a percentage of inventory
averaged 1.7% to 3.0% in these markets, well
above the national average of 1.1%. Pent-up
demand in auto sales, household consumption
and housing sales has the strongest upside
in the South and West and these areas also
stand to benefit most from falling gas prices.
In contrast, most Northeast markets (with
the exception of Boston) and those in the
Midwest are lagging, with net absorption as a
percentage of inventory often falling short of
1.0%.
Auto Sales - A Good Road Map
The release of pent-up demand in auto and
housing sales has been the basis for optimistic
Source: Bureau of Labor Statistics
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
-6.0%
-5.0%
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
25
26
27
28
29
30
31
Millions
National Office Emp. U.S. - % Annual Change
Office-Using Employment Trends
$31.77
$36.52
$24.84
$28.49
$0
$10
$20
$30
$40
1Q10 1Q11 1Q12 1Q13 1Q14 1Q15
($/sf)
Class A Class B & C
Asking Rent Trends
18.1%
20.8%
15.8%
17.6%
0%
5%
10%
15%
20%
25%
1Q151Q141Q131Q121Q111Q10
(%)
Class A Class B & C
Availability Rate Trends
3. savills-studley.com/research 03
Q1 2015
Tenant Sq Feet Address Market Area
US Marshal Service 332,964 1215 S Clark St, Arlington, VA Northern Virginia
Markit North America 141,832 5 Manhattan West, New York, NY New York
Harland Clarke Corp 141,332 240 America Pl, Jeffersonville, IN Louisville
Harman Professional Inc 128,974 8760 S Sandy Pky, Sandy, UT Salt Lake City
Sharp HealthCare 100,000 16909 W Bernardo Dr, San Diego, CA San Diego
New Advisory LP c/o PJT Partners LP 98,740 280 Park Ave, New York, NY New York
American Imaging Management Inc 93,678 540 Lake Cook Rd, Deerfield, IL Chicago
Apttus Corporation 90,128 1400 Fashion Island Blvd, San Mateo, CA San Francisco
US General Services Administration 84,606 250 E Street SW, Washington, DC Washington, DC
McGladrey LLP 83,200 80-100 City Sq, Charlestown, MA Boston
forecasts of stronger growth going back to
2012. Auto sales are now nearly even with
pre-recession trends and are expected to
push as high as 17.0 million vehicles in 2015.
A stronger auto sector is benefitting a lot of
different markets, supporting expansion at ad
and media agencies in expensive talent-laden
cities such as New York and Los Angeles.
Many carmakers are also renewing their push
to compete with Apple and Google in the race
to develop “connected car technology.” It is no
surprise that BMW and Tesla are basing some
of these R&D operations in Silicon Valley, but
they also have development groups in Chicago
and Detroit, respectively. Even some of the
most cash-rich companies are starting to show
concerns about costs, pushing them to tap into
deeper and less expensive talent pools in the
Midwest.
Sunbelt markets seem to be gaining the
most from resurgent auto sales though. They
have ample lower-cost talent and unlike the
Midwest, Northeast and Southern California, a
strong demographic upside. In Orange County,
Hyundai Capital recently leased 178,000 sf,
snaring one of the last big blocks in the Airport
Area. Mercedes Benz USA’s decision to move
its headquarters from Bergen County, New
Jersey to the Central Perimeter in Atlanta is
just the latest case of an automaker relocating
from a high-cost market to a lower-cost one.
Mercedes Benz's relocation, which is yet
another body blow for Northern New Jersey,
was motivated in part by Atlanta’s lower cost
of real estate and taxes, as well as proximity
to Mercedes' production plant in Alabama
and shipping in South Carolina. However, the
company's CEO ultimately highlighted talent,
saying the move would position them to be
competitive for the next 50 years.
Housing Still a Road Block
The auto sector is critical to the U.S. economy
– even to office markets – because of its
spillover effects on finance, advertising and
engineering. No sector has as potent a
spillover effect as the U.S. housing market
though. Moody's estimates that every new
home built creates two other jobs in fields that
feed off housing such as finance, home goods
stores and local retail. The U.S. housing sector
is still stumbling a bit. New homes sales rose
sharply in February to an annualized pace of
539,000 but this was still was less than half of
the pre-recession peak of 1.2 million per year.
Some Investors Stick to the
Straight and Narrow Path
While manufacturers of consumer staples and
durable goods are following the American
consumer, most institutional investors are still
a bit wary of many of these high-growth/low
cost markets. They continue to focus much of
their attention on the core gateway markets.
Investors acquired $120 billion in U.S. office
properties during 2014, but the so-called big
six metros (New York City, San Francisco,
Boston, Washington, DC, Los Angeles and
Chicago) captured $42 billion of the sales.
Buildings in these “most-favored markets"
are selling for $200 to $300/psf higher than in
nearly all other markets.
A bit of a shift could be at hand though as
more value-add/opportunistic investors buy
properties in markets that are seen as having
an upside. Rental rates – both asking and
effective – are back to their pre-recession norm
in only five of the 35 largest markets. There
is more room for rental rate appreciation in
the balance of the markets, creating a strong
upside for value-add/opportunistic investors.
Investors willing to take on somewhat more
risk are venturing out of the gateway markets,
and they are hoping to hit a trifecta. They want
to spend big, capture a higher yield and add
assets that align with shifting demographics.
The bigger the deal, the more interest it draws
from investors who need to get out a lot
more capital. Investors are showing strong
interest in specialty properties that offer higher
yields - a 7%-plus cap is a big deal in today's
environment. Investors are not only seeking out
assets with higher yields, but also properties
that align with demographic shifts. This made
multi-family the darling of investors (and
developers) early on in the cycle.
More recently, the vast increase in the number
of people over age 65 has investors targeting
medical office space and outpatient clinics.
It is estimated that in the next 10 years the
number of people over 65 in the U.S. will
increase by 17 million. Medical offices and
assisted living facilities often offer higher yields
and have the added advantage of aligning with
an aging U.S. population. Veritas paid $2.6
billion for a portfolio of medical and assisted
living properties that included 78 medical
offices and 46 senior living facilities. American
Capital Realty Trust sold the buildings at a
6.3% cap rate.
Availability Rate Comparison Rental Rate Comparison
Major Savills Studley Transactions
$70.53
$59.32
$49.53
$39.22
$34.57
$33.15
$31.02
$30.67
$29.65
$29.55
$27.84
$26.76
$25.88
$25.20
$23.95
$22.10
$21.54
$21.17
$0 $20 $40 $60 $80
New York City
San Francisco
Washington, DC
Silicon Valley
Chicago CBD
US Index
Los Angeles Region
Northern Virginia
Houston Region
San Diego
South Florida
Philadelphia CBD
New Jersey
Orange County
Denver Region
Dallas/Ft Worth Region
Atlanta Region
Tampa Bay
($/sf)
Overall Rental Rate Comparison
7.7%
10.6%
10.7%
13.0%
13.6%
14.3%
15.9%
16.3%
17.0%
17.4%
17.6%
17.8%
18.0%
20.5%
21.2%
22.2%
22.3%
26.4%
0% 10% 20% 30%
San Francisco
New York City
Silicon Valley
Orange County
Washington, DC
Philadelphia CBD
Chicago CBD
Denver Region
US Index
Tampa Bay
San Diego
South Florida
Los Angeles Region
Houston Region
Atlanta Region
Northern Virginia
Dallas/Ft Worth Region
New Jersey
(%)
Availability Rate Comparison
