U.S. Research Report TOP OFFICE METROS SNAPSHOT Q3 2017

Featured Highlights > Major office markets in the U.S. continued to show solid performance in Q3 2017. Rents held steady in eight of the 10 leading markets and rose in two. Only three markets had a rise in vacancy. However, growth has largely slowed and been replaced by stability.

> A bifurcation in demand is emerging. Traditional office tenants from the professional and business services sector are increasingly in cost-containment mode. Some occupiers are reducing their office footprints in pursuit of space efficiency, with law firms being a prime example.

> At the same time, the tech sector continues to expand at a torrid pace. Dropbox signed San Francisco’s largest ever office lease and Amazon is still eating up space in multiple locations. These are just the leading examples. Additionally, creative office space providers—most notably WeWork—are increasing their presence in several markets with Boston a leading example.

> Manhattan, the San Francisco Bay Area and Seattle continue to lead the way. All have vacancy rates well below 10% and saw positive absorption in the third quarter. Rents are reaching new highs in San Francisco’s Financial District. Leasing activity in Manhattan is particularly strong and at the second highest year-to-date level seen in the past 10 years.

> Two markets merit a note of caution—Los Angeles and Washington D.C. Both have a sizeable volume of new supply seeing little leasing traction, in both recently completed developments and projects underway. D.C. has been here before, but market indicators are not as healthy this time around.

* A quarterly rent change of +/-1% or less, is judged to be flat.

MARKET1-YR

OUTLOOK

METRO CORE CBD

INVENTORY (SF)CORE SUBMARKETS ABSORPTION

(SF)AVG RENT

($)*VACANCY

RATE

Manhattan, NY500,918,568

Manhattan: Midtown, Midtown South,

Downtown1,544,636 $72.72 6.2%

Washington, D.C.  185,462,288

CBD (D.C.), East End (D.C.), Capitol Hill

(D.C.), NoMa (D.C.), Capitol Riverfront

(D.C.), Carlyle (D.C.), R-B Corridor (NOVA),

Tysons Corner (NOVA), Bethesda (SubMD)

-1,187,234 $47.90 14.6%

Chicago, IL145,784,075

West Loop, Central Loop, River North, East

Loop376,264 $39.21 11.9%

Houston, TX   118,388,682

CBD, Katy Freeway, West Loop (Galleria),

Westchase-684,258 $34.84 20.6%

LA County, CA113,572,200

Downtown Los Angeles, West Los Angeles,

Tri-Cities877,100 $45.47 15.2%

Atlanta, GA 100,816,345

Midtown, Buckhead, Central Perimeter,

Cumberland/Galleria-161,272 $28.15 13.4%

San Francisco Bay Area, CA 93,759,830

Financial District (North Financial District & South Financial

District), SOMA (West SOMA & East SOMA),

Palo Alto, Mountain View, Sunnyvale

201,036 $82.89 6.5%

Dallas, TX76,850,194

Uptown, Preston Center & Far North Dallas 317,898 $31.00 12.1%

Boston, MA69,165,145

Back Bay, Financial District, Charlestown, Crosstown, Fenway/

Kenmore, South Station, North

Station, Seaport

-160,550 $56.21 10.8%

Seattle, WA62,370,471

Seattle CBD, Lake Union, Pioneer Square, Belltown, Queen Anne,

Ballard

613,093 $38.74 7.6%

Another Solid Quarter for Office as Fundamentals Hold FirmTech Sector Growth is the Key Demand Driver

> Pre-leasing of high-end new office towers continues in downtown Chicago. Fulton Market has established itself as a credible and lower-cost option for tenants seeking creative space in a desirable neighborhood.

> Houston was battered by Hurricane Harvey in the third quarter. Unlike housing and infrastructure, the office inventory emerged relatively unscathed. However, both the office market and the city will face significant challenges.

> Dallas’ expansion may be slowing. Market indicators are still solid, but the pace of major corporate locations and new campus developments appears to be tapering. However, rent levels in its core, niche submarkets are still breaking records.

LOCAL INSIGHTS

> The Manhattan office market remains one of the strongest in the U.S. with solid performance in Q3 2017. Net absorption was over 1.5 million square feet, more than double the prior quarter. Rents are holding firm and Manhattan’s office vacancy rate of 6.2% is the lowest of the 10 markets discussed in this report. Third quarter leasing volume at 9.5 million square feet represented a 10% increase from the prior quarter. Combined leasing activity for the first nine months of 2017, which stands at 27.3 million square feet, is the second-highest total for the corresponding period in the past 10 years.

> Average asking rates stand at $72.70 per square foot, led by Midtown where rents stand at $81.50 per square foot. Average asking rents in Midtown South and Downtown ended the third quarter at $66.10 and $63.20 respectively. The highest rental rates in Manhattan, at over $90 per square foot, are in the Plaza District and Hudson Yards/Manhattan West, with the latter being driven by new office construction and high-end retail and residential development.

> Third quarter leasing activity was led by the FIRE (financial services, insurance and real estate), TAMI (technology, advertising, media and information firms) and public sectors with each accounting for around 20% of space leased. The higher than usual public sector share of leasing was due to labor union 1199SEIU’s 578,000-square-foot relocation to 498 Seventh Avenue in Midtown South.

> In Midtown’s largest new lease signed in the first nine months of 2017, New York Presbyterian took 471,000 square feet at 237 Park Avenue, which is the largest healthcare sector lease on record in Midtown. In addition, Amazon almost doubled its Manhattan presence by leasing 360,000 square feet at 5 Manhattan West.

> There is 12.6 million square feet of new office space under construction in Manhattan, 60% of which is already pre-leased. In the short-term deliveries are mostly comprised of smaller boutique properties in Midtown South, where there are 10 projects underway in the 50,000 to 175,000 square feet size range.

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> There are five major developments of more than 1 million square feet underway, ranging from 1.6 to 2.9 million square feet. The largest of these, due to deliver in 2018, is Silverstein Properties’ 2.9 million square foot 3 World Trade Center in the Downtown market, where 1.8 million square feet remains available. The only other major project underway that is mostly available is SL Green’s 1.6 million square feet One Vanderbilt in Midtown. However, this project is not due to come online until 2020.

> Although average asking rents are holding steady at around $48 per square foot, the Washington, D.C. market is facing a dual challenge from negative absorption and a high volume of new construction. Third quarter net absorption was negative 1.2 million square feet—almost double the amount of the next market with negative absorption (Houston.) At the same time, D.C.’s office vacancy rate moved up by 120 basis points to 14.6%—the largest third quarter increase of all 10 markets covered by this report.

> New supply is the main culprit. There is 6.6 million square feet under construction in the District alone, almost half of which remains available. This is not a new phenomenon. A similar volume of space was underway 10 years earlier in 2007 but the market dynamics are different. Vacancy in the District stood at 8.1% then compared to 11.8% percent now. It is feasible that vacancy could rise to the mid-teens unless there is a sudden uptick in demand. Developers face a balancing act between securing tenants and limiting the impact on pro-forma targets of providing rent abatements and high tenant improvement incentives.

> Federal downsizing continues to have a negative impact on demand. D.C.’s core submarkets—the CBD and East End—saw a combined 480,000 square feet of negative absorption in the third quarter. Close-in markets in Northern Virginia are even more challenged. Ballston and Rosslyn both have vacancy rates over 27% and are struggling to attract new tenants despite a $20 per square foot discount in asking rates to the CBD and East End.

> The largest leases signed in Q3 2017 were both renewals. In Northern Virginia, the State Department renewed its 280,000-square-foot-lease at 1701 N Fort Myer Drive in Rosslyn and Capital One renewed its 178,700-square-foot-lease at 8020 Towers Crescent Drive in Tysons Corner. There were no leases of 100,000 square feet or above in the District.

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more than 150,000 square feet, 10 of which are in the core submarkets. The largest of these is at Four Westlake Park in the Katy Freeway submarket, where 503,330 square feet formerly occupied by British Petroleum remains available.

> Although Q3 2017 net absorption was negative 265,625 square feet in Houston’s CBD, the submarket is seeing some traction with the five largest leases signed in the quarter. These were led by NRG’s 431,000-square-foot new lease at 910 Louisiana and Porter Hedges LLP’s 105,025-square-foot renewal at 1000 Main. Asking rates are highest in the CBD at $39.30 per square foot compared to a market average of $38.85 per square foot, with some prestige properties asking over $50 per square foot.

> Construction activity remains focused on build-to-suit and largely pre-leased developments with one major exception. SCD Acquisitions LLC’s 778,350-square-foot Capitol Tower project in the CBD, which is scheduled for completion in mid-2019, has more than 70% of its space available. Bank of America has pre-leased approximately 200,000 square feet and is understood to have the naming rights.

> The Los Angeles office market posted solid performance in Q3 2017. Net absorption remained positive and was higher than the prior quarter, while average asking rents rose by 3% and vacancy held steady. Net absorption totaled 877,100 square feet in the third quarter and was positive in all three core submarkets, but skewed toward West LA which saw 692,200 square feet of net absorption.

> Average asking rates rose to $45.50 in Q3 2017 and stand at more than $60 per square foot in the most prestigious Westside locations of Beverly Hills, Century City and Santa Monica. Culver City, which has historically been viewed as a fringe Westside location, is gaining strength as an affordable alternative in West LA with rents that are around $20 per square foot lower than the most prestigious locations.

> After being impacted by major move-outs in prior quarters, most notably Warner Music and Nestle, the Tri-Cities submarket tightened in Q3 2017 with vacancy falling from 13.3% to 12.3%. Burbank, with its critical mass of entertainment industry occupiers, continues to lead the way with higher rents ($40.20 per square foot) and lower vacancy (9.7%) than neighboring Glendale and Pasadena.

> Construction activity is concentrated in Downtown and West LA which, when combined, account for more than half of the office space underway across the Greater Los Angeles Basin. The vast majority of space in recent completions and projects underway is still available, feeding concerns of a supply-side risk. A combined total of 2.1 million square feet has been delivered in Downtown and West LA during the first three quarters of 2017, more than 70% of which remains available with both submarkets being similarly impacted. Projects underway paint a similar and worrying picture. A further 1.7 million square feet is in progress and is less than 20% pre-leased.

> The Chicago office market saw rents increase and vacancy fall in Q3 2017. Average asking rates increased by almost 2% while vacancy saw the largest drop of the 10 markets covered by this report. Although net absorption was negative, the amount was inconsequential given the size of the Chicago office market. It was a result of tenant move-ins to recently completed high-end office towers in the West Loop rather than any decline in tenant activity.

> Average asking rates stand at $39.20 per square foot and are highest in the West Loop at $45.50 per square foot. Market vacancy has fallen to 11.9% with a low of 7.5% in the River North submarket. The West Loop has the highest vacancy rate at 13.7%, but this reflects the ebb and flow of tenant move-outs to new properties rather than any weakness in the submarket.

> Northern Trust signed the largest lease in the third quarter for 462,000 square feet at 333 South Wabash in the Central Loop. CNA Financial Corporation was formerly the owner-occupier of the 1.1 million-square-foot-property, which has been repositioned by The John Buck Company as a multi-tenant property. CNA is downsizing to lease 274,000 square feet in another John Buck Company property at 151 North Franklin in the West Loop, which is a new 807,000-square-foot tower due for delivery in Q2 2018 which will be named the CNA Center.

> The formerly industrial Fulton Market submarket, which adjoins both River North and West Loop, has established itself as a credible and lower-cost option for tenants seeking creative space in a hip neighborhood. While it has largely attracted tech-centric users, including Google’s regional headquarters, Glassdoor and WeWork, McDonalds Corporation is moving its headquarters to Fulton Market to be closer to its target employee demographic. Local developer Sterling Bay is the key player. In Q3 2017 WPP Group announced that it will occupy 253,000 square feet in Sterling Bay’s newest project—the redevelopment of the former Coyne College Building.

> Hurricane Harvey was the dominant story in Houston in Q3 2017. The Category 4 hurricane, which dropped over 50 inches of rain in some locations, caused catastrophic damage across the metro destroying homes, businesses and infrastructure and shutting down certain oil refineries and drilling operations. Houston’s office inventory was relatively unscathed with less than 7% of stock impacted, 45% of which was back in operation within a month. There was minimal impact on the core submarkets covered by this report.

> Although rents held steady in Q3 2017, absorption remains stubbornly in the red at negative 684,250 square feet, while vacancy rose by 50 basis points to 20.1%. Houston has by far the highest vacancy rate of the 10 markets covered by this report. Low crude oil prices—at around $50 per barrel—and a high volume of sublease space continue to drag market performance. There is 5.5 million square feet of sublease space available across the metro, including 13 spaces with

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o > The Atlanta office market saw minimal change in Q3 2017. Rents held steady while vacancy increased slightly by 20 basis points. Following healthy demand in the prior quarter, net absorption turned negative by 161,000 square feet in Q3 2017 with modest occupancy losses in Buckhead and Central Perimeter. In the quarter’s largest lease transaction, law firm Eversheds Sutherland renewed their lease at 999 Peachtree in Midtown but reduced their footprint by 20% to 188,820 square feet.

> Average asking rents are holding firm at $28.15 per square foot led by Buckhead and Midtown where rates are both around $33.00 per square foot. However, asking rents for the best Class A space in Midtown are now ahead of those in Buckhead for the first time. Midtown is seeing some properties quoting upwards of $50 per square foot representing the highest levels ever seen in Atlanta.

> Following a busy second quarter which saw 1.5 million square feet of new inventory added to the Atlanta market, new space deliveries took a pause in Q3 2017. There were no completions of note in the core submarkets. This is a temporary pause with three projects totaling 738,250 square feet scheduled for completion in Q4 2017. Over half of this space is pre-committed but the largest of the three projects has yet to see any leases signed, local developer Seven Oaks Company LLC’s 335,250-square-foot 4004 Perimeter Summit in the Central Perimeter submarket.

> In total, there is 2.1 million square feet of new office space under construction scheduled to deliver between Q4 2017 and Q1 2020. Five of these projects are fully-leased, build-to-suit developments for occupiers including Comcast, NCR and State Farm Insurance. The only post-2017 project with significant vacancy is New City’s 430,000 square feet 725 Ponce in Midtown which is scheduled to deliver in Q1 2019 and is currently 80% vacant.

> The San Francisco Bay Area office market continues to outperform, fueled by record leasing activity by technology firms. Average asking rates stand at $82.30 per square foot which is the highest rent across the 10 markets covered in this report. The market’s vacancy rate remains tight at 6.5%.

> Rent levels have been boosted by a series of leases signed at $85 per square foot and above in San Francisco’s Financial District. This transactional evidence underlines the strength of the San Francisco market. Rent growth is attributable to leases being signed as opposed to new product entering the market with higher asking rates. In core Silicon Valley locations such as Palo Alto Central, rents are as high as $95 per square foot reflecting the submarket’s extremely tight vacancy rate of 2%.

> The dominance of the tech sector in the San Francisco office market cannot be overstated. It has been the key driver in this cycle and tech leasing is again on the rise despite the overall cooling in the U.S. economy. Tech leasing in Q3 2017 was led

by Facebook (Instagram), which leased 412,230 square feet at 181 Freemont Street, Airbnb (290,000 square feet at 650 Townshend Street) and Amazon (175,725 square feet at 525 Market Street).

> While outside of Q3 2017, another tech firm—Dropbox—signed San Francisco’s largest ever lease in early October pre-leasing 736,000 square feet at the four-building 1800 Owens development in Mission Bay. This surpasses the 714,000-square-foot pre-lease signed by Salesforce at its namesake tower which is due to be completed in Q4 2017.

> Office space under construction in San Francisco stands at 6.4 million square feet, a little over half of which is pre-leased. Given the pace of tech leasing and timing of projects underway, we do not anticipate any supply-side risk. The first project with significant availability is a year away from completion. Park Tower at 250 Howard Street, totaling 751,500 square feet and currently fully available, is scheduled to deliver in Q4 2018.

> All signs were encouraging in the Dallas office market in Q3 2017. Rents rose, vacancy tightened and net absorption stayed positive. Vacancy across the core submarkets covered by this report fell by 50 basis points to 12.1%, which compares favorably to the overall vacancy rate of 15.1% for the Dallas-Fort Worth Metroplex. Average asking rents rose by 1.6% to $30.50 per square foot and net absorption was 317,890 square feet.

> Far North Dallas continues to dominate market activity. The submarket is home to multiple new corporate campuses and as these projects reach completion tenants are moving in and boosting absorption. Toyota’s 2.1 million-square-foot headquarters is now fully-occupied, and JP Morgan is starting to move in to its 1 million-square-foot new complex.

> Corporate relocations have fueled the current cycle. The question going forward is whether this trend can be sustained. Construction activity looks set to taper and the amount of space breaking ground has seen a marked fall. Leasing activity is slowing. The largest lease signed in Q3 2017 was at 6501 Legacy Drive in Far North Dallas, where NTT Data Inc. took 232,745 square feet. There were no other leases signed of 100,000 square feet or above.

> The prestigious submarkets of Preston Center and Uptown/Turtle Creek continue to garner the highest rents. Average asking rates in both locations are approaching $40 per square foot, but the top performing properties are seeking rents in the mid to upper $50s per square foot. Site availability in these submarkets is relatively finite and after the current round of development completes, it will be challenging to add additional product, not just due to limited options but also the impact of rising land prices and construction costs on pro-forma rents.

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Copyright © 2017 Colliers International.The information contained herein has been obtained from sources deemed reliable. While every reasonable effort has been made to ensure its accuracy, we cannot guarantee it. No responsibility is assumed for any inaccuracies. Readers are encouraged to consult their professional advisors prior to acting on any of the material contained in this report.

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OFFICE SERVICES | contactCynthia Foster President, National Office Services+1 212 716 3515 cynthia.foster@colliers.com

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Stephen Newbold National Director of Office Research | USA +1 202 534 3630 stephen.newbold@colliers.com

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> The Boston office market held firm in Q3 2017 with no rent growth and a 20-basis-point increase in vacancy to 10.8%. Average asking rates of $56.10 per square foot are the third highest among the 10 markets covered in the report, behind only Manhattan and San Francisco albeit by a significant delta. No other markets have rates of above $50 per square foot.

> There was only a modest shift in demand in Q3 2017. Net absorption was negative 160,550 square feet compared to 197,200 square feet in the prior quarter. Following an uptick in the first half of 2017, net absorption in the Financial District was negative 191,900 square feet in Q3 2017.

> Despite 68,670 square feet of negative absorption, Seaport continues to attract major tenant interest and accounted for two of the three largest leases signed in Q3 2017. Both took place at 121 Seaport Boulevard, where PTC took 250,000 square feet and Alexion Pharmaceuticals leased 150,000 square feet. There was one other lease signed of more than 100,000 square feet. Law firm Mintz Levin leased 205,000 square feet at One Financial Center in the Financial District, representing a 20% reduction in space occupied.

> The PTC lease is a further illustration of tenants relocating to central Boston both from suburban markets and further afield. PTC relocated 1,000 employees from Needham to Seaport. Four firms are known to have active requirements in the region of 100,000 square feet focused on the core submarkets: Rapid7, WeWork, Cengage and Draft Kings. With leases signed, or rumored to be in the works across multiple submarkets, WeWork has the potential to become one of the largest tenants in Boston.

> The Seattle office market continues to post strong performances, with positive absorption in Q3 2017 and a tight and stable vacancy rate. Earlier concerns of a supply-side risk are receding as new construction is mostly leasing up at a healthy rate.

> Overall market vacancy stands at 7.6%, virtually unchanged from the prior quarter. The smaller submarkets that abut the CBD have the lowest vacancy rates: Q3 2017 vacancy stands at 5.1% in Denny Regrade, 5.8% in Lake Union, which is the principal home of Amazon, and 4.7% in Pioneer Square/Waterfront. CBD vacancy is higher at 10.7% but the submarket posted more than 450,000 square feet of net absorption in Q3 2017.

> Average asking rates held steady in the third quarter at $38.75 per square foot. The highest rents are found in the CBD and Lake Union at a little over $41 per square foot. Class A asking rents in Lake Union have broken through $50 per square foot.

> The big news of the third quarter was Amazon’s pre-lease of the 726,800-square-foot Rainier Square tower at 411 Union Street in the Seattle CBD. Other notable leases signed in Q3 2017 were also mostly focused on tech firms including Sound Transit, WeWork and Indeed. Tableau and Snapchat took occupancy of their new offices in the third quarter.

> New construction is mostly leasing up at a healthy clip. There is 2.8 million square feet underway that is scheduled for completion by the end of 2018 and 72% is pre-leased. There are only two projects that are mostly vacant. Schnitzer West’s 764,000-square-foot Madison Center in the CBD was finished earlier this year and has 534,800 of space available. GLY Construction Inc. is building a 650,000-square-foot office property at 333 Dexter Avenue in Lake Union for completion in 2018. The project is less than 10% pre-leased.

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