WHAT’S HOT IN COMMERCIAL REAL ESTATE SUMMER 2013
WHAT’S HOT... in Commercial Real Estate
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Table of Contents National Overview GDP Growth and the Rise of the Millennials
3
High-quality, New Office Space, Creative Space
4
Healthcare Bonanza
5
Changing Spaces: Law Firms
5
E-Commerce: Bigger Box Warehouses/Smaller Box Retail
6
Multifamily
7
Hot Stats
8
What's Hot in... Atlanta, GA
9
San Diego, CA
31
Baltimore, MD
10
San Francisco, CA
32
Greater Boston, MA
11
San Jose-Silicon Valley, CA 33
Charlotte, NC
12
St. Louis, MO
34
Cincinnati, OH
13
Tampa, FL
35
Columbus, OH
14
Washington, DC Metro
36
Dallas, TX
15
Dayton, OH
16
Denver, CO
17
Houston, TX
18
Indianapolis, IN
19
Kansas City, MO
20
Los Angeles. CA
21
Louisville, KY
22
Milwaukee, WI
23
Minneapolis, MN
24
Nashville, TN
25
New Jersey
26
New York, NY
27
Phoenix, AZ
28
Raleigh, NC
29
Sacramento, CA
30
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WHAT’S HOT... in Commercial Real Estate
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The U.S. economy is now midway through the fourth year of its recovery. While it has shown recent flashes of a more robust trajectory potentially forming – galvanized by housing and equities – it has yet to prove that these stronger trends are sustainable. Indeed, as of this writing, the Federal Reserve was still artificially stimulating the economy by making $85 billion in asset purchases each month (though now hinting they may begin tapering the program at the end of 2013). Until the bond-buying program comes to an end, and the economy demonstrates that it is capable of standing on its own two feet, we will remain cautious in making our commercial real estate predictions. What we can say with greater certainty is that the U.S. economy remains on a consistent path of slow improvement. Real GDP is on track to grow at a rate of 2% in 2013 – roughly the same rate of growth observed in the prior three years of this recovery. But even in this slow 2% GDP recovery there are certain commercial real estate (CRE) sectors that are not only performing well, but thriving. Even in a slow 2% GDP recovery there are The most notable winners include multifamily, “big box” distribution center space, high-end office space, creative office space, medical certain CRE sectors that are not only office buildings and virtually any property type that is newly built or performing well, but thriving. newly renovated. There are a number of forces at work that explain why these CRE sectors are winning in this recovery. For instance, the rise of e-commerce and mobile technology is contributing to the massive surge in demand for distribution center space in multiple markets across the country. Some forces reflect a more risk-averse, practical consumer, which explains some of the shift in demand from owning to renting, from large space to smaller space. Other forces are driven by pure demographics: Millennials – those aged 20-35 – are entering their prime rental years, fueling the engine for the multifamily market; at the same time an increasing number of baby-boomers are reaching the age where they require increased medical attention; hence, the medical office bonanza. Demographics also explain shifts in the office sector. With the rise of the millennial generation, the new workplace is increasingly focused on mobility, wireless office space, communal work areas, new creative space and energy efficiency. Properties that can tick those boxes – rather than older, traditional product – are dominating in this recovery. The younger generation is also drawn to The Rise of the Millennials edgy, urban lifestyles; that explains why After ‘98 Gen 2020 most downtown areas are hot, while most suburbs are not. ’77-’97 Millennials
37%
’65-’76
Gen X
‘46-’64
Boomers
2010
Traditionalists
Before ‘46
Gen 2020
51%
Millennials Gen X
This paper focuses on the bright spots in CRE. In this national overview section, we will touch on a few common themes observed throughout the country, followed by a discussion of hot trends we are observing at the metro level.
2020
Boomers
Traditionalists
0%
20%
40%
60%
Source: Bureau of Labor Statistics Employment Projections
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High-quality, New Office Space, Creative Space – Crushing It The high-end of the office sector is clearly bouncing back, and most of it is newly built or newly upgraded. When we say “new space” we generally mean office space that was built or rehabbed after 2007. This segment of the market has accounted for all, 134 million square feet (msf), of the net absorption that has occurred since 2010. What makes that statistic even more astounding is that new space represents only 8% of the country’s total office inventory. Thus, there is a huge wave of tenant demand chasing a very small sliver of the market, and consequently rents are soaring. In New York City, for instance, there were 29 leases signed recently for over $100 psf in rent; a few deals were reported to reach north of that to $200 psf. In Washington, DC, higher quality buildings with views of the Capitol Building are fetching rents that are, on average, $30 psf above the rest of the market. Every metric for new, high quality space is exceedingly more robust vis-à-vis traditional space: vacancy for new space has been cut in half during the recovery, while vacancy for traditional space remains at recessionary highs; rents for new space is $12 higher than rents for traditional space.
New vs. Older Space U.S. Office Net Absorption
Yr Blt After 08' Yr Blt Before 08'
30 20 msf
Creative space is another subplot in this evolving story of “out with the old, in with the new”. Some of the common characteristics include edgy architectures, wireless environments, walkable locations, benching and open floor plans, and unique exteriors. This creative space trend is most evident in tech-fueled markets on the West Coast (e.g., Seattle, San Jose, and Los Angeles) but it is gradually catching on in other major metros such as New York City, Austin, TX and Washington, DC. In Los Angeles, buildings with a creative space strategy are leading the charge in the recovery, registering some of the strongest lease-up rates and fetching some of the highest rents and values in the city.
10 0
-10
2010
2011
2012
Q1 13
Still, it's not yet time to ring down the curtain on the traditional office building model – a game of musical chairs within the tenant world will keep many assets afloat for years to come. But to appeal to the high-end and command those eye-popping rents associated with new higher quality space, these buildings need a lot of TLC. There are currently 80,000 buildings in the U.S. that are 20 years in age or older, accounting for 61% of the total national inventory. This presents potentially 80,000 opportunities to retrofit these buildings to match today’s tastes and preferences, and the possibility of generating higher returns. Out with the old, in with the new: Millennials taking over. This generation (those aged 20 - 35) favors new, edgy, creative, yet smaller space requirements. Millennials will replace baby-boomers as the primary decision makers by 2020, 51% to 21%. “Right-sizing” Many businesses shrunk staff during the recession. As their leases expire, they are looking for space that better fits a smaller headcount – new space is generally more flexible and configurable. Change in tastes and preferences: The new workplace is about mobility; wireless office spaces where cubicle and private offices are being replaced by communal work areas with a smattering of private meeting rooms. These changes in office space usage began with tech firms but are spreading to other tenant types as mobility, benching, shared space and collaborative environments in energy efficient space rise in popularity—the net result being smaller office footprints for many tenant types.
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Healthcare Bonanza There are 75 million baby-boomers in the U.S. – the largest of the demographic cohorts. The simple fact is that as a group they are getting older, sicker and fatter, and that is creating a healthcare bonanza in the country. Since 1990, employment in healthcare services has grown nearly four times faster than U.S. employment overall. It is not only strong growth, it’s reliable growth. Healthcare employment has added jobs throughout each of the last three recessions (1991, 2001 and 2007), and that includes a greater number of doctors, nurses and medical assistants. A number of cities are cashing in. In the well-established medical hubs, such as Nashville and Raleigh, medical office construction increased over 50% since 2007 – surging in the face of a weak recovery. In Boston (biotech hub), Minneapolis (medical device firms), suburban Maryland (NIH & medical research), New Jersey (pharmaceutical hub) - health services have already grown to account for about 15% of total employment in those cities. Pittsburgh – a traditional “rust-belt” metro – has largely reinvented itself based on healthcare growth and research. More than 246,000 people in Pittsburgh work for health companies. Louisville, Cleveland, Houston and St. Louis, all report surging demand for medical space. In nearly every major metro across the country, the heath-service employment chart reveals nearly the exact same trend, robust growth year after year. The growth in demand for medical office space is only going to accelerate. Every day since January 1, 2011, and for the next 19 years, more than 10,000 baby-boomers reached or will reach the age of 65, according to Pew Research. People over the age of 60 visit a doctor’s office twice as often as does the general population and are prescribed four times the number of prescription medications. Investors are clearly savvy to these trends. While sales volume for nearly all CRE product types are still hovering at 2004 levels, sales of medical office buildings posted a record high in 2012.
Healthcare Bonanza Healthcare Jobs Growing 4x Faster than other Industries 140000
18000
135000
17000 16000
130000
15000
125000
14000
120000
13000
115000
Total Nonfarm 000's
110000
12000 11000
Healthcare Services 000's
105000
10000
100000
years, more than 10,000 baby-boomers will reach the age of 65 – driving record levels of demand for medical office space.
Changing Spaces: Law Firms Historically, law firms have been tagged as having overly large executive offices and a substantial amount of space dedicated to legal documentation and legal libraries. Times have changed. Technological developments – such as cloud storage capabilities – have eliminated the need for storing bulky legal books onsite. Moreover, law firms are beginning to embrace the efficient space movement which is materializing for commercial space. There are examples in the marketplace of law firms that have downsized and moved to modernized layouts with single-size offices that allow for more efficient floor plans. In Washington, DC for example, of the 29 leases executed for greater than 30,000 sf since the beginning of 2011, 35% (10 leases) were for less space than tenants originally occupied. And of those 10 deals, 7 opted to move from traditional office space into brand new space.
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
9000
Every day for the next 19
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While all that is compelling enough, let’s layer in policy. The impact from the Affordable Care Act (nicknamed “Obamacare”) will be another boom to the healthcare sector. The program will expand insurance coverage to an additional 22 million people, spurring even more demand for care. Every one additional patient typically creates two square feet (sf) of new demand for medical office space. Assuming no change in policy, Obamacare alone will generate an additional 46 msf of new demand for medical space by 2017.
E-Commerce: Bigger Box Warehouses/Smaller Box Retail Throughout the recovery, e-commerce has been “the elephant in the room” for retailers. While retail sales in the U.S. have averaged a 5% growth rate for each of the past three years, the growth rate for e-commerce is triple that. Meanwhile, it is no coincidence that the retail categories where online sales have been strongest are the same ones in which bricks-and-mortar chains have struggled the most. As Amazon and other purely online players continue to grow, retailers are rushing to beef up their e-commerce platforms in order to compete. Retail activity used to be about the big box store; it is now about the big box warehouse – in particular, the mega big box distribution warehouse—the new industrial product type that sits at the nexus of retail and industrial. While the old bulk warehouse paradigm used to average 100,000 sf and was utilized primarily for regional distribution chains, the new model is much larger and much more complex. In the new world, 300,000 sf is small and million-square-foot warehouses are not uncommon. That is because the new mega warehouses often serve dual roles as distribution centers for stores as well as e-commerce fulfillment centers. Instead of just supplying 50 stores in a region daily, warehouses may also be responsible for fulfilling 50,000 individual e-commerce orders per day as well.
The Rise of E-Commerce U.S. Retail E-Commerce Sales as a Portion of Total U.S. Retail Sales 4,000 3,500 3,000 2,500
6% 7%
28% 30% 24% 26% 22% 20% 16% 18% 8% 10% 12% 14% 7% 7% 8%
2,000
PROJECTED
1,500 1,000
2025
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2010
0
2011
Likely to reach 30% of all retail sales by 2025…
500 2009
Demand for mega bulk warehouse space is being driven by retailers as diverse as Walmart and Nordstrom. Still the largest single player remains Amazon. com, which currently has 50 msf of distribution space with ambitious plans to increase its footprint to nearly 90 msf by 2016. In all, we estimate the market will witness over 80 msf of demand over the next few years in a marketplace that has very little inventory that can currently accommodate these needs as users increasingly require more that just space – they need greater stacking capabilities, more dock doors, greater mezzanine space and more parking, power, HVAC and ESFR capabilities.
Source: Deloitte
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WHAT’S HOT... in Commercial Real Estate
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Multifamily – Yes, a lot of new supply, but also, a lot of new demand The multifamily sector is booming. Just take a stroll around almost any city in the U.S. and count the cranes. The demand numbers remain compelling. For the last three years The notion that a healthy housing through April of 2013, the apartment sector has absorbed 45,000 units per quarter – the sector and a healthy rental sector strongest demand since the technology boom of the late 1990s. U.S. apartment vacancy ended the first quarter of 2013 at 4.3% – the lowest national vacancy rate in over a cannot coexist goes against 50 decade. All of the 82 markets tracked by Reis posted year-over-year increases in asking years of business cycles. and effective rents in the first quarter of 2013. In some markets, supply is shockingly scarce. In New York City, for example, the vacancy rate is 1.9%. Similar tight markets are San Diego, San Jose and Minneapolis which have vacancy rates of 2.5% or lower. Developers are gearing up. Reis estimates that 634,000 new apartment units will deliver across major markets over the next five years. This will be the largest development wave in over a decade. Some fear that with housing “coming back,” the multifamily industry may again be overbuilding. Certain markets will clearly overdo it, but in general the demand metrics support the new construction. Household formation is the apartment sector’s trump card. The prime renter cohorts are ages 20-35 (echo-boomers) and those over 65 years old (the leading edge of the baby-boomers). According to the Census Bureau, those two groups will grow by 2.2 million annually over the next three years – the fastest rate of growth since the early 1980s. That means demand for rental units is potentially 50% above the norm and doesn’t even include the pent-up demand now being unleashed in the recovery. Moreover, the notion that a healthy housing sector and a healthy rental market cannot co-exist goes against 50 years of business cycles. Every newly completed single-family home creates 3.05 jobs. Higher employment leads to faster household growth, which will only add to multifamily demand.
Multifamily - Fundamentals Support New Construction Forecast
240,000
9% 8%
190,000
7% 6%
140,000
5% 4%
90,000
3% 2%
40,000
1% 0%
-10,000 Recession New Supply, # units
Net Absorption, # units Renter Household Formation
Vacancy Rate, % Source: Reis; NBER
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Hot Stats Economy...
8 YEARS The average length of a U.S. expansionary business cycle since 1981 – currently in year 4
2.3 MILLION The current rate of job growth
329
in the U.S. for 2013
The number of metro areas that have now exceeded pre-recession levels of employment
Industrial…
Office…
72.3 MSF Industrial space
100% Of the net growth in the office sector has been in
absorption in last 6 months – strongest gains in 15 years
concentrated in buildings developed or rehabbed since 2008
$12 The premium for Class A rents over
21 OUT 68 Metros tracked posted
Class B – a record high
record levels of industrial absorption Q1 13
2.5% Year-over-year decline in vacancy for newly built bulk distribution space vs. 0.8% decline for older distribution space
Retail…
16.3% The growth of online retail sales vs. 5.1% overall growth in retail sales in 2012
30% The marketshare of e-commerce by 2025, up from 8% today
Multifamily…
Medical…
4.3% U.S. apartment vacancy at
85% The growth rate in healthcare employment
the end of Q1 13 – the lowest national vacancy rate in over a decade
since 1990 – 4x faster than total nonfarm
161,000 Units of annual new demand for apartments from household formation – 50% above the average
46 MSF Future demand for medical office will materialize over the next 4 years
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WHAT’S HOT... ATLANTA in
?
Metro Atlanta is finally emerging from many of the struggles caused by the Great Recession. While office vacancy remains elevated and unemployment has just dipped below 8%, encouraging signs have begun to appear that point to Atlanta’s next wave of growth. Many businesses are expanding, particularly professional services, technology, healthcare and related companies (especially healthcare IT and biotech). As an example, digital marketing firm ExactTarget recently announced an expansion in Atlanta, creating 225 additional jobs, with its CEO offering a simple explanation: “Atlanta is a great place to grow a business.” Firms of all sizes are working to gain efficiencies in their space usage and many are considering relocation of their headquarters or back-office space. Some large firms are considering launching new developments. As they weigh their relocation options, many companies are attempting to exploit one of Atlanta’s Millennials are having a hottest trends: the rise of young professionals – large influence in shaping generally aged 20 to 35, often called “Millennials.” what type of commercial The Atlanta Regional Commission recently reported that Millennials accounted for 36% of real estate emerges as metro Atlanta’s workforce. (By comparison, baby- “hot” in “Hotlanta.” boomers accounted for 26%.) By 2030, Millennials will comprise fully 75% of Atlanta’s workers. The workforce is also attractive to employers. Almost half (46%) of Atlanta residents hold a bachelor’s degree or higher (compared to 28% nationally) and companies often must compete aggressively for that kind of talent, such as offering amenities and incentives desired by these workers.
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Did you know... By 2030, Millennials will comprise fully 75% of Atlanta’s workers.
$
Metro Atlanta expects to gain 46,300 jobs in 2013,
53,800 in 2014, and 61,700 in 2015. An average of 25% of these new jobs are expected to be premium or high-paying jobs.
Job growth is projected to be strongest in the
professional services, information technology, education and healthcare sectors. Nearly 4 msf of mixed-use space is under
Unlike baby-boomers, many Millennials place a higher premium on quality of life than retirement packages or opportunities for advancement. Companies are learning that young professionals are less concerned with buying a house in the suburbs and more interested in access to public transit, pedestrian and bike-friendly areas and vibrant mixed-use environments in which to live, work and play. The Atlanta markets enjoying the greatest levels of activity in 2013 – Midtown, Buckhead and Central Perimeter – all offer some variation of these components and most active developments are designed to provide these characteristics to businesses and their employees. Atlanta’s largest current projects include Ponce City Market – a 1.1 million square-foot redevelopment of the 87-year-old Sears building in Midtown – and Buckhead Atlanta – a 900,000 square-foot multi-block development in the heart of one of Atlanta’s wealthiest neighborhoods. Both projects are due to open in 2014 and include a MILLENNIALS mix of high-end retail, restaurants, office space and residential units. WORKFORCE This trend is also evident in Atlanta’s northern suburbs, like Avalon, a $600 million mixed-use development in North Fulton County. Like the other projects, Avalon will feature retail, dining, residential and office components, as well as two hotels. This type of development would have been unthinkable in Atlanta just a few years ago. It is clear from the latest trends that Millennials are having a large influence in shaping what type of commercial real estate emerges as “hot” in “Hotlanta.”
36%
construction in just three projects.
Elizabeth Green elizabeth.green@cassidyturley.com 404.682.3399
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WHAT’S HOT... BALTIMORE in
?
With the increase in size of Fort Meade due to the Base Realignment and Closure Act of 2005 (BRAC), the Baltimore Metropolitan region has become a hotbed of cyber security activity. Fort Meade is currently the largest employer in Maryland with more than 56,000 employees, and is home to the U.S. Cyber Command, the Defense Information Systems Agency and the National Security Agency. These agencies, and the emphasis on ever-growing threats of cyber-attacks on both public and private systems, have been strong engines driving the local office sector. Baltimore has absorbed 3.5 msf of office space since 2010 in large part due to cyber security-related employment growth. The Baltimore Metropolitan region ranks third in total cyber security job postings (13,393), trailing Employment in the only traditional tech powerhouses Palo Alto (17,570) highly skilled category of 1 and San Francisco (13,710) . Indeed, the impact of cyber security on Baltimore is easily seen in the job professional, scientific numbers. Employment in the highly skilled category and technical jobs has of professional, scientific and technical jobs has grown by more than 24% grown by more than 24% in Baltimore since the beginning of 2004. That’s the sixth largest growth in Baltimore since 2004. rate in the country. In addition to the increased size of Fort Meade due to BRAC, the Baltimore region has also benefited from the high volume of federal spending made available to private contractors and cyber security companies in the area. At the end of 2011, federal spending accounted for more than 29% of Baltimore’s Gross Metro Product. Unlike other areas in the federal budget which are now being squeezed, cyber security remains in growth mode. The “United States Government for FY 2014” report states, “the budget supports the expansion of Government-side efforts to counter the full scope of cyber threats.” The proof is in the pudding. While most metros are registering job losses in the federal sector, Baltimore has actually added 1,100 government-related jobs since 2011. The growth in cyber security has clearly been a boom for the local office sector. Over the past 10 years, the Northern Baltimore-Washington (NBW) Corridor submarket has experienced an average annual positive absorption rate of 817,000 square feet of office space per year. While demand for office space suffered during the Great Recession, the submarket still managed to eke out positive absorption in both 2008 and 2009 compared to the nationwide absorption level of a mere 87 msf during that same period. With the worst behind us, the NBW submarket is re-accelerating once again; the area has averaged 2012 TECH JOB GROWTH 700,000 sf of positive absorption annually since 2009 and the submarket posted another 290,000 sf of positive absorption in the first quarter of 2013. Developers have taken notice of these stronger trends. There are nearly 1.3 msf of office space under construction in the NBW Corridor with several million additional sf waiting in the pipeline. In general, whatever real estate the cyber security industry touches in Baltimore, it turns hot very quickly.
6.7%
1
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Did you know... The Department of Homeland Security has increased its cyber security workforce by 500% over the past 2 years. Baltimore Professional/ Scientific/Technical jobs have increased by 6.7% in the past year, 2nd nationally. President Obama recently proposed more than $13 billion in cyber-related programs in his fiscal-year 2014 budget.
$
The annual global cost of cyber crimes is estimated
at $100 billion a year.
The NBW Corridor submarket experienced 896,125 sf
of positive office space absorption in 2012.
Matthew Myers matthew.myers@cassidyturley.com 410.347.7808
Source: Cyber Security Jobs Report – The Abell Foundation & CyberPoint International, LLC 1/2013
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WHAT’S HOT... GREATER BOSTON in
?
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Financial and professional service firms will always account for a significant portion of greater Boston’s tenant demand. But startups and biotech firms, despite their traditionally smaller footprints, have rapidly become the key players in Boston’s race for commercial space. Between MIT and Harvard is East Cambridge’s Kendall Square neighborhood where, for the past eight quarters, rents have surged. Indeed, asking rents for Class A office space have jumped 12.7% just in the past year, driven by demand from the entrepreneurial establishments rising from this nexus of intellect (deals are currently being executed in the low $60s PSF). As a result, many of the enterprising firms born in Cambridge are seeking space outside of the neighborhood – but still along the MBTA red line – due to tight conditions and soaring rents. As a general rule, entrepreneurs are “cool” people. And where they choose to cluster will inevitably become hotspots. Take the 2012 migration to Boston’s Seaport District. At the beginning of that year, many Kendall Square tenants could find Class A space in the Seaport District in the mid-to-upper $30’s – it was scarce, but available. By the end of the year, it had become a myth – with deals averaging in the low $40s to mid-$50s.
Did you know...
Asking rents for Class A office space in East
Cambridge’s Kendall Square neighborhood have jumped nearly 13% in the past year. Asking rents for Class A space in Boston’s Seaport District have climbed into the
Spiking Seaport rents are forcing entrepreneurial companies to continue their hunt for economical, centrally located space – Boston’s Financial District appears to be the next “it” spot.
low-$40s to mid-$50s.
$
Low-rise space in Boston’s Financial District offers a
70% discount from Class A space in the Seaport.
A victim of its own success, the spiking Seaport rents are forcing entrepreneurial companies to continue their hunt for economical, centrally located space, and Boston’s Financial District appears to be the next “it” spot. At the end of the first quarter of 2013, low-rise space in the Financial District was still a value play. Asking rents were in the low-to-mid $30s PSF, a more than 70% discount off the Class A space in the Seaport District.
KENDALL ASKING RENTS, CLASS A
12.7%
While there was a time following the Great Recession when it seemed this low-rise space might never be filled, last year PayPal and Technip took the plunge and relocated into the Financial District. Cassidy Turley is currently tracking a handful of tech requirements we expect to land here in the second half of 2013 – and we’re excited to see what happens as one of Boston’s most traditional neighborhoods makes a move to become one of the city’s hippest.
Ashley Lane ashley.lane@cassidyturley.com 617.279.4570
11
WHAT’S HOT... CHARLOTTE in
?
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Master-planned and mostly speculative Ballantyne Corporate Park – known locally as Ballantyne – has been one of Charlotte’s hottest submarkets throughout the recession and into the recovery with its mix of live-work-play options. To be clear, there are other submarkets in Charlotte that are also performing much stronger as of late, but Ballantyne has been one of the bright spots. Owner-operator Bissell Companies has made no secret of its recent success, divulging that it has signed nearly 3 million square feet (msf) of total leasing (new deals, renewals and expansions) between 2009 and 2012, while also constructing six additional buildings summing to slightly more than 1 msf during that period. Ballantyne is comprised of 29 office buildings with just over 4 msf of space, and the past several successful years of activity has caught the attention of several high-profile national companies. A number of big-name tenants have located to Ballantyne – Premier, BAE Systems, XPO Logistics, and Extended Stay Hotels, to name a few – drawn Ballantyne has been one by the area’s business atmosphere, wide-ranging of Charlotte’s hottest amenities and free parking.
submarkets throughout
However, Ballantyne got another jolt recently when the recession and into the insurance behemoth MetLife announced in March recovery with its mix of that it was leasing 340,000 sf at the newly completed (and speculative) Gragg and Woodward buildings. live-work-play options. With that, Ballantyne gained the largest tenant in its 17-year history and simultaneously saw vacancy decline by 8.5 percentage points to a healthy 13.9%. With Ballantyne’s recent building spree, the area’s vacancy rate has frequently vacillated with each new delivery and new major lease, though the five-year average is 20.7%. Not only is MetLife now Ballantyne’s largest tenant, but the relocation announcement highlights many of the winning business strategies already implemented by Ballantyne and the thriving community that has grown up around this rapidly growing office park. It reaffirms Charlotte’s strengths: home to a young, educated workforce that is big-bank trained, a high quality of life, and relatively low costs of living and of doing business.
Did you know... Ballantyne has 29 office buildings totaling more than 4 msf. Only three of those buildings were not speculatively built. Ballantyne’s latest 550,000 square-foot speculative project was hailed by CoStar as the largest speculative project in the nation in mid-2011.
Ballantyne enjoyed nearly 3 msf of total leasing
(new, renewal, and expansion) in 2009-2012. Ballantyne is zoned for almost 2 msf of additional office space.
Other major characteristics that have contributed to Ballantyne’s success are: • Very high-quality office product that was all built after 1996.
METLIFE VACANCY IMPACT
8.5%
• Though this is changing as Ballantyne matures, the prevalence
of new construction means there is a relative dearth of second generation space. Shell space allows companies to fully customize their spaces.
Sarah Godwin sarah.godwin@cassidyturley.com 704.887.3021
• New buildings are being constructed with parking decks, which enable companies to
accommodate more dense office environments. Most other suburban Class A buildings in Charlotte do not have deck parking which de facto limits density. • Immediate interstate access via Charlotte’s beltline Interstate 485. The other premier office
market, SouthPark, is not directly accessible by any of the region’s three interstates. 12
WHAT’S HOT... CINCINNATI in
?
The economic recovery in Cincinnati is making consistent progress. So far in 2013, Cincinnati is on pace to add 10,100 net new jobs, a pace on par with the growth observed in the prior two years of this recovery. The local economy’s rebound has aided in the performance of office, industrial and retail markets which are reflecting decreasing vacancies and positive absorption. Still, vacancy remains elevated across most product types, so the improvement in demand has yet to translate into significant rent growth. Also, speculative construction remains dormant. However, one “hot” trend that may be flying The rise in tourism has under the radar in Cincinnati is the surprisingly strong increase in tourism. In 2012, the city was prompted a wave of named the #3 U.S. travel destination by Lonely new hotel development Planet and it played host to the World Choir concentrated in Games which poured $73.5 million into the local economy and attracted over 20,000 visitors. Cincinnati’s CBD. Cincinnati’s surprising rise as a tourist hot spot is also expected to continue as the Great American Ballpark (home of the Cincinnati Reds) was recently chosen as the venue for the 2015 Major League Baseball All-Star Game. The rise in tourism has prompted a wave of new hotel development concentrated in Cincinnati’s CBD. For 27 years, virtually no new hotels were built in downtown Cincinnati. Since the recession, there has been a surge of activity, leading to the development of six new hotels. A few notables include the 134-room Residence Inn Cincinnati-Downtown and the 156-room 21c Hotel and Museum. There are interesting examples of office buildings getting converted to hotels. For instance, a vacant 232,000 sf office building in the heart of the CBD was recently sold to Columbus, OH-based EV Bishoff Co., which is planning to covert the property into a 312-room luxury hotel. The Old Enquirer Building at 617 Vine Street is currently being retrofitted from an office property into two hotels, a 105-room Homewood Suites and 144-room Hampton Inn & Suites. Finally, plans are being pursued that would transform the former Cincinnati School for Contemporary and Performing Arts into a 140-room boutique hotel. In addition to the six hotels currently under development, there is a pad-ready site at the TOURISM IS UP Banks project, a mixed-used development located between Great American Ballpark and Paul Brown Stadium (home of the VISITORS IN Cincinnati Bengals) along the banks of the Ohio River, that could 2012 facilitate the construction of another 200-room hotel.
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Did you know... Cincinnati has added 31,400 jobs since 2010.
#3
In 2012 Cincinnati was ranked as the #3 U.S. Travel
destinations by Lonely Planet and hosted the World Choir Games, which pumped $73.5 million into the local economy and attracted 20,000 visitors to the City.
H
After 27 years of no activity, 6 new hotels have either
opened or are being developed in downtown Cincinnati since 2011. Demand for urban living has led to 1,427 new planned multifamily units in Cincinnati’s urban core.
20,000
James Flick james.flick@cassidyturley.com 513.322.3820
Cincinnati, like many other cities, has also seen demand for urban living skyrocket. 88 apartment units opened in November 2012 at the Reserve at 4th and Race and another 1,427 units are in the works.
13
WHAT’S HOT... COLUMBUS in
?
In an age dominated by technology, the Columbus market may be flying under the radar as one the markets cashing in from the tech-fueled growth. The Columbus region boasts upwards of 2,000 technology establishments employing 35,000 people and the market is evolving into one of the fastest growing tech cities in the country (ranked #2 according to a March 2013 Gallup Poll). For many tech firms looking for a new location to grow their operations, Columbus makes a lot of business sense. With Ohio State University (OSU) embedded into The market is evolving the local economy, along with 54 other colleges and universities, Columbus is a city teeming with young, into one of the fastest hungry tech minds. Moreover, the cost of living is one growing tech cities in of the lowest in the country; for tech firms, that puts the country. Columbus into the low-risk/high-reward category. The new tech growth cycle does not appear to be waning anytime soon. In the early months of 2013, tech companies such as IBM, Verizon and SpeedFC were expanding their current facilities in addition to creating 500, 500 and 250 new jobs, respectively. An offshoot from the tech-growth cycle is the rise of online high schools that have seen significant increases in enrollment. Since its founding in 2001, the online high school, ECOT, has seen its graduating class grow from 21 students to more than 2,000 in 2012.
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Did you know... Tech-employment in Columbus has grown by 33% since 2003.
#8
Columbus is No. 8 on Forbes’ Top 10: Best U.S. Cities for
Tech Jobs. Columbus’ unemployment rate is 1.4% below the national average.
The booming tech trend is also helping to fuel robust demand for apartment units. Over the last two years, Columbus has absorbed 6,200 rental units. Except for those during the tech boom of the late 1990s, these are the strongest demand levels on record. Multifamily space in Columbus is currently 95% occupied. As thousands of young people remain in the area after they graduate from college, and with good prospects of landing a high-paying tech job, the Mayor of Columbus has approved the construction of thousands of multifamily units throughout the city, particularly in formerly distressed areas just outside of the metro area.
MULTIFAMILY OCCUPANCY
95%
Between the large university population, diversity of industries and a geographical location that is within a 10-hour drive of nearly 50% of the U.S. population, Columbus should continue to evolve into a significant tech hub in the Midwest, and the technology sector will be a key engine driving the local property markets going forward.
Jeff Tyndall jeff.tyndall@cassidyturley.com 614.827.1894
14
WHAT’S HOT... DALLAS in
?
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By most economic measures, the Dallas market has clearly been one of the strongest in this recovery, and the robust trends continue in 2013. Dallas has absorbed 3.1 msf of office space over the last six months – twice that of the next closest metro, Seattle, at 1.4 msf. But the macro trends gloss over what is perhaps the hottest commercial real estate sector in Dallas right now: mixed-use.
Did you know...
Since Legacy Town Center Portfolio was built
in 2002-2006, the average Physical aspects of the workplace environment are having an increasingly direct impact on the productivity, comfort, job satisfaction and morale of the people working within it. Included in this physical environment are such amenities such as restaurants, shopping, drycleaners, fitness centers, conference rooms, landscaped green areas, and most importantly, close proximity to housing. As the importance of talent recruitment and employee retention continues to rise, employers are recognizing that workplace amenities are huge factors that directly influence where they should office.
Employee-friendly office space is one of the primary reasons why Dallas’ various mixed-used projects have been consistently “hot” across the metroplex in recent years.
In fact, employee-friendly office space is one of the primary reasons why Dallas’ various mixed-used projects have been consistently “hot” across the metroplex in recent years. The Far North Dallas submarket has the amenities many companies are looking. Legacy Town Center I, II, and III (523,043 sf) has shops and restaurants—totaling more than 600,00 sf – and more than 3,600 apartments in the Town Center alone. Since Legacy Town Center Portfolio was built in 2002-2006, average quoted rental rates have dramatically increased to $33.00 psf plus electric from the original listing price of $25.50 psf plus electric and is currently 95% leased. In the North Central Expressway submarket, the Offices at Park Lane (231,227 sf) has over 800,000 sf of retail property and over 300 apartments. Similarly, Park Lane is 98% leased with rates at an all-time high of $22.00 psf plus electric. In the past 12 months both of these developments have expanded and/or plan to expand their office space to meet growing demand.
MIXED-USE DEVELOPMENT
2.1 MSF
With such high demand for mix-used, high-amenity product, developers have shifted into a higher gear. There is currently 2.1 msf of mixed-use development in the pipeline. And the numbers confirm that these new projects are leasing up quickly. For example, of the 2.1 msf in the development pipeline, 26% is already pre-leased.
quoted rental rates have dramatically increased to $33.00 psf plus electric. In the Legacy area alone, there are four office buildings currently under construction. Craig Hall’s new tower in the Art District was the first multi-tenant office building permit filed downtown in almost seven years.
Alexandra Jennings alexandra.jennings@cassidyturley.com 972.692.1746
In other words, combine a robust economy with a product that most businesses want, and the end result is a mixed-use segment of the market that has become white hot.
15
WHAT’S HOT... DAYTON ?
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The Greater Dayton economy is facing significant challenges due to the sharp cuts in government spending. Over 25% of Dayton’s workforce is employed by the manufacturing and aerospace sectors, which includes more than 27,000 civilian and military personnel that work at the Wright Patterson Air Force Base. Federal sequestration has resulted in sizeable military budget cuts and unpaid furloughs for thousands of defense employees. Despite the dark cloud of sequester looming over the local economy, there is clear optimism and momentum in certain segments of Dayton’s commercial real estate market. The three clearest bright spots involve construction in the areas of industrial, healthcare and multifamily. Demand for real estate space in these three sectors has been ramping up for several months, so much so, that Site Selection Site Selection Magazine Magazine recognized Dayton as the #1 mid-sized recognized Dayton as metro region for business facility projects in 2012.
the #1 mid-sized metro region for business facility projects in 2012.
In metro Dayton, much of the available industrial inventory is antiquated, and therefore, it fails to meet the needs of today’s advanced manufacturers and logistics companies. Sensing opportunity, developers currently have over 1.17 million sf of industrial-specific construction projects underway in Greater Dayton. Major projects include a 250,000 sf nutritional drink plant for Abbott Labs in Tipp City, a 124,000 sf addition for Piqua-based automotive supplier Industrial Products Co., and an 83,000 sf food processing plant for White Castle in Vandalia. There are also rumors of a major company planning to build a 2 msf distribution center in Dayton’s north submarket. The healthcare industry, which employs 31,000 people in Dayton, has also been a fairly reliable economic engine driving growth. Since 2010, 1.5 msf of new healthcare space has been developed. Two new hospitals were built from scratch: the 474,000 sf Springfield Regional Medical Center in Clark County and the 278,000 sf Soin Medical Center in Beavercreek. In addition, Kettering Health Network added a 5-floor, 70,000 sf wing to Grandview Medical Center this year. Its rival, Premier Health Partners, added a 484,000 sf patient tower to Miami Valley Hospital in late 2010 and a 200,000 sf tower to Miami Valley Hospital South in Centerville last year. Premier also just opened a 32,000 sf satellite Emergency Center in the eastern Greene County city of Jamestown. The multifamily sector is also posting “hot” numbers in Dayton. According to the Downtown Dayton Partnership, the apartment INDUSTRIAL vacancy rate in downtown Dayton currently ranges between 2% and CONSTRUCTION 3%. As of mid-June 2013, there were fewer than 1,000 apartment/ condo units vacant in the entire downtown area. The combination of high office vacancy (currently 35.7% in downtown Dayton) and increasing demand for urban living space has resulted in a push to convert downtown office buildings into apartments and condominiums. Since 2011, 25 downtown condominiums have been built, with another 55 units projected to open within the next 12-18 months. In addition, plans were announced for construction of a 200-unit downtown student housing complex near Sinclair Community College, and the 110-unit Lux Lofts apartments in the former David Building on E. Third Street.
1.17 MSF
Did you know...
$
29% of Dayton’s economy is
in
The Dayton area
linked to federal spending.
unemployment rate is
7.6%, down from 8.1% just one year ago. With over 27,000 employees, Wright Patterson Air Force Base is the largest single site employer in the state of Ohio. In 2013, Abbott Labs will complete a 250,000 sf nutritional drink plant in Tipp City at a cost of $270 million. Two new major hospitals have been built in Greater Dayton since 2011.
Jarrett Hicks jarrett.hicks@cassidyturley.com 513.322.3802
16
WHAT’S HOT... DENVER in
?
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The Denver Metro market continues to ride a wave of positive momentum, with strong economic indicators aiding the growth and expansion of the local real estate market. Through April of 2013, the market was on pace to add over 34,000 jobs in 2013, helping to bring the metro’s unemployment rate down to 6.9%. Colorado has done an excellent job of attracting new businesses to the region, and ranks as one of the top three states for supporting business innovation according to the U.S. Chamber of Commerce. In the past 12 months In the past 12 months, alone, 11 major corporations have relocated their 11 major corporations headquarters to the Denver Metro market, including Arrow Electronics and DaVita HealthCare Partners. have relocated their
headquarters to the Denver Metro market.
Multiple industries are leading the market expansion, most notably, information technology and software. Information technology has always accounted for a significant portion of Colorado’s workforce, with the state having the third largest concentration of high-tech workers in the country. However, software companies have had particular success in recent years. According to Inc. 5000’s list of companies with the highest threeyear percentage growth in the Denver Metro market, seven of the top ten companies were software companies. Boulder startup Rally Software exemplifies the success of this industry, having raised $84 million in April of 2013 in the first significant IPO for a Denver-based software company in the past decade. Since the IPO, shares of the company have increased over 40%. Given Rally’s IPO success, it is likely that a number of other growing local tech companies will go public before the end of the year. The growth of the software industry is already evident in the real estate market, increasing demand for data center industrial space and high density office space for call center and customer service use. Currently, 30% of new office tenant demand is comprised of software and technology firms. Another industry poised for future growth – and certainly one unique to Denver – is the marijuana industry. In January of 2014, Colorado will begin licensing retail establishments to sell marijuana products to anyone over the age of 21. Currently, only medical marijuana dispensaries are permitted to distribute the substance, and then only to individuals with medically prescribed cards. Even with these conditions in place, there are well over 500 dispensaries and 150 processors of cannabis-infused food statewide. These numbers are expected to increase significantly once recreational sales begin. While controversial, the marijuana industry is likely to prove a net positive for commercial real estate throughout the state, not only for retail and warehouse space, but for office space as well. Because JOB GROWTH marijuana is currently illegal under Federal law, many banks, insurance companies and other auxiliary industries will not support the industry. Therefore, the emergence of a potentially vast network of business support companies could in theory grow office demand throughout the state. Colorado is headed into uncharted territory come January and it is difficult to estimate the true impact this new industry will have on commercial real estate demand. But with an estimated 1 msf of warehouse space leased to meet the existing medical demand and nearly 1,000 license applications awaiting approval, Colorado’s commercial real estate sector stands to see some green of its own.
2.2%
Did you know...
$
Through April 2013, the Denver market has added
over 34,000 jobs, bringing unemployment down to 6.9%.
3
Colorado has the 3rd largest concentration of high-tech
workers in the country. According to Inc. 5000’s list of companies with the highest three-year percentage growth in the Denver Metro, seven of the top ten were software companies. Starting in January of 2014, Colorado will begin allowing licensed retail establishments to sell marijuana and marijuana-related items to anyone over the age of 21. An estimated 1 msf of warehouse space is currently leased to meet the existing medical marijuana demand and nearly 1,000 license applications currently await approval.
Andrea Jones andrea.jones@cassidyturley.com 303.312.4256
17
WHAT’S HOT... HOUSTON in
?
Thanks to the healthcare industry, the Port of Houston, and the energy sector, Houston has been one of the bright spots in this lackluster recovery. Although all three sectors explain Houston’s healthy economic trajectory, it is the energy sector that is keeping this Texas City “hot.” Houston is home to every segment of the oil and gas industry including upstream energy (exploration and production, equipment and manufacturing), downstream energy (refining and petrochemicals), and distribution and energy trading. As the unrivaled epicenter of the global oil and gas industry, Houston can accredit 50% of the local economy to the petroleum, natural gas and chemical industries. The city has roughly 3,700 energy-related establishments; more than 500 exploration and production firms and more than 150 pipeline Houston can accredit transportation establishments. In addition, the city 50% of the local is recognized as the center for emerging alternative sources. The Institute for Energy Research (IER) and economy to the the Advanced Energy Consortium are both located petroleum, natural gas in Houston and working to expand research and and chemical industries. development of alternative and renewable energy. The massive energy sector has provided a source of economic stability, even in the midst of the national recession. As of March 2013, the city recovered 230.5% of the jobs lost in the recession. In other words, Houston has added more than two jobs for every one that was lost after the downturn. With an abundance of this important natural resource, to go along with a geographical advantage in serving multiple markets and a still affordable housing market, people continue to pour into Houston. And as everyone in the CRE industry knows, the real estate game is a whole lot easier in cities that have strong population growth. For the last decade, Houston has consistently ranked in the top 3 out of all major metros in terms of net migration into its city. Houston’s CBD and western submarkets have been the clear beneficiaries of the strong economic trends. Since 2010, Houston has absorbed 7.7 msf, and 55% of that growth has been concentrated in the CBD and the western submarkets. The fervent demand for living and working in these submarkets has prompted developers to propose office, residential and retail projects in and around these areas. Once again, the energy sector is driving the growth. An astonishing 52% of office space in the CBD is occupied by energy-related industries. Energy giants such as EOG Resources, Plains All American Pipeline and Plains Exploration and Production are headquartered in the downtown submarket. Due to energy CBD SPACE company relocations and expansions, the Energy Corridor OCCUPIED submarket, has been dubbed one of the city’s fastest-growing submarkets over the last decade. More than 4 msf of office space (out of the 19 million in the submarket) can be accredited to multi-national corporations such as ConocoPhillips, ExxonMobil, Shell Oil and British Petroleum.
52%
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Did you know... Houston is home to 40 of the nation’s 145 publicly traded oil and gas exploration and production firms, including 11 of the top 25. The nine refineries in the Houston region produce 2.3 million barrels of crude oil per calendar day – approximately 50% of the state’s total production and 13.8% of the U.S. capacity.
Among the nation’s 20 largest metro areas, the Houston-
Sugar Land-Baytown Metro Statistical Area had the fastest rate of job growth in the 12 months ending March 2013.
#1
The Brookings Global MetroMonitor ranked
Houston’s economy #1 in the U.S. and # 40 in the world.
Lizzie Layne lizzie.layne@cassidyturley.com 713.572.0114
18
WHAT’S HOT... INDIANAPOLIS ?
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History shows that cities fortunate enough to be at the nexus of trade routes almost always flourished and those that not only transported hot commodities but also produced them often saw their property markets catch fire. Such is the case for Indianapolis where a red-hot logistics market, stoked by rekindled manufacturing demand, has set the Indianapolis industrial market ablaze. Demand metrics confirm that Indianapolis is among the hottest industrial markets in the nation. Over the last year, leasing activity has heated up and translated into over 5 msf of net Demand metrics confirm absorption. That has caused industrial vacancy rates that Indianapolis is to sizzle at a historically low 3.1%.
among the hottest industrial markets in the nation.
Hot warehouse demand is nothing new. Indianapolis is called the Crossroads of America for a reason – it’s the most centrally-located major metro in the United States. More interstate highways intersect in Indianapolis than in any other metropolitan statistical area, and nearly 75% of all businesses in the country are within a 1½-day truck drive. Moving goods is big business. But so is manufacturing them. Manufacturing is heating up. That is a relatively new development and critical in a market like Indianapolis where manufacturing comprises nearly 30% of industrial inventory. In addition, the manufacturing pay premium is growing. The average manufacturing job paid $55,398 last year, 38% above the average for all Indiana jobs. And average factory pay this year is rising more quickly than ever, growing in the first quarter by an estimated $2,000 on an annual basis. Manufacturing not only pays workers well in Indianapolis, it accounts for the largest portion of Indiana’s economy in terms of output, or state gross domestic product, which last year totaled more than $278 billion in current dollars. In fact, manufacturing generated over a quarter of Indiana’s GDP, a far larger share than any other economic sector and high enough to rank the Hoosier state second nationally. Central Indiana manufacturing also drives statewide exports; that is big news for small business when considering that manufacturing accounts for 98% of Indiana’s exports and small businesses comprise 86% of Indiana’s exporters. Such strength in manufacturing has had significant impact on the property markets. Manufacturing vacancy rates have fallen for three consecutive quarters and are now reflecting pre-recession levels of demand, tracking below 5%. Why? Quite simply, new workers are being hired to meet growing demand and those workers need INDUSTRIAL VACANCY space to produce goods. The result is more money in the pockets of many, including landlords. Those new jobs are also putting a lot more money into consumer pockets, which eventually winds up in the cash registers of many other businesses and ultimately in their employees’ paychecks, raising the state’s standard of living in the process. Thus, expect rekindled manufacturing demand to drive the market in the sizzling summer months ahead.
Did you know...
Over the last year, leasing velocity has heated up and
translated into over 5 msf of net industrial absorption. Manufacturing comprises nearly 30% of industrial inventory.
$
Manufacturing generated over a quarter of Indiana’s
GDP, a far larger share than any other economic sector, and high enough to rank the Hoosier state second nationally. Small businesses comprise 86% of Indiana’s exporters.
in
Manufacturing vacancy rates have fallen for three
consecutive quarters and are now reflecting pre-recession levels of demand by tracking below 5%.
Jason Tolliver jason.tolliver@cassidyturley.com 317.639.0549
3.1%
19
WHAT’S HOT... KANSAS CITY in
?
Kansas City has long been known as a place of steady economic performance. The unemployment rate has been below the national average since March of 2009; in April the metro-area’s unemployment was 6.1% compared to the national average of 7.6%. According to the Bureau of Labor Statistics (BLS), in the twelve months ending in April of 2013 employment growth in Kansas City was strongest in Professional and Business Services (3.4%), Leisure and Hospitality (3.4%), Wholesale Trade (2.2%) and Healthcare and Social Services and Hospitals (1.8%). Beneath the surface of these broad categories, Kansas City is experiencing growth in biotechnology, medical services and distribution/ logistics – three of the most active sectors in the Biotechnology, medical area. For example, the Stowers Institute for Medical Research has an endowment of approximately $2 services and distribution billion and more than 150 ongoing research projects. centers are three of the The University of Kansas Cancer Center received most active sectors in the National Cancer Institute designation in 2012. Kansas City. Doctors from around the globe send DNA samples to Children’s Mercy Hospital’s Center for Pediatric Genomic Medicine for sequencing which processes and analyzes genomic testing more quickly than any other facility in the world. Cerner Corporation, one of KC’s fastest-growing companies, uses information technology to create tools to help healthcare providers eliminate errors, variance and waste, simplify payment systems, and engage people in their lifetime health goals. Kansas City is also where biotechnology meets agriculture, as it is at the midpoint of an animal health corridor. The corridor is home to the largest concentration of animal health interests in the world and accounts for almost 32% of the $19-billion global animal healthcare market. Manhattan, Kansas was selected for a new $1.2 billion National Bio- and Agro-Defense Facility to replace an aging one off the coast of Long Island, New York. Google selected Kansas City for its first Google fiber installation in the metro’s neighborhoods Google has designated “fiberhoods.” Its central location and abundance of transportation infrastructure make Kansas City well-suited for bulk distribution and e-commerce fulfillment. Rail connects it to Los Angeles, Chicago, Houston, Mexico and elsewhere. Multiple interstates – I-70, I-35, I-29 and I-49 – connect the metro to population centers in every direction. These connections have contributed to growth in bulk distribution activity. From 2003 to 2013, KC’s bulk space grew by 47.5%. Early in 2013, an 820,000-square-foot speculative building was completed and several others are planned. BNSF Railroad recently opened a new intermodal facility. In the adjacent business park, a speculative 500,000-square-foot distribution center is under way. BULK DISTRIBUTION
SPACE
47.5%
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Did you know... Manhattan, Kansas was selected for a new $1.2 billion National Bio- and AgroDefense Facility. Google selected Kansas City for its first Google fiber installations. From Kansas City’s central location, one can ship to most of the country in two days or less. From 2011 through 2015, automotive and related companies will expand by 2.3 msf.
Carolyn Bagnall carolyn.bagnall@cassidyturley.com 816.412.0244
Auto production is a prominent part of the area’s manufacturing industry. Both Ford and General Motors have assembly plants there. From 2011 through 2015 automotive and related companies will expand by 2.3 msf.
Biotechnology, healthcare services, distribution and automotive sectors will continue to keep Kansas City’s economy performing steadily, and support its commercial real estate markets. 20
WHAT’S HOT... LOS ANGELES in
?
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National tech office submarkets can seemingly do nothing wrong during this post-recessionary period. Whether it’s Silicon Valley in the Bay Area, Silicon Alley in New York City, or biotech in Boston, these tech markets are frequently cited in most every real estate panel discussion as the hottest markets in CRE. Oddly, Los Angeles (LA) is routinely left out of the national tech markets Southern California is discussion and not really acknowledged as spearheading the movement a bona fide hot-bed of tech incubation; this away from traditional office couldn’t be further from the truth.
space towards more creative
Silicon Valley may have its search engines, apps, and social media, Cambridge its biotech and adaptable space designs. and Seattle its e-commerce, but LA is quickly pioneering its own tech industry genre. Not surprisingly, it is the interplay between technology, media, and entertainment with the end goal of curating original content for the internet that is LA’s niche. Southern California as a region is also one of the markets spearheading the movement away from traditional office space towards more creative and adaptable space designs. The definition of creative space is evolving; people use to consider creative space as exposed ceiling and concrete polished floors but today it can be simply more efficient space use. Bench style seating and perimeter-less office layouts with more of a focus on lounge, breakout, and café kitchen areas today are common themes of creative space in Los Angeles. Of course, the definition of “creative” is a market-by-market definition. What is creative in Orlando is not necessarily creative in LA. For a growing number of businesses in LA, creative space has become a part of their strategy to woo new clients as well as to retain and recruit new talent. Office submarkets heavily built out with creative offices are experiencing the greatest rent growth in Los Angeles. Santa Monica has seen a 15.5% rent growth from June 2012 to June 2013, while the Arts District in downtown LA has seen a 14.8% growth over the same timeframe.
OFFICE RENT SANTA MONICA
15.5%
An increasing number of architectural, engineering, and even financial, legal, and professional business service tenants are adopting more and more aspects of this creative office environment. One prime example of this is the financial district in downtown LA. Once known for its buttonup suit and tie decorum, over the last few years the financial district has become ever more varied in its tenant base. Migration by edgy tech firms to downtown LA has increased 19% from five years ago.
Of course, LA’s office sector is unlikely to fully recover without a strong rebound in financial services and from the legal sector which combined account for nearly one-third of LA’s tenant base. As of June 2013, both of these job sectors had stabilized but tenants from both sectors were also generally signing leases for less office space than in the past and continue to adjust to smaller headcounts.
Did you know... More than 700 tech startups exist in LA. LA is ground-zero for original programming for the web; Facebook, Amazon, Youtube, Google, and Microsoft all are positioned there to curate original content for the internet.
A growing number of LA's submarkets are recording
double-digit rent growth. Technology, media, and entertainment people employ 250,000 (more than LA’s financial sector) and they are growing, adding over 8,000 jobs since 2011.
Arty Maharajh arty.maharajh@cassidyturley.com 213-330-0959
But make no mistake, technology, media, and entertainment (TME), when combined, are big enough to move the needle in LA. LA’s office vacancy rates and rents have stabilized, largely due to the growth in tech-related industries and its ancillary services. 21
WHAT’S HOT... LOUISVILLE in
?
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Manufacturing plays a huge part in Louisville’s economy and manufacturing is hot. Since the end of the recession, manufacturing employment in Louisville has increased by 17.5% – generating far more employment growth than any other sector in the metro area. Part of the growth is from new corporate investment. Ford, which has been an integral part of Louisville’s economy since 1913, invested $600 million into revamp its Louisville Assembly Plant (LAP) which will now be considered the company’s most flexible high-volume plant in the world. The LAP reopened June 2013 for production of the all new Ford Escape. The company also plans to invest $600 million in its Kentucky Truck Plant in Louisville, further solidifying its commitment to the area. In addition, General Electric (GE) has begun to relocate production of most appliances from China back to GE Appliance Park – GE’s mega-manufacturing facility in Louisville, which had been considered extinct. GE has invested nearly $800 million to bring A total of 5.3 msf of industrial GE Appliance Park back to life.
space has been absorbed since 2010 – the strongest demand in 13 years.
The Bourbon industry is also a hot spot in Louisville’s economy. The state of Kentucky produces 95% of the world’s supply of Bourbon, and the popularity of this whiskey is surging both in the U.S. and around the globe. According to the Kentucky Distillers’ Association (KDA), in 2012, demand for Bourbon production surpassed the 1 million mark for the first time since 1973. The inventory of Bourbon totaled 4.9 million barrels in 2012 – more barrels than people (4.4 million) who reside in the state. Granted, a good amount of the whiskey is for U.S. consumption. But there is also strong demand abroad. Exports to the Asia-Pacific region rose 20% and exports to Mexico were up 200% in 2012. The rise in Bourbon’s popularity is also boosting tourism. The number of visitors to the Bourbon Trail, which runs through downtown Louisville, is at an all-time high, according to Moody’s. The rise of tourism is clearly bolstering the hotel sector, as well as the retail sector, where rents are the highest in 14 years. The most obvious beneficiary of this manufacturing-led recovery is the industrial sector of Louisville’s commercial real estate market. A total of 5.3 msf has been absorbed since 2010, the strongest demand in 13 years. Moreover, at the end of the first quarter of 2013, the vacancy rate was 6.7% – its lowest point since 2000 – and developers are chomping at the bit. There is currently 1.5 msf in speculative warehouse space under construction and another 4 msf is scheduled to break ground between 2014 and 2015. In addition, there are two build-to-suit warehouses totaling 819,000 sf under construction. MANUFACTURING EMPLOYMENT
17.5%
What is driving demand? In addition to Ford and GE, demand for industrial space is being driven by the UPS Worldport facility located at Louisville International Airport. The facility continues to be a draw for companies that ship products around the globe as it is the largest fully-automated package handling facility in the world. The Louisville Regional Airport Authority reports that in the first four months of 2013, 50% of the 20,262 flights that landed at the airport were UPS cargo flights. That statistic alone demonstrates the sheer volume of packages that move through distribution centers within Louisville’s boundaries.
Did you know... Louisville Slugger was first known as the Falls City Slugger as a reference to Louisville’s location at the falls of the Ohio River. The inventory of Bourbon reached 4.9 million barrels in 2012 which is more aging barrels than people (4.4 million) in the state. Kentucky ranks #3 in auto industry-related employment among auto vehicle producing states.
In April 2013, employment growth in the manufacturing
sector registered at 8.7% when compared to a year ago, landing it 4th in the nation when ranking employment growth in the sector.
Steve Lannert steve.lannert@cassidyturley.com 502.394.2508
22
WHAT’S HOT... MILWAUKEE ?
The Milwaukee region’s economy is still climbing back from the recession. Although the local economy has been creating jobs since 2010, Milwaukee is still 36,000 jobs short of pre-recession levels of employment. While the office sector is slowly on the mend, it is Milwaukee’s industrial sector that is easily the strongest performing segment in the market. In fact, demand for industrial space in Milwaukee has been consistently robust since late 2010. The Demand for industrial industrial market is on track to hit 12 successive space in Milwaukee quarters of positive space absorption when the has been consistently numbers are tallied for 2Q 2013. Over this period, Milwaukee has averaged over 860,000 square feet of robust since late 2010. net absorption per quarter – the pace is right up there with some of the strongest levels on record dating back to 1990. The overall vacancy rate is approaching 6%, down from a high of over 9% in mid-2010 – making Milwaukee the 13th tightest industrial market in the country out of 53 metros tracked. Investors have taken notice of the hot leasing trends and are competing for deals, and bidding up prices. The average sale price for an industrial building in Milwaukee climbed from $17.30 psf in the first quarter of 2012 to $21.17 in the first quarter of 2013, representing a 22% increase. With supply suddenly lean, build-to-suit projects and speculative construction are on the rise. It is also worth noting that unlike the bulk of the U.S., Milwaukee did not significantly overbuild prior to the recession – which has helped to accelerate the rentrecovery and the need for new product. 2012 saw several build-to-suit projects added to the inventory, with several others soon to be announced in 2013. Although speculative development is still rare, there are signs that that too is picking up. Developers such as Zilber Co. are moving forward with several spec projects. With 120,000 square feet built in 2012 that is now approximately 60% leased, Zilber Co. announced two additional projects totaling up to 265,000 square feet for completion in 2013.
INDUSTRIAL SALES
22%
Finally, the velocity of industrial sale and lease transactions has steadily grown since the depths of the recession, with velocity increasing by more than 100% in both areas since 2009. The market is seeing renewed confidence amongst manufacturers and other users of industrial space. Milwaukee’s industrial sector has strong links to the U.S. macro economy and to Canada – its largest foreign trading partner. So assuming economic conditions don’t take a turn for the worse, Milwaukee’s industrial sector should remain on a strong trajectory going forward.
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Did you know...
12
The industrial market is on track to hit 12 successive
quarters of positive space absorption.
in
With a 1Q 2013 vacancy rate of 6.5%, Milwaukee
has one of the lowest industrial vacancy rates in the country. Industrial sales volume has increased by more than 100% since 2009.
3Q
Milwaukee has averaged 860,000 sf of positive
absorption per quarter since 3Q 2010.
Nicole Cadkin nicole.cadkin@cassidyturley.com 414.271.1870
23
WHAT’S HOT... MINNEAPOLIS in
?
Hot spots are forming in multiple commercial real estate sectors of the Twin Cities, and most of the improvement links back to the rebounding labor market. Unlike the U.S. economy, which is still down over one million jobs from the recession, as of April 2013 Minneapolis/St. Paul surpassed its pre-recession level of employment by 4,100 jobs. More good news for the metro: the unemployment rate has continued to fall since the beginning of 2013 landing at 5.0% in April Industrial absorption – its lowest reading since June of 2008. Currently, totaled 2.4 msf in 2012, the Twin Cities have the lowest unemployment rate across major U.S. metros – surpassing the rates of reaching its highest point Seattle, Washington, DC and San Francisco. since 2007. What is driving such job growth? The main driver is the Education and Health Services sector – which should be no surprise given that eight of the top 20 employers in Minneapolis are in the healthcare industry. In April, Education and Health Service jobs increased by 11,900 – the most significant rise during a 12 month period since October of 2007. Moreover, the sector has performed consistently by creating an average of 717 jobs per month since the recession ended. That bodes well for demand in the office market. The vacancy rate for office space, which peaked at 19.5% in 2010, reached pre-recession levels (16.6%) at the end of the first quarter of 2013. Rents have yet to turn the corner, but with space options eroding, they are inching closer to an upturn. Accelerating trends are also forming in the industrial sector. Unlike other markets in the U.S., the industrial market in the Twin Cities wasn’t overwhelmed by a surplus of empty inventory from over-building prior to the economic downturn. Therefore, the market rebounded quickly and in 2012 demand for industrial space went from modest to robust. Net absorption totaled 2.4 msf, reaching its highest point since 2007. The uptrend has continued into 2013. In the first quarter, net absorption totaled 1.1 msf, causing vacancy to drop to 11.0% – 230 basis points lower than the first quarter of 2012. Moreover, both declining vacancy and rent growth have given developers the confidence to start new projects. Build-to-suit projects are the most common, although speculative development is also popping up more and more, particularly as it relates to bulk distribution center space. Lastly, the multifamily market is generating some heat. In the first quarter of 2013 there were 828 units absorbed in Minneapolis – more than double the amount rented the same period a year ago, according to Reis. Multifamily vacancy ended the quarter at 2.3%, giving the UNEMPLOYMENT RATE Minneapolis apartment market the lowest vacancy rate among all U.S. metros. Razor-thin vacancy has stimulated multifamily development activity across the Twin Cities. Multifamily building permits totaled 5,517 by the end of April 2013 – up 21% from March, according to the Census Bureau. Development is most prevalent in areas that are likely to benefit from the light rail projects (Central Corridor and Southwest) slated to connect areas such as downtown Minneapolis and downtown St. Paul upon completion. Development is most prevalent in urban areas such Downtown Minneapolis, the North Loop and Uptown. These areas support the rent levels needed for new construction.
5.0%
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Did you know... Even during the recession, the Education and Healthcare sectors in Minn/St. Paul performed well, generating an average of 549 jobs per month.
Office rents have increased an average of 8.1% since
Q1 2007. From April 2012 to April 2013, office-using employment increased by 7,800 jobs.
Industrial demand has driven land prices back to
pre-recession levels. Multifamily vacancy ended the first quarter of 2013 at 2.3%, giving Minneapolis one of the lowest multifamily vacancy in the U.S. among metros.
Dennis Panzer dennis.panzer@cassidyturley.com 612.347.9309
24
WHAT’S HOT... NASHVILLE in
?
What’s hot in Nashville, TN? Nashville is hot. The city is booming. The metro’s economy created 30,000 net new jobs in 2012 – its strongest performance on record. It currently ranks in the top 5 in job creation in 2013 as measured by year-over-year percent change. Businesses and people are continually relocating to Nashville. Over 11.5 million visitors come to Nashville each year resulting in almost $4.25 billion in direct spending. Since the recession, Nashville has commanded attention from national media. The New York Times recently touted “Nashville’s Latest Hit May Be the City Itself;” Conde Naste Traveler named it among the top 5 places to go in the world, Bloomberg ranked it eighth among American boomtowns and Travel and Leisure considered it #3 overall among America’s best cities. Nashville’s location is unmatched for distribution and competitive and affordable Nashville has become a transportation costs. The area has become a “who’s who” of top logistics “who’s who” of top logistics and distribution firms. It is also home to more than 250 and distribution firms. healthcare companies; the healthcare industry is also Nashville’s largest and fastest-growing employer, directly employing 110,000. The region is also home to more than 100,000 college students, 60 percent of whom remain in the area after graduation. However, despite all the media attention on the city itself, the current “hot topic” is Nashville’s new convention center: Music City Center. This project is so impressive that development records have been broken and results of the impact studies are eye-popping: • Most expensive municipally-financed project in Tennessee
history (over $600 million) • 1.2 million square feet (msf) • Over 1,500 jobs
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Did you know... Rolling Stone magazine named Nashville the country’s best music scene. The Grammy nominations aired live from Downtown Nashville, the first time for the concert special to take place outside of Los Angeles. The region is home to more than 100,000 students who attend the region’s 21 higher education institutions, with 60 percent choosing to stay in the area. More than 250 healthcare companies are headquartered in the Nashville region. Self-employment levels in Nashville are higher than the national average, at 21.6 percent. This high rate of entrepreneurial business is a cornerstone of the Middle Tennessee economy.
• Silver LEED certification
30,000 NEW JOBS IN 2012
• $200 million annually projected in economic impact in fiscal
year 2014 • Over 1,000 hotel rooms added with 3,000 more rooms planned • 1.0 msf of additional commercial space is expected
Carrie Robinson carrie.robinson@cassidyturley.com 615.301.2937
Now more than ever, downtown Nashville is truly the heart of the community. What once was considered the “Central Business District” has expanded into the area dubbed “SoBro.” While many cities are trying to revitalize their existing downtowns, Nashville has a successful existing CBD that is growing and improving. Nashville is alive and Music City has a whole new meaning today.
25
WHAT’S HOT... NEW JERSEY ?
Much of Northern New Jersey’s (NNJ) office space is outdated and losing its competitive edge. In fact, approximately 80% of the entire office inventory in the state, 2,421 buildings, were built in the 1980s and haven’t received much updating since. However, we’ve learned in this recovery that newer space is outperforming older, traditional space. Hence, the hottest trend in NNJ: repurposing old buildings to make them appealing and usable again. ”Adaptive re-use,” which entails converting a property from one zoning use to another to more aptly match " Adaptive re-use” current demand, is occurring all around the New Jersey is gaining momentum market. The repurpose trend is particularly apparent in the rezoning of large office campuses into retail, multifamily, in New Jersey. residential or industrial/data centers. One major factor influencing adaptive re-use initiatives is the contraction and merger activity in the pharmaceutical industry. That has left huge chunks of empty office space in desperate need of a new lease on life. Additionally, as patents expire and research trends shift from chemical to biochemical research, from massive office/R&D facilities to consolidated office layouts, less square footage is needed throughout the industry. Many existing campuses are being vacated or have been vacant for an extended period of time. On a positive note – and in response to these changes – some Northern New Jersey towns have become increasingly more flexible in allowing re-zoning of existing facilities to avoid further losses. Key examples of adaptive re-use initiatives include: • The 2 msf former Bell Labs building on 473 acres in Holmdel, which has been vacant for
five years, is currently part of a redevelopment plan to transform the campus into a mixeduse “Town Center” with office, conference centers, retail and hotel amenities. • Roche Pharmaceuticals recently announced it will vacate their 2 msf office/R&D campus in
Nutley with an impending closure at the end of 2013. A master architect has been selected to provide plans for a mixed-use redevelopment site. • The former Sanofi Aventis U.S. R&D campus in Bridgewater, comprised of over 1.2 msf of
office/lab space, will be branded as the “New Jersey Center of Excellence.” The new owners are exploring mixed-use redevelopment plans for portions of the property to maximize demand.
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Did you know...
in
The Garden State’s unemployment rate in April
was 8.7%, the lowest in four years. Recovery in the commercial real estate market will strengthen this year as New Jersey metro areas add more office-using jobs. Private-sector employment has increased by 59,600 jobs from April 2012 to April 2013.
$
Tax credits offered by New Jersey’s Economic
Development Authority are promoting business retention and attracting businesses from higher-cost East Coast locations. Increasing activity from the Ports of New York/New Jersey will fuel market activity and further boost industrial and warehouse demand in markets surrounding the Port and along the New Jersey Turnpike Corridor.
• Merck announced it will be closing its 1 msf global headquarters
in Whitehouse Station and moving 1,000 employees to an existing, alternate location in Summit. The move is expected to start in 2014 and be completed by mid-2015. UNEMPLOYMENT
RATE
8.7%
• The town of Edgewater recently approved the redevelopment of
Michelle Clifford michelle.clifford@cassidyturley.com 973.908.6109
Unilever’s former research headquarters into a residential, retail and Borough Hall. The main 200,000 sf former headquarters building has been transformed into luxury lofts.
Overall, repurposing non-functioning commercial buildings that are no longer in demand into mixed-use facilities that will generate new business will ultimately contribute to the growth of the surrounding communities and health of the commercial market.
26
WHAT’S HOT... NEW YORK in
?
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Despite negative absorption through the first quarter 2013, the Manhattan office market has recently been heating up in more ways than one. The Midtown South market, which accounted for almost 60% of the market’s positive absorption over the past two years, prospered with the explosion of tech and media firms. In 2013, this continued demand allowed Class A and Class B asking rents in four out of five submarkets in Midtown South to exceed their historical-high from 2008. These four submarkets–Hudson Square/ TriBeCa (+42%), Chelsea/Meatpacking (+27%), Flatiron/Union Square (+10%) and SoHo/NoHo/Village (+4%) – are the only areas in Manhattan to exceed historical high rents through the first half of 2013. Midtown and Downtown pricing is still 15% and 17% respectively, off historical highs. But aside from the blazing Midtown South submarkets, there are The high-end market is other trends in Midtown and Downtown heating bouncing back. Through up.
May 2013, 29 leases were signed starting at $100 psf or more.
In Midtown, the high-end market is bouncing back. Through May 2013, 29 leases were signed starting at $100 psf or more. Two of those transactions reportedly reached north of $200 psf during the span of lease terms. The number of $100 psf leases signed this year is significant compared to the 34 such leases completed throughout all of 2012. With tenants looking to the high-end market, the Plaza District – the most expensive area in Manhattan – is reaping the benefits. Through the first five months of this year, over 600,000 sf of positive absorption was posted, causing the Plaza District availability rate to drop 160 basis points to 11.4% this year. Expect activity in leases signed north of $100 psf to heat up throughout the rest of 2013 and to double 2012’s total, although still be well-off the 92 such leases averaged per year in 2007 and 2008. Demand for space is occurring not only in the small-sized high-end market, but there has been an increase in the number of large leases signed as well. Through May of this year, 25 leases for 100,000 sf and greater were signed, up from the average 19 significant leases signed in the first five months of 2006 to 2012. The increase in large transaction activity has fueled leasing velocity and with 14.1 msf transacted through May, the market is up 5% compared to 2012 and is poised to surpass last year’s total of 30 msf. Despite of high-end leases on the rise, a majority of the tenants in today’s market are still value-driven. Many tenants are renewing in place rather than incur all the capital expenses associated with a move. This has led to an increase in renewals, which have accounted for 41% of leases signed January through May of this year. LEASING ACTIVITY
5%
Did you know...
Four Manhattan submarkets surpassed historically high
asking rents from 2008–all are located in Midtown South. Hudson Square/TriBeCa Class A and Class B asking rents exceeded 2008’s historical highs by 42%. There has been an increase in demand for high-end spaces commanding north of $100 psf and large leases of 100,000 sf and greater.
$
Lease renewals account for 41% of this year’s (through
May) leasing activity. Prime Midtown office towers are commanding top dollar again, similar to the sales price psf garnered in 2007.
Richard Persichetti richard.persichetti@cassidyturley.com 212.954.0917
In addition to these hot leasing trends, investors are sensing the market heat-up as well. Prime Midtown office towers are commanding top dollar again, similar to the sales price psf garnered in 2007. 650 Madison Avenue traded for over $2,000 psf, and although the price is higher due to the building offering prime retail space in one of the world’s most expensive retail corridors, the $1.3 billion price tag is the highest paid for an office property since Google purchased 111 Eighth Avenue in 2010.
27
WHAT’S HOT... PHOENIX in
?
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The Metro Phoenix economy continues to recover from the Great Recession. The commercial real estate sector in Phoenix was hit hard by the downturn, especially its housing, retail and office sectors. Commercial real estate is now rebounding, as nearly all property types are experiencing improving demand for space. The fundamentals first began to improve in multifamily, industrial and residential, while the office sector clearly lagged behind. However, subtle signs are beginning to appear indicating the local office sector is heating up. Historically, Historically, whenever the whenever the Phoenix office market starts to go, it Phoenix office market isn’t long before it is going fast.
starts to go, it isn’t long
The Phoenix office sector is still climbing out of a big hole. The office vacancy rate more than doubled before it is going fast. from the start of 2007 to the second quarter 2011, increasing from 12.2% to 24.5%. Since then, gradually increasing demand and lack of new construction has brought the vacancy rate down to 22.0%. Office users consolidating space and using more efficient floor plans have slowed the overall decline in vacancy. However, this sluggish improvement is showing signs of accelerating, particularly for office spaces best suited for large corporate users. In 2012, Metro Phoenix ranked sixth in the nation in terms of office using and total nonfarm job growth, increasing 3.5% and 2.8% respectively. The Metro Phoenix office sector also ranked eighth in the nation in terms of positive net absorption during the same time period. The pattern of “slow starter, strong finisher” looks familiar. To draw a parallel to the 2001 recession, demand for office space in Phoenix was weak in the first three years of the recovery (averaging 725,000 sf of annual absorption), and then the office sector took off in 2005, 2006, 2007 (averaging 2.7 msf of annual absorption). Corporate-users are once again leading the charge. Since early 2012, large corporate office users had begun to look at Metro Phoenix for their next expansion or relocation. As of midMay 2013, Cassidy Turley Arizona was tracking over 2.5 msf of office users, greater than 100,000 sf, actively looking at the Metro Phoenix market. With very few high-quality buildings available, most of these tenants are pursuing build-to-suit opportunities. We expect more build-to-suit announcements over the next 12 to 24 months as tenant demand strengthens and the last few large blocks of space are leased.
OFFICE-USING JOB GROWTH
3.5%
It is also worth noting that the industrial sector is often a good barometer for the office sector. In 2010 and 2011, large industrial users leased the majority of available Class A industrial properties. By mid-2011, large industrial build-to suits reemerged and accounted for all industrial construction activity until late 2012 when speculative construction reentered the market. At the end of the first quarter 2013, there were six speculative industrial buildings under construction totaling approximately 2.5 msf.
Did you know... Recent major office commitments in Metro Phoenix: • State Farm – 2,000,000 sf • General Motors – 170,000 sf • Aetna – 139,403 sf
#8
In 2012, the office sector ranked eighth in the nation
in terms of net absorption.
Overall job growth increased 2.8% from one year ago,
ranking Metro Phoenix sixth in the nation.
2.5
As of mid-May 2013, 2.5 msf of office users, greater than
100,000 sf, are actively looking at the Metro Phoenix market.
Zach Aulick zach.aulick@ctarizona.com 602.224.4464
The Metro Phoenix office market is expected to follow a similar path as the industrial market. Build-to-suits are expected to comprise the majority of new office construction activity for the next 12 to 24 months. These new build-to suit projects will establish a foundation in lease rates that will support new speculative development in the future.
28
WHAT’S HOT... RALEIGH in
?
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Much of the Triangle’s region’s historical innovation and growth has been tied to siloed corporate campuses in and around Research Triangle Park (RTP) and in a network of sprawling suburban office and flex parks. But large local and out-of-market technology firms are beginning to embrace the national trend towards integrated business clusters and are looking to reap the benefits that vibrant central business districts offer. While the biggest upsides for companies are recruiting and retaining top talent, there are other tangential benefits: more More than a quarter of after-hours camaraderie and broader employee recent RFPs have been from integration from being in one building compared technology and software to multi-building suburban campuses.
Did you know... The average Red Hat Triangle employee age is 32. Of the 5,700 residents of Downtown Raleigh, the average age is 30 years.
companies that see this area
After Progress Energy’s merger with Duke as a burgeoning tech cluster. Energy was announced in late 2011, Red Hat and Progress Energy struck a deal for the tech company to sublease one of Progress’ Downtown Raleigh towers. In one lease, the percentage of submarket space occupied by tech-related companies jumped from below 1% to approximately 8%. With Red Hat’s move into the 390,000-square-foot (former) Two Progress Plaza building, Downtown Raleigh became a more vibrant area with increased retail and multifamily housing demand as well as increased attention from other technology-oriented companies. Citrix, which acquired local firm ShareFile, is planning a 130,000-square-foot – and possibly larger – campus at the former Dillon Supply warehouse. At the same time, New York-based data analytics company Ipreo committed to nearly 24,000 sf at One Bank of America Plaza with an option to double that if needed. These three companies alone will add nearly 2,000 young, high-income new employees to occupy almost 550,000 sf of space in Downtown Raleigh. Interestingly, although these companies are migrating towards primarily open floor plans, estimates of average space per employee is not as low as expected due to the plethora of amenities and perks built in, such as large break rooms and collaborative spaces.
46% have a college degree or higher.
6.5
There are 6.5 Downtown Raleigh employees for every
one resident. Downtown Raleigh Alliance tallied 160 restaurants and bars in the area. 38 new street-level businesses started in 2012.
With almost a quarter of new Downtown Raleigh tours connected to technology-related companies, the impact of downsizing and space shedding by more traditional office occupiers like financial services firms, law firms, and government agencies (Ipreo is taking space previously occupied by the State of North Carolina) has been mitigated. Anecdotal evidence also suggests that an outsized number of recent leasing RFPs (more than a quarter) have been from technology and software companies that see this area as a burgeoning tech cluster. Accordingly, there has been a flurry of interest in new apartment development and even new office buildings in Downtown Raleigh as NEW TECH office absorption picks up and the area’s demographics shift due to EMPLOYEES the relatively young workforce at tech companies. Red Hat’s CEO has revealed that the average age of Red Hat’s Triangle employees is 32. Not only did the Downtown Raleigh Alliance tally 38 new street-level businesses in 2012, but there are currently 1,600 multifamily units either planned or under construction in the submarket. The long-delayed office project Charter Square, slated now for 225,000 sf of space, is scheduled to break ground in the fall of 2013.
Sarah Godwin sarah.godwin@cassidyturley.com 704.887.3021
2,000
29
WHAT’S HOT... SACRAMENTO in
?
It’s difficult to gauge the impact of losing a professional sports team on a local economy. One can measure the loss of jobs almost immediately, but it is harder to quantify the resulting effect on a city’s image and the indirect impact that it has on a region’s ability to lure businesses and create jobs. Professional sports franchises are certainly not the only facet that build a city’s identity—the arts, culture and history all play vital roles. But this issue has been a vexing problem for Sacramento. At just under 2.2 million people, the Sacramento metropolitan area is larger than the Cincinnati, Cleveland, Kansas City, Las Vegas, Indianapolis and even San Jose metropolitan areas. But much of that population growth is new growth – indeed, The new arena is greater Sacramento’s population has increased by 33% over the past 25 years. Perhaps because of already sparking interest that, or because the region exists in the shadow in new Downtown of the neighboring San Francisco Bay Area, it has development resulting in struggled to create a national image. So, for most of the past four years, the city has braced itself for the a chain reaction of new blow from the impending departure of the region’s multifamily, retail and sole professional sports franchise, the NBA’s office projects. Sacramento Kings. The team’s owners made clear their plans to relocate the team. But in May 2013, following a multi-year grass-roots effort and intensive dealings by Mayor Kevin Johnson (a former Phoenix Suns player himself), the city culled together an alternate group of buyers for the team with plans for a new arena to replace the current, aging, stand-alone suburban stadium with a world-class facility in the heart of Downtown Sacramento. The NBA Board of Governors sided with the City and compelled the Maloof family to accept the local ownership bid, keeping the team in town. While these events can’t be downplayed in terms of what they mean for local fans or civic pride, the deal was critical because the construction of a new Downtown arena will have a major positive impact on the city’s urban core. The new $448 million, 18,500-seat facility will be situated on one-half of what is now known as Downtown Plaza. This once thriving shopping mall, anchored by Macy’s, had fallen on hard times in recent years with vacancy levels approaching 50%. Westfield sold the property to San Francisco-based JMA Ventures for just $39 per square foot in 2012, a move that helped pave the way for NBA deal. JMA Ventures plans on selling off the eastern, mostly vacant, portion of the mall to be redeveloped as the arena site. Meanwhile, JMA is reportedly planning to upgrade the remaining portion of the center as a world class entertainment district to rival that of L.A. Live—the highly successful dining and entertainment district that adjoins the Staples Center in Downtown Los Angeles. Construction on the project will likely start later this year with completion scheduled for early 2016.
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Did you know...
24
The Sacramento Metropolitan Statistical Area is the 24th
largest in the United States and the fourth largest in the State of California. The population of the fourcounty Sacramento region has increased by 33% over the last 25 years and over 22% over the past 15 years.
NBA
The Sacramento Kings initially relocated to Sacramento from
Kansas City in 1985 and played their first three years in a building that was later converted to office space. “The Madhouse on Market Street” seated only 10,000 fans and now serves as the headquarters of the California Department of Consumer Affairs. The Kings’ current home, Sleep Train Arena, was built in 1988 and is the fourth oldest facility currently utilized by an NBA team.
Garrick Brown gbrown@ctbt.com 916.329.1558
The development will also reinvigorate a decade-long attempt to rejuvenate Downtown’s K Street Corridor. Plans were announced to convert a neighboring, blighted SRO property into a world-Class Boutique hotel, while many long-stalled Downtown projects are suddenly finding new life and interest. The new arena is already sparking intense interest in new Downtown development and will almost certainly result in a chain reaction of quality new multifamily, retail and office projects that have potential to radically reinvent the urban core. 30
WHAT’S HOT... SAN DIEGO in
?
San Diego is recognized as one of the top craft beer destinations in the U.S. More than 10 annual beer festivals draw crowds to San Diego from all over the world including the 2012 World Beer Cup also known as the “Olympics of Beer”. With a home to more than 60 breweries including superstars such as AleSmith , Stone, Green Flash, Pizza Port, The Lost Abbey/Port Brewing and Karl Strauss Brewing companies and its own Imperial India Pale Ale (IPA) category, San Diego is a hotspot on many beer explorer's maps.
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Did you know... According to the Brewers Association, San Diego is home to 61 breweries of 2,403 in the U.S.
Driven by consumers’ growing appetite for highquality craft beers, the number of breweries has Brewers and brew pubs skyrocketed throughout San Diego. More than generated $681 million half of all new brewery licenses were issued in the in sales and represented last two years1. In fact, San Diego has more than twice the number of Type 23 licenses issued to a $299 million direct breweries that produce up to 60,000 barrels per economic impact for year than any other county in California. When San Diego County. adding the total licenses issued to craft breweries that produce more than 60,000 barrels per year and to supporting businesses, such as restaurants, tasting rooms, pubs, bars and taverns authorized to sell those beers, it is evident that the demand for commercial real estate catering to the industry is “hot” and “getting hotter.”
Breweries occupy and estimated 570,000 SF
countywide.
50
Stone Brewing, Ballast Point, and Karl Strauss make the list
of 50 largest craft breweries in the U.S. at Nos. 10, 38 and 45.
The majority (37) of existing breweries are located south of the Highway 56 in the Central and South Counties of San Diego with the remaining 24 located in North County in proximity to Highway 78. Well-known breweries are expanding while new breweries are facing the challenges of finding space that meets many requirements. Brewers and brew pubs generated $680.9 million in sales and represented a $299.5 million direct economic impact for San Diego County2. The impact on the local economy is even greater when including wholesale, retail and industries indirectly supporting brewers. According to the Beer Institute, more than 24,400 jobs are sustained by brewers representing $3.5 billion in output in 2012. For comparison, the U.S. beer industry’s total direct economic impact was more than $246.5 billion in 2012 and employed more than two million workers, paying them $78.9 billion in wages and benefits.
HOME TO 60+
BREWERIES
1&2
To support craft breweries and encourage expansion, the San Diego City Council recently approved zoning changes that will allow craft breweries to operate full-service restaurants and tasting rooms. Brewers that have at least 12,000 sf of floor space in areas zoned for light manufacturing will be able to open eateries or tasting rooms larger than 3,000 sf under the ordinance.
Jolanta Campion jolanta.campion@cassidyturley.com 858.625.5235
“ The Economic Impact of Craft Breweries in San Diego” by the National University System Institute for Policy Research (NUSIPR)
31
WHAT’S HOT... SAN FRANCISCO in
?
The San Francisco marketplace is about to enter its fourth year of a tech-driven office boom—one that has not only driven office vacancy rates to their lowest levels in 15 years (and sent rents skyward), but that has also fueled job growth that is among the strongest in the nation and kickstarted nearly every other commercial real estate sector. Retail vacancy is one of the tightest in the nation, multifamily vacancy is at record lows and apartment rents have grown by 30% over the past three years. As a result, new development is taking off (multifamily development alone is at its highest level in more than 20 years). Nowhere have the changes been more profound than in the City’s South of Market neighborhoods where the tech foothold has expanded from just a few blocks immediately south of the financial San Francisco is about to district westward to reclaim the long-neglected enter its fourth year of a mid-Market area and southward to the former industrial neighborhoods of Mission Bay/China tech-driven office boom Beach. New creative office, high-rise multifamily that has fueled job growth and retail is underway in all of these submarkets. and kick started nearly There is yet another project underway on San Francisco’s waterfront that promises to further every other commercial transform South of Market as one of the nation’s real estate sector. premier sports and entertainment destinations. The NBA’s Golden State Warriors have announced plans to relocate from their current home at Oakland’s Oracle Arena to a new facility on Piers 30 – 32 on the San Francisco waterfront. This new 17,500-seat arena will be constructed on 13 acres of rebuilt, seismically stable piers over San Francisco Bay. Plans also call for an adjacent 2.3 acre seawall lot to be developed with a 250-room hotel, up to 130 new condominiums and 34,000 sf of restaurant and retail space. The site is located just south of the Oakland Bay Bridge, but north of AT&T Park. Upon its delivery in 2000, AT&T Park (home to the MLB’s San Francisco Giants) helped initially to transform the industrial waterfront neighborhood of Mission Bay/China Basin.
APARTMENT RENT GROWTH
UP 30%
Thanks also to the influx of tech companies, this is now one of the area’s most sought-after residential neighborhoods— with nearly half of the 15,000 multifamily units either currently under construction or proposed for San Francisco situated in either this or the neighboring South of Market Street (SoMa) trade areas. The delivery of this new state-of-the-art arena will only further cement this area’s growing reputation as the hottest neighborhood in what may be America’s hottest growth city.
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Did you know... NBA
The Warriors current home, Oakland’s Oracle Arena, was
built in 1966 and is the oldest facility currently utilized by an NBA team. The Golden State Warriors relocated to San Francisco from Philadelphia in 1962. They changed their name to the Golden State Warriors in 1971, five years after moving to Oakland.
$
Because the Warriors arena is to be constructed on rebuilt,
seismically safe piers, there is no actual land footprint to the arena portion of this project. The entire project is estimated by some to have a cost approaching $1 billion, but the effort is being privately funded.
2x
Since the delivery of AT&T Park, office and retail space
in the Mission Bay/China Basin neighborhood has more than doubled to over 4.1 msf.
Garrick Brown gbrown@ctbt.com 916.329.1558
32
WHAT’S HOT... SAN JOSE-SILICON VALLEY in
?
Silicon Valley has been one of the hottest real estate markets in the country for the past three years. Perhaps the most notable real estate project currently being developed in Silicon Valley isn’t an office park, high-rise residential building or shopping center; it is, instead, a football stadium. In June 2010, the city of Santa Clara agreed to lease 17 acres of land to the San Francisco 49ers for a new state-of-the-art sports complex.
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Did you know... Levi’s Stadium will be the first LEED certified stadium in the NFL.
The new $1.2 billion, 68,500-seat Levi’s Stadium will be situated just north of Great " Our proposed project along America Amusement Park and adjacent to with the Related Company's the 49ers’ current practice facility. Bolstered potential development will be by the new stadium and backed by the great additions to the North 49ers, developer Stephen Ross of Related California and Joe Montana’s business of the Bayshore area." group are looking to capitalize on action - Joe Montana around the new stadium. Related California is set to receive exclusive rights to negotiate a 230-acre land lease from the city of Santa Clara to create luxury shops, restaurants and housing similar to the successful Santana Row project in neighboring San Jose. The city has also approved a request from Joe Montana’s group to lease seven acres adjacent to the stadium where the developer will build a luxury hotel, restaurant and sports bar. Both groups hope to have their projects completed before the muchanticipated 2016 Super Bowl that is scheduled to be held at the new stadium. Meanwhile, land prices in the area have surged as developers look at bringing new retail and hotel projects to the area in what will likely be a local development boom.
LAND LEASE
230
ACRES
Is there a loser here? There might not be one. Lennar Corporation has master plans to revive Bayview/Hunters Point after the 49ers move out of Candlestick Park. During the 2012-2013 football season, Candlestick Park hosted only 12 major sporting events. The 775-acre “parking lot” surrounding the stadium was virtually abandoned for 344 days out of the year. This is the largest remaining tract of developable land in San Francisco. Lennar’s plans include entitlements for 12,000 homes, 3.1 msf of office space, 885,000 sf of retail, 100,000 sf of community facilities and a 10,000-seat performance venue. If Lennar follows through with its development, Santa Clara and San Francisco will both be winners.
The 49ers plan on having a 27,000 sf green rooftop plaza. The structure will serve as a roof for one of the luxury suite towers and will include 2,000 tons of dirt with native plants to soak up precipitation and provide insulation.
NFL
After petitioning the NFL for five years, the 49ers were
named a charter member of the NFL in 1946. They called Kezar Stadium in San Francisco their home until the 1970 season. The 49ers’ current home, Candlestick Park, was built in 1960 for the San Francisco Giants and the 49ers moved in for the 1971 season. Candlestick is the third oldest stadium in the NFL.
Garrick Brown gbrown@ctbt.com 916.329.1558
33
WHAT’S HOT... ST. LOUIS in
?
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St. Louis is clearly making progress in this recovery, but challenges remain. On the upside, St. Louis has added roughly 15,000 jobs since 2011. While that’s not a robust job creation pace, it is good enough to have lowered the unemployment rate from 10.3% in 2009 to 7.3% as of the end of April 2013. The commercial real estate fundamentals are mixed. The industrial sector is coming on strong, averaging 500,000 sf of new demand over the last three quarters, while the office sector is eking out smaller gains, but still positive. The biggest threat to the local economy is from cuts in federal defense spending. Scott Air Force Base – located across the Mississippi but still a significant metropolitan area employer The metro area is a growing – was scheduled to implement 4,500 unpaid furloughs beginning in July 2013. St. Louis is hub for research and also home to nearly 500 defense contractors, development with a thriving most of whom remain in a “wait and see” mode bioscience industry led by with respect to the sequester cuts and how St. Louis-based universities, those will impact future revenue streams.
hospitals and medical-
However, there is a thick silver lining in St. Louis’ economy that is generating significant employment related companies. growth and demand for commercial real estate. The metro area is a growing hub of research and development with a thriving bioscience industry led by St. Louis-based universities, hospitals and medical-related companies. There are over 12,000 jobs and 275 establishments in the medical devices and biotechnology industry and these numbers continue to grow. Employment in education and health services has been expanding at an annual pace of 2.2% over the past decade, much faster growth than in any other sector in St. Louis. Given this strong engine, medical office inventory has expanded from 980,000 sf since 2003 to 5.1 msf currently. The Center of Research, Technology and Entrepreneurial Exchange (CORTEX) is an important player building up the biotech/medical sector in St. Louis. This not-for-profit organization buys and develops real estate in and around St. Louis to attract and support biotech start-up companies. The company developed a 240-acre urban bioscience research district including 340,000 sf of laboratories and offices in midtown St. Louis in the area between the medical schools of Washington University and Saint Louis University. The first development phase involved a $155 million investment, creating approximately 950 technology and building management jobs and 124 housing units.
JOB GROWTH
2.2%
The next development phase has been launched, and it will transform an aging 200-acre industrial area in midtown St. Louis between the Central West End and Forest Park South-east into a vibrant, mixed-use, research and entrepreneurial community. The $186 million development phase will include 1,400 new jobs and an additional 384,000 sf of office space, bringing more jobs, innovation and infrastructure improvements to the area. The total facilities space in the district will total 1 msf when the phase is completed. Other phases of development will occur over the next 20 years and will aim to position St. Louis as the center of the BioBelt in the U.S.
Did you know... 42% of the St. Louis economy is linked to education and health services. Medical office inventory has expanded from 980,000 sf since 2003 to 5.1 msf currently. The construction of a new urban bioscience research district will transform an aging 200-acre industrial area in midtown St. Louis. The $186 million development phase will include 1,400 new jobs and additional 384,000 sf of office space, bringing more jobs, innovation and infrastructure improvements to the area.
Brandon Svec brandon.svec@cassidyturley.com
34
WHAT’S HOT... TAMPA ?
Like most Florida metros, Tampa’s economy was deeply wounded by the recession. But over the last 18 months, the local economy has clearly been gaining momentum. It added 24,900 net new jobs during the first four months of 2013 – its highest job creation level since 2005. At the same time, the unemployment rate dropped 90bps to 7.0%. Overall, the market has recovered 65% of the jobs lost in the past recession, making the Tampa metro the strongest job creation performer in the State of Florida. Perhaps not surprisingly in the wake of such health job creation, the multifamily sector is also heating up in Tampa. Like most metros, demand for rentals units has been very strong throughout this recovery, and apartment vacancy in Tampa currently sits at 5.2%. The good news for Tampa commercial real estate is that other sectors are seeing improvement as The one sector that is well. Tampa’s office sector is gaining momentum, unequivocally hot, and registering 613,000 sf of absorption in the first only getting hotter is quarter of 2013. Tampa’s office markets still have a way to go; with vacancy currently at 18.9%, it Tampa’s industrial sector. is years away from being considered hot. The one sector that is unequivocally hot, and only getting hotter is Tampa’s industrial sector. The numbers already look good. Over the last three years, Tampa’s industrial sector has absorbed 3 msf of industrial warehouse space. The vacancy rate tightened to 6.8% at the end of April 2013, 170 bps lower than the national average. There are numerous industries driving the industrial growth – housing, auto, manufacturing and food-based commodities. But one of the key differentiators for Tampa is its port. The Port of Tampa, the largest and the most diversified cargo tonnage port in Florida, is currently undergoing expansion of its terminal facilities, modernization, and significant enhancements of rail and roadway links in order to prepare for the increasing cargo traffic once the Panama Canal expansion is completed in 2014. Ongoing developments include a $600 million I-4/ Selmon Expressway Connector project and $10.9 million intermodal rail project that will enable the Port of Tampa to move containers and general cargos more efficiently between the port and distribution centers. The port currently handles more that 34 million tons of cargo every year – nearly 40% of all cargo moving in and out of the state of Florida. With the Panama Canal expansion, the port of Tampa anticipates an increase in freight from Asia, as it is located on the shortest combined ocean inland route from Shanghai to the Southeast U.S. INDUSTRIAL VACANCY
6.8%
Increased port activity will drive demand for warehouse space in the coming years, positioning the Tampa metro area as an expanding container and distribution center gateway for the state of Florida and the Southeast. Some of the exporters and importers with significant facilities in the Tampa/Orlando I-4 corridor region have already constructed and/or expanded distribution center capacity. Investor interest in industrial property type is also on the rise. Annual investment sales have been picking up overall for the past three years, registering $181 million in 2012. The sales posted a 17% increase (year-over-year) in the first quarter of 2013.
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Did you know... 3
MSF
Tampa’s industrial sector has absorbed 3 msf of industrial
warehouse space over the last three years.
$
The Port of Tampa serves as the largest economic
engine in West/Central Florida, supporting more than 80,000 jobs and producing more than $15 billion in annual economic impact.
in
Cap rates on industrial properties have fallen by
100 bps since 2010.
The Port of Tampa handles nearly 40% of all cargo moving in and out of the state of Florida.
Molly O’Brien molly.obrien@cassidyturley.com 813.349.8545
35
WHAT’S HOT... WASHINGTON, DC METRO in the
Area?
The Washington, DC region’s economy continues to muddle through two years of federal budget bewilderment. Lawmakers are still debating how to address the federal deficit (which may or may not include further cuts to discretionary spending programs, and inasmuch as 40% of Washington’s economy is linked to federal spending, the region’s commercial real estate market is about as difficult to underwrite as any market in the country. However, despite the “everlasting gobstopper” of uncertainty, some segments of the area’s Absent the government commercial real estate market are seemingly sector, the underlying unfazed. Even absent the government sector, the local economy is underlying local economy is percolating with new growth prospects. In Northern Virginia (NoVa), percolating with new beyond the DoD agencies and government growth prospects. contractor signage, the market has a core privatesector economy rooted in technology. For the past 15 years, tech employment in NoVa has grown seven times faster than employment at local federal agencies. In the past 18 months, growing technology companies like Transaction Network Services, VMWare and Amazon Web Services have filled vacant floors along the Dulles Toll Road. This could be an early indication that the tech boom is now rolling into NoVA.
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Did you know...
$ 7x
40% of Washington’s economy is linked to federal spending. For the past 15 years, tech employment in NoVa has
grown seven times faster than employment at local federal agencies. Suburban MD has a labor force participation rate of 73.5% compared to 64.4% rate nationally. In the District, the Educational and Health Services sector has been the fastest growing sector in the local economy for over 20 years.
In suburban Maryland (SMD), there is little that is overtly “hot.” But the details in the employment data reveal clear strength beneath the surface, particularly in Bethesda. Also of note is the labor participation rate. Nationally, labor force participation is declining: people are so discouraged they have stopped looking for work. In SMD, the exact opposite is occurring; in fact, SMD has a labor force participation rate of 73.5% compared to 64.4% rate nationally. This is important because there is a strong correlation between high labor participation rates and robust recoveries. Simply put, people don’t ramp up their job search unless they see more job openings, and more job openings typically translate into more hiring. Turning to the District of Columbia – here is a little known fact: the Educational and Health Services sector has been the fastest growing sector in the local economy for over 20 years. Since 1995, Education and Health Services employment has expanded by 53%; employment growth in Professional and EDUCATION & Business Services was 39%. The size of the Federal Government HEALTH SERVICES has actually declined over that same period, perhaps dispelling the notion that the District of Columbia is just a government town. It is also worth noting that the Education and Healthcare sectors are key engines driving growth for office space in Washington, DC. As of mid-June 2013, Georgetown University, George Washington University, University of the District of Columbia, Children’s Hospital and MedStar were all looking to lease additional office space for their growing operations and administrative staff.
53%
Nate Edwards nathan.edwards@cassidyturley.com 202.266.1189
36
About Cassidy Turley Cassidy Turley is a leading commercial real estate services provider with more than 3,800 professionals in more than 60 offices nationwide. The company represents a wide range of clients—from small businesses to Fortune 500 companies, from local non-profits to major institutions. The firm completed transactions valued at $22 billion in 2012, manages approximately 400 million square feet on behalf of institutional, corporate and private clients and supports more than 23,000 domestic corporate services locations. Cassidy Turley serves owners, investors and tenants with a full spectrum of integrated commercial real estate services—including capital markets, tenant representation, corporate services, project leasing, property management, project and development services, and research and consulting. Cassidy Turley enhances its global service delivery outside North America through a partnership with GVA, giving clients access to commercial real estate professionals in 65 international markets. Please visit www.cassidyturley.com for more information about Cassidy Turley.
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