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Q4 2012 | OFFICE

NORTH AMERICA

HIGHLIGHTS

Q4 2012 | OFFICE NORTH AMERICA HIGHLIGHTS MARKET INDICATORS Relative to prior period Unlocking 2013 Office
Q4 2012 | OFFICE NORTH AMERICA HIGHLIGHTS MARKET INDICATORS Relative to prior period Unlocking 2013 Office
Q4 2012 | OFFICE NORTH AMERICA HIGHLIGHTS MARKET INDICATORS Relative to prior period Unlocking 2013 Office
Q4 2012 | OFFICE NORTH AMERICA HIGHLIGHTS MARKET INDICATORS Relative to prior period Unlocking 2013 Office
Q4 2012 | OFFICE NORTH AMERICA HIGHLIGHTS MARKET INDICATORS Relative to prior period Unlocking 2013 Office
Q4 2012 | OFFICE NORTH AMERICA HIGHLIGHTS MARKET INDICATORS Relative to prior period Unlocking 2013 Office
Q4 2012 | OFFICE NORTH AMERICA HIGHLIGHTS MARKET INDICATORS Relative to prior period Unlocking 2013 Office

MARKET INDICATORS

Relative to prior period

Unlocking 2013 Office Property Performance

What will be the right combination in 2013?

K.C. CONWAY, MAI, CRE EMD | Market Analytics

KEY TAKEAWAYS

K.C. CONWAY, MAI, CRE EMD | Market Analytics KEY TAKEAWAYS   US US Canada Canada •
 

US

US

Canada

Canada

• The North American and U.S. office vacancy rates declined further during Q4 2012 to 14.09%

Q4

Q1

Q4

Q1

2012

2013*

2012

2013*

and 14.63%, respectively. This was the fourth consecutive quarter of improvement for the 6.4 billion square feet of inventory in the 85 North American office markets tracked by Colliers.

VACANCY

VACANCY
VACANCY
VACANCY
VACANCY

NET ABSORPTION

• The market uncertainty and volatility of 2H2012 inhibited neither office leasing or transaction activity. Q4 North American net absorption of 21.1 MSF was more than double Q3’s 10.4 MSF.

CONSTRUCTION

CONSTRUCTION 2012 total net absorption was 50.7 MSF (roughly the office inventory of Ft. Lauderdale), the
CONSTRUCTION 2012 total net absorption was 50.7 MSF (roughly the office inventory of Ft. Lauderdale), the
2012 total net absorption was 50.7 MSF (roughly the office inventory of Ft. Lauderdale), the

2012 total net absorption was 50.7 MSF (roughly the office inventory of Ft. Lauderdale), the best since the 2008–2009 financial crisis. CONSTRUCTION CONSTRUCTION

absorption was 50.7 MSF (roughly the office inventory of Ft. Lauderdale), the best since the 2008–2009

RENTAL RATE

RENTAL RATE
RENTAL RATE

*Projected

Construction is the change in Under Construction

NORTH AMERICAN OFFICE MARKET

Summary Statistics, Q4 2012

 

US

CAN

NA

VACANCY RATE

14.63% 6.80% 14.09%

Change From Q3 2012

-0.21% -0.26% -0.21%

ABSORPTION (MSF)

18.8

2.3

21.1

NEW CONSTRUCTION (MSF)

9.1

1.5

10.6

UNDER CONSTRUCTION (MSF)

39.5

11.3

50.8

ASKING RENTS PER SF

US

CAN

Downtown Class A

$41.22

$51.42

Change from Q3 2012

0.17%

1.67%

Suburban Class A

$26.21

$31.94

Change from Q3 2012

0.08%

0.16%

WWW.COLLIERS.COM

• Major office property transactions totaled $77.6 billion in 2012, and surged at year-end 2012.
• Major office property transactions totaled $77.6 billion in 2012, and surged at year-end 2012.
Q4’s $29.1 billion in office building sales surpassed all prior quarters in 2012, according to Real
Capital Analytics.
NORTH AMERICAN OFFICE VACANCY, INVENTORY AND ABSORPTION – Q4 2012
Absorption Per Market (SF)
q3 '12 - q4 '12
2,500,000
1,250,000
250,000
-250,000
-1,250,000
-2,500,000
Sq. Ft. By Region
2 billion
2.0000000
1
billion
1.0000000
2.0000000 200 mil.
Total_O Occupied SF -Vacant_O Sq. Ft. SF
Vacant_O Vacant Sq. SF Ft.

HIGHLIGHTS | Q4 2012 | OFFICE | NORTH AMERICA

KEY TAKEAWAYS (continued)

• Capital is migrating out of the risk curve for investment in office building assets in search of yield. This trend, reported by Colliers in previous 2012 reports, was corroborated by the recent Association of Foreign Investors in Real Estate report in which four of the top five markets for investment were in the U.S., including Houston for the first time.

• “ICEE” office markets are still hot. Intellectual Capital, Energy and Education (ICEE) markets continue to capture a disproportionate share of North American office absorption. During 2012, two-thirds of the 10 North American MSAs with the greatest absorption are characterized as ICEE markets. We see this trend continuing in 2013 as technology, energy and knowledge gateway centers remain the dominant generators of office-related employment.

• Medical Office has been a sleeper office sub-property type that saw a 30% growth in transaction activity in CY 2012 to $6.1 billion, or just shy of the 10% total $77.6 billion in CY 2012 office property sales. And, approximately half of the 71 MSF of office space under construction in the U.S. at the onset of 2013 is for medical-related use.

• Recovery in housing is an overlooked office demand driver that will gain additional traction in 2013.

IN THIS QUARTER’S REPORT, WE TAKE A LOOK AT THE COMBINATION TO UNLOCKING VALUE IN 2013:

TAKE A LOOK AT THE COMBINATION TO UNLOCKING VALUE IN 2013: RIGHT 14: In 2013 look

RIGHT 14: In 2013 look for North American vacancy to drop below 14%, fueled by another 50 MSF of absorption.

LEFT 80:total office transactions above $80 billion

RIGHT 10: CMBS office property delinquencies rate below 10%

LEFT ICEE: Office job growth in Tech/ Energy/Education MSAs outperforms FIRE MSAs for a third consecutive year

RIGHT MO: Medical Office is the emerging leader among office sub-property sectors

See page 7 for details

office sub-property sectors See page 7 for details  CANADIAN OFFICE ABSORPTION BY MARKET Q4 2012

CANADIAN OFFICE ABSORPTION BY MARKET Q4 2012

365.7 Montréal, QC 330.0 Calgary, AB 203.3 Toronto, ON 190.2 Regina, SK 138.9 Saskatoon, SK
365.7
Montréal, QC
330.0
Calgary, AB
203.3
Toronto, ON
190.2
Regina, SK
138.9
Saskatoon, SK
24.4
Waterloo Region, ON
13.3
Edmonton, AB
0.0
Winnipeg, MB
-0.5
Halifax, NS
-14.4
Victoria, BC
-130.9
Vancouver, BC
-183.2
Ottawa, ON
-300.0
-200.0
-100.0
0.0
100.0
200.0
300.0
400.0
Thousands

CANADIAN OFFICE UNDER CONSTRUCTION BY MARKET Q4 2012

Toronto, ON

     

2.78

Calgary, AB

1.66

Vancouver, BC

1.56

Ottawa, ON

0.36

Montréal, QC

0.30

Halifax, NS

0.19

Winnipeg, MB

0.13

Regina, SK

0.08

Waterloo Region, ON

0.07

Saskatoon, SK

0.05

Victoria, BC

0.00

Edmonton, AB

0.00

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Millions

Note: Q3 data reported for Winnipeg, MB

HIGHLIGHTS | Q4 2012 | OFFICE | NORTH AMERICA IN BRIEF: OFFICE OUTLOOK 2013 2012
HIGHLIGHTS | Q4 2012 | OFFICE | NORTH AMERICA IN BRIEF: OFFICE OUTLOOK 2013 2012

HIGHLIGHTS | Q4 2012 | OFFICE | NORTH AMERICA

IN BRIEF: OFFICE OUTLOOK 2013

2012 finished—and 2013 began—as Colliers observed in fall 2012: with progress on all fronts.

• North American Office Vacancy falls to just 14.09% at YE 2012.

• Net leasing activity best in five years: i) 21.1 MSF in Q4 2012; and ii) 50.7 MSF for CY 2012

• A 19% surge in office building sales surpasses 2004 transaction volume (3,000+ properties totaling approximately $78 billion during 2012)

Despite the harmful summer “UV (Uncertainty & Volatility) rays” during 1H2012, and lingering anxiety surrounding the U.S. fiscal debt crisis, ongoing Eurozone recession, the cost and logistics of implementing Obamacare, and anemic job growth (150,000/month) for two consecutive years, office real estate is persevering and returning to a state of balance. However, the recovery is broadening, both in the factors that have driven it over the past 12 months, as well as the markets that it’s reaching. No longer is the recovery confined to the CBDs of the “sexy six” core MSAs of New York, Boston, Chicago, Los Angeles, San Francisco and Seattle; it’s expanding to suburban submarkets and secondary MSAs. Real Capital Analytics’ Office Year In Review report noted a 31 percent increase in suburban office building sales during 2012, and a 40 percent increase in office building sales outside the six core MSAs. While this new interest is driven by a dearth of assets in the core MSAs and the search for yield in response to Federal Reserve monetary policy and cap rate compression, it has been office job growth in technology, energy and primary-education focused MSAs (what Colliers coined the Intellectual Capital, Energy and Education, or “ICEE” markets in 2011) that has defined which secondary markets were participating in this broadening recovery in the office property sector thus far.

In 2013, two other positive influences will impact this expansion: the housing recovery and growth in medical office demand. Both are broad-based across the U.S. and will have more of an effect on suburban office submarkets than CBDs. Why? First, professional services associated with a rise in new home construction and existing home sales activity will rebuild in proximity to this increasing housing activity in the suburbs. Second, our healthcare delivery model is shifting from one concentrated on expensive urban hospital campuses to less capital-intensive, suburban outpatient facilities.

The ICEE, housing, and medical office factors, along with the continuing search for yield by investors, add up to M.O.T.S (More Office To Secondaries) in 2013. As the diagram below depicts, rising absorption and modest new supply are driving vacancy down, and the requisite conditions to improve NOI are in place to absorb any interest rate risk in 2H2013.

U.S. OFFICE MARKET Q4 2010–Q4 2012 20.0 16.11 15.57 15.36 15.14 15.03 14.96 18.0 14.88
U.S. OFFICE MARKET Q4 2010–Q4 2012
20.0
16.11
15.57
15.36
15.14
15.03
14.96
18.0
14.88
14.83
14.63
16.0
16.0
14.0
14.0
12.0
12.0
10.0
10.0
8.0
8.0
6.0
6.0
4.0
4.0
2.0
2.0
-
-
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
2011
2012
Absorption MSF
Completions MSF
Vacancy %
Vacancy %

North American Downtown Markets:

Excluding renewals, of the leases signed this quarter, did most tenants:

Hold Steady 69.1% Expand 16.2% Contract 14.7%
Hold Steady
69.1%
Expand
16.2%
Contract
14.7%

North American Downtown Markets:

What was the trend in Free Rent (in months)

o ered by CBD landlords this quarter?

Same 80.9% Less 14.7% More 4.4%
Same
80.9%
Less
14.7%
More
4.4%

North American Downtown Markets:

What was the trend for tenant improvement allowances o ered by CBD landlords this quarter?

Hold Steady 91.2% Expand Contract 5.9% 2.9%
Hold Steady
91.2%
Expand
Contract
5.9%
2.9%

North American Suburban Markets:

Excluding renewals, of the leases signed this quarter in your CBD/downtown, did most tenants:

Expand Hold Steady 30.9% 60.3% Contract 8.8%
Expand
Hold Steady
30.9%
60.3%
Contract
8.8%

HIGHLIGHTS | Q4 2012 | OFFICE | NORTH AMERICA

HIGHLIGHTS | Q4 2012 | OFFICE | NORTH AMERICA BEHIND THE STATISTICS & BEYOND THE BASICS

BEHIND THE STATISTICS & BEYOND THE BASICS

Scope of Colliers Office Outlook Report: Colliers monitors office property conditions in 85 North American markets from Toronto to Tampa, totaling 6.4 billion square feet of inventory. Approximately 93 percent (6.0 billion square feet) of this inventory is located in the United States.

The largest 20 North American markets (those with at least 100 MSF of existing inventory) constitute approximately 60 percent of the 6.4 billion square feet of North American office space tracked by Colliers. All of the >90 million-square-foot markets are located in the U.S., except one: Toronto. With respect to 2012 net absorption, just 10 of the 85 markets accounted for 53 percent of the 50.7 MSF of net absorption, and all but one market (Calgary) are located in the U.S. Below are the ten absorption-leading MSAs for 2012—seven of which are ICEE markets.

ICEE MARKETS LEAD IN 2012 ABSORPTION

 
 

MSA

2012 ABSORPTION

1

Houston (ICEE)

4.50

MSF

2

Dallas (ICEE)

2.90

MSF

3

Atlanta (ICEE)

2.80

MSF

4

Detroit

2.75

MSF

5

Chicago

2.70

MSF

6

Calgary (ICEE)

2.5

MSF

7

Phoenix

2.4

MSF

8

Boston (ICEE)

2.2

MSF

9

Philadelphia (ICEE)

2.2

MSF

10

Seattle (ICEE)

2.2

MSF

Vacancy From a regional perspective, Canada has the lowest average vacancy rate at 6.8 percent; and in the U.S., the Northeast has the lowest vacancy rate just shy of 14 percent. The highest vacancy rate among North American regions is the Western U.S. at 15.27 percent. The South and Midwest have average regional vacancy rates of 14.81% and 14.71%, respectively. Housing has been slow in its recovery in both these regions, and the job growth has been more focused on manufacturing, transportation and distribution, favoring industrial real estate over office.

 

US

CA

NA

Vacancy Rate:

14.63%

6.80%

14.09%

Change from Q3 2012

-0.21%

-0.26%

-0.21%

Absorption The final tally on 2012 net office absorption was not in the cards in mid-2012, when it appeared that tenants and businesses were pulling back from leasing activity driving absorption down 6% over the prior six-month period (2H2011). However, despite the market’s anxiety over the November 2012 election and the Fiscal Cliff, 2012’s net office absorption had its best performance since the 2008–2009 financial crisis. Q4 net absorption was more than double that for any prior quarter during 2012 (21.1 MSF in Q4 compared to 10.0 MSF for the rest of the year).

Which markets outperformed and why? Examination of the top ten North American markets with respect to absorption in Q4 and YTD 2012 reveals the impact of ICEE employment drivers, commencement of a true housing recovery, and importance of having a nationally or regionally recognized medical center.

TOP MARKETS FOR ABSORPTION

 
 

MSA

Q4 2012

MSA

CY 2012

 

Detroit

   

4.50

MSF

1

(Auto + Housing)

1.66

MSF

Houston

(ICEE) + Medical Center

       

2.90

MSF

2

Phoenix

1.46

MSF

Dallas

(ICEE) + Medical Center

     

Atlanta

2.80

MSF

3

Chicago

1.13

MSF

(Housing Recovery)

(ICEE) + Medical Center

 

Montreal

   

2.75

MSF

4

(ICEE)

0.99

MSF

Detroit

Medical Center

5

Philadelphia

0.98

MSF

Chicago

2.70

MSF

(ICEE)

Medical Center

 

Houston

   

2.5

MSF

6

(ICEE)

0.93

MSF

Calgary

(ICEE)

 

Boston

 

Phoenix

 

7

(ICEE)

0.93

MSF

(Housing Recovery)

2.4

MSF

 

Dallas

   

2.2

MSF

8

(ICEE)

0.84

MSF

Boston

(ICEE) + Medical Center

       

2.2

MSF

9

Minneapolis

0.82

MSF

Philadelphia

(ICEE) + Medical Center

       

2.2

MSF

10

Sacramento

0.82

MSF

Seattle

(ICEE) + Medical Center

Looking at this list, several themes emerge:

• The overlapping seven MSAs: Seven of the top ten most active markets for leasing activity in Q4 were also among the ten most active MSAs for all of calendar 2012. Houston, Dallas, Detroit, Chicago, Phoenix, Boston, and Philadelphia are prominent in both categories.

• The predominance of ICEE: Seven of the top ten markets for net absorption in 2012 are MSAs with an ICEE employment profile (technology, energy and/or primary education).

• The increasing role of housing and medical office: However, only five of the top ten markets for Q4 leasing activity are ICEE MSAs. What explains the difference, and what explains the emergence of MSAs like Atlanta, Detroit and Phoenix? The answer is two-fold:

1) the real housing recovery is taking hold in even the most distressed housing markets, such as Atlanta, Detroit and Phoenix; and 2) high-profile medical centers are strongly impacting demand for medical office space: Eight of the leading MSAs for absorption in 2012 have nationally or regionally recognized medical centers.

Looking forward to 2013, the only brake on office leasing activity in key energy markets—Dallas, Denver, Houston, Oklahoma City, Philadelphia (impact of Bakken shale), and Calgary—will be the delayed delivery of new space under construction. Houston and Denver can’t complete new space fast enough to keep pace with demand. ICEE will also continue to be an important office space demand driver in markets like Atlanta and Detroit where auto technology is fueling demand for engineers, and the office space to house them. (In 2012, Porsche and General Motors both made material commitments to locating auto technology centers in Atlanta.) And, the housing recovery will benefit suburban office space demand as contractors and professional service providers (closing attorneys, architects, engineers, building inspectors, etc.) rebuild or expand their operations to service housing activity of approximately 1.0 million new units—after years of less than half that level of activity. Atlanta, Charlotte, Nashville, Phoenix, Tampa, and inland California markets will see the most benefit from this housing recovery in 2013. In aggregate, 2013 should surpass 2012’s 50 MSF of net absorption by conservative estimates of 15%–20%, or 57.5 to 60.0 MSF in total. Market forces will see 2H2013 disproportionately higher net leasing activity than 1H2013, as was the case in 2012.

Transaction Activity Transactions of major office property were also uninhibited by 2H2012 uncertainty. There were more than 3,000 transactions in 2012, totaling $77.6 billion, with a noticeable surge at year-end 2012: the $29.1 billion in Q4 office building sales surpassed all prior quarters in 2012, according to Real Capital Analytics. As in recent years, New York, San Francisco, Los Angeles, Washington D.C., and Seattle accounted for approximately 50 percent of the total dollar volume of office building sales during 2012. Houston and Denver (two key ICEE MSAs) now rank among the top markets for office building transaction volume.

The $77.6 billion in office transaction activity from 2012 is likely to be surpassed in 2013, given the amount of idle domestic and foreign capital searching for yield in tangible assets, such as commercial real estate. The

in tangible assets, such as commercial real estate. The HIGHLIGHTS | Q4 2012 | OFFICE |
in tangible assets, such as commercial real estate. The HIGHLIGHTS | Q4 2012 | OFFICE |

HIGHLIGHTS | Q4 2012 | OFFICE | NORTH AMERICA

Association of Foreign Investors in Real Estate’s annual 2013 Foreign Investment Survey ranked the U.S. as the top place overall to invest; four U.S. markets were among their top five picks, including Houston, which had never before made this report’s global ranking.

Construction Activity To assess the risk of overbuilding, new construction activity needs to be considered from three perspectives: 1) new supply as a percent of existing inventory; 2) geographic concentration; and 3) sub-property type concentration.

At the onset of 2013, approximately 78.5 MSF of new office supply is underway in the U.S. and Canada, according to Dodge Pipeline. That activity translates to a North American new supply to existing inventory ratio of 1.2%. Historically, only when this ratio passes 2.0% is it considered elevated and indicative of overbuilding risk. What’s more, the current supply-to-inventory ratio is actually much lower for most U.S. office markets due to geographic and sub-property type concentration.

With respect to sub-property type construction, 51% of the 78.5 MSF of total new supply is medical-office-related construction. Of the remaining 38.5 MSF, 17.55 MSF (45.7% of the non-medical office new supply) is concentrated in just five states. The following table delineates these geographic and sub-property type ratios:

Delineation

New Supply

Ratio (%)

(MSF)

North America

78.5

100.0

Canada

7.2

9.2

United States

71.3

91.8

Office Property

78.5

100.0

Medical Office

40.0

51.0

Non-Medical Office

38.5

49.0

U.S. Non-Medical Office

38.5

100.0

Top 5 States

17.5

45.7

Texas

6.7

17.4

California

4.9

12.8

Pennsylvania

2.5

6.4

New York

2.0

5.2

New Jersey

1.5

3.9

HIGHLIGHTS | Q4 2012 | OFFICE | NORTH AMERICA

ENGINEERING NEWS-RECORD’S CONSTRUCTION COST INDEX

 

YEAR

JAN

FEB

MAR

APR

MAY

JUN

JUL

AUG

SEP

OCT

NOV

DEC

 

AVG

2013

9437

9453

 

Note: Construction Costs never dropped post 2007 & are rising at a faster pace.

   

2012

9176

9198

9268

9273

9290

9291

9324

9351

9341

9376

9398

9412

 

9308

2011

8938

8998

2011 8938 8998 9011 9027 9035 9053 9080 9088 9116 9147 9173 9172 9070

9011

9027

9035

9053

9080

9088

9116

9147

9173

9172

2011 8938 8998 9011 9027 9035 9053 9080 9088 9116 9147 9173 9172 9070

9070

2010

8660

8672

8671

8677

8761

8055

8844

8837

8836

8921

8951

8952

 

8799

2009

8549

8533

8534

8528

8574

8578

8566

8564

8586

8596

8592

8641

 

8570

2008

8090

8094

8109

8112

8141

8185

8293

8362

8557

8623

8602

8551

 

8310

2007

7880

7880

7856

7865

7942

7939

7959

8007

8050

8045

8092

8089

 

7966

2006

7660

7689

7692

7695

7691

7700

7721

7722

7763

7883

7911

7888

 

7751

2005

7297

7298

7309

7355

7398

7415

7422

7479

7540

7563

7630

7647

 

7446

2004

6825

6862

6957

7017

7065

7109

7126

7188

7298

7314

7312

7308

 

7115

2003

6581

6640

6627

6635

6642

6694

6695

6733

6741

6771

6794

6782

 

6694

2002

6462

6462

6502

6480

6512

6532

6605

6592

6589

6579

6578

6563

 

6538

2001

6281

6272

6279

6286

6288

6318

6404

6389

6391

6397

6410

6390

 

6343

2000

6130

6160

6202

6201

6233

6238

6225

6233

6224

6259

6266

6283

 

6221

INDEX METHODOLOGY: 200 hours of common labor at the 20-city average of common labor rates, plus 25 cwt of standard structural steel shapes at the mill price prior to 1996 and the fabricated 20-city price from 1996, plus 1.128 tons of portland cement at the 20-city price, plus 1,088 board-ft of 2x4 lumber at the 20-city price.

The good news is that the U.S. ratio of new supply to inventory (excluding medical office construction) is less than a one-half of one percent—the lowest since 2003. And, only 21 MSF of new construction is underway outside of the five most active states, where energy and technology companies, such as Exxon Mobil and Shell Energy in Texas and Endo Pharmaceutical in Pennsylvania, account for 60 percent of activity.

However, rising construction costs are a concern that spans all commercial property types. It may surprise many to learn that construction costs never actually declined during the 2008–2009 financial crisis and the ensuing recession. As documented by the Engineering-News Record, Construction, costs have risen 17% since the end of 2007, and are up over 5.0 percent since February 2011. Investors and developers considering new construction investments should budget construction cost increases at double the CPI for 2013 and 2014, due to pressures on labor and materials.

PERCENTAGE 30+ DAYS DELINQUENT BY PROPERTY TYPE

12 10.34 10.16 10.13 10.04 9.99 10 9.80 9.68 9.69 9.71 9.71 9.57 9.52 9.37
12
10.34
10.16
10.13
10.04
9.99
10
9.80
9.68
9.69
9.71
9.71
9.57
9.52
9.37
8
Jan 2012
Mar 2012
May 2012
Jul 2012
Sep 2012
Nov 2012
Jan 2013

Source: Trepp – January 2013 CMBS Delinquency Report

CAPITAL MARKETS

What is better than improving office property type fundamentals? For those that purchased any of the 3,000 office properties that traded in 2012, the answer is availability of capital. Domestic and foreign sources are flush with capital ready to invest in tangible assets like real estate, that can offer 2.5 to 3.0 times the yield offered by the U.S. government’s 10-year Treasury bond. And, the CMBS debt markets are opening up again after four consecutive years of annual new issuance below $50 billion. Underwriting terms and pricing spreads have also compressed in favor of borrowers: Improving market conditions have enabled even properties with elevated vacancy rates to become financeable again due to the low DSCR hurdle provided by sub-5.0 percent interest rates and 90 percent LTVs. Declining CMBS delinquency rates have further aided new issuance interest, and have CMBS investors enthusiastic about 2013 new issuance increasing 50 percent over 2012’s $50 billion level to $75 billion. If you have tenants, and can meet a 1.4 DSCR using a 4.5% loan coupon, the capital markets are once again open to refinance your office building.

PERCENTAGE 30+ DAYS DELINQUENT BY PROPERTY TYPE

 
 

JAN ‘13

DEC ‘12

NOV ‘12

3 MON

6 MON

1 YEAR

Industrial

11.32

11.24

11.48

11.53

11.72

12.14

Lodging

11.77

11.73

12.24

11.24

13.06

12.09

Multifamily

13.43

13.98

14.21

14.26

15.69

15.39

Office

10.48

10.66

10.37

10.20

10.69

8.90

Retail

7.79

7.62

7.75

8.03

8.03

7.88

Source: Trepp – January 2013 CMBS Delinquency Report

THE COMBINATION TO UNLOCKING 2013 OFFICE PROPERTY PERFORMANCE RIGHT 14 – Vacancy: If the absorption

THE COMBINATION TO UNLOCKING 2013 OFFICE PROPERTY PERFORMANCE

THE COMBINATION TO UNLOCKING 2013 OFFICE PROPERTY PERFORMANCE RIGHT 14 – Vacancy: If the absorption momentum

RIGHT 14 – Vacancy:

If the absorption momentum from 2H2012 carries over into 2013 and Congress can maneuver its fiscal debt obstacle course in 1H2013, the North American office vacancy rate will decline below 14.0 percent for the first time since 2005. Office property investors are keenly focused on the need for improvement in NOI in office properties going forward to be positioned to absorb higher interest rate costs 3-5 years out. Cap rate compression has aided property values the past two years, but future value enhancement will have to be unlocked through NOI improvement (i.e., increasing occupancy and rental rates).

improvement (i.e., increasing occupancy and rental rates). LEFT 80 – Office Transaction Activity: With improving

LEFT 80 – Office Transaction Activity:

With improving office property fundamentals and cheap debt to leverage transactions to maximize yield, 2013 should see office transaction activity surpass the $80 billion mark by as much as 20%. The opportunity to unlock value here is in quality assets in secondary ICEE markets, such as Atlanta, Austin, Baltimore (now a post-Panamax ready port), Denver, Fort Worth, and Houston.

a post-Panamax ready port), Denver, Fort Worth, and Houston. RIGHT 10 – CMBS Office Delinquency: For

RIGHT 10 – CMBS Office Delinquency:

For the capital markets to contribute to the improving office property conditions, CMBS delinquency rates need to continue on their downward trajectory and remain south of 10 percent overall. As new issuance increases to a level north of $50 billion (increases the denominator in the delinquency calculation), and special servicers continue to resolve in excess of $1.0 billion in delinquent or defaulted loans (decreases the numerator portion of the delinquency ratio calculation), CMBS delinquency is likely to remain below 10 percent. This trend needs to translate over to the office property sector. With a January CMBS office delinquency rate of 10.48%, this ratio should decline further, and maybe even drop below 10%, as mature legacy office property loans are finally able to refinance. CMBS delinquency below 10 percent is critical to capital market confidence and unlocking more opportunity for office property leverage in 2013.

more opportunity for office property leverage in 2013. HIGHLIGHTS | Q4 2012 | OFFICE | NORTH
more opportunity for office property leverage in 2013. HIGHLIGHTS | Q4 2012 | OFFICE | NORTH

HIGHLIGHTS | Q4 2012 | OFFICE | NORTH AMERICA

in 2013. HIGHLIGHTS | Q4 2012 | OFFICE | NORTH AMERICA LEFT ICEE – Office Demand

LEFT ICEE – Office Demand Drivers:

The greatest opportunity for value enhancement and yield will remain in those secondary markets with an ICEE employment profile. Traditional FIRE (Finance Insurance and Real Estate) markets are going to face office absorption headwinds as financial institutions reduce operating costs and the amount of office space they occupy. Financial institutions will be returning office inventory to the market undermining recent improvement in vacancy. For this part of the combination, turn to ICEE vs. FIRE.

For this part of the combination, turn to ICEE vs. FIRE. RIGHT MO – Medical Office:

RIGHT MO – Medical Office:

The role of medical office space in the overall office vacancy picture warrants monitoring in 2013, particularly as the Obama administration’s healthcare legislation and mandated healthcare exchanges are implemented. Due to strong demand and an absence of much new supply since 2007, demand for medical office space has risen dramatically and is fueling a boom in new construction. The states with the most medical office construction activity are Texas, California, Maryland, New York, North Carolina and Ohio. Medical office offers an unlocked opportunity as contraction continues among traditional users of office space, such as financial services firms. Do your homework before jumping into this sub-property sector, though. Vacancy and rental rates vary widely, and this subsector lacks the same availability of data and transparency as the greater North American office market.

of data and transparency as the greater North American office market. Houston COLLIERS INTERNATIONAL | P.

Houston

HIGHLIGHTS | Q4 2012 | OFFICE | NORTH AMERICA

UNITED STATES | DOWNTOWN OFFICE | ALL INVENTORY

MARKET

EXISTING INVENTORY (SF) DEC 31, 2012

NEW SUPPLY

Q4 2012

(SF)

UNDER

CONSTRUCTION

(SF)

VACANCY RATE (%) SEP 30, 2012

VACANCY RATE (%) DEC 31, 2012

ABSORPTION

Q4 2012

(SF)

NORTHEAST

Baltimore, MD

28,840,782

234,874

-

14.06

14.02

9,076

Boston, MA

60,725,404

98,096

2,435,000

14.08

13.06

616,698

Hartford, CT

9,769,060

-

-

21.24

20.72

50,896

New York, NY – Downtown Manhattan

110,942,138

-

5,200,000

16.09

15.36

814,431

New York, NY – Midtown Manhattan

227,532,283

-

1,052,150

11.94

12.04

(226,585)

New York, NY – Midtown South Manhattan

165,368,697

-

850,000

7.96

8.03

(119,601)

Philadelphia, PA

43,133,883

654,000

-

11.17

10.76

178,159

Pittsburgh, PA

32,161,109

52,000

800,000

9.68

10.9

(129,087)

Stamford, CT

18,966,293

-

-

19.55

21.00

(274,722)

Washington, DC

140,909,953

-

1,903,911

10.44

10.48

(59,655)

White Plains, NY

7,741,025

-

-

15.19

15.78

(45,062)

Northeast Total

846,090,627

1,038,970

12,241,061

11.86

11.77

814,548

SOUTH

Atlanta, GA

49,933,614

433,822

450,000

17.04

16.94

47,727

Birmingham, AL*

4,338,335

-

-

22.00

19.80

95,482

Charleston, SC

2,068,469

-

52,000

7.70

7.24

9,369

Charlotte, NC

22,511,630

828,831

-

8.80

7.94

193,649

Columbia, SC

4,490,309

-

-

16.80

14.21

116,125

Dallas, TX

34,744,566

204,109

-

26.98

27.58

(208,846)

Ft. Lauderdale-Broward, FL

8,003,061

-

-

16.49

16.33

12,534

Ft. Worth, TX

10,400,974

-

154,801

13.05

12.14

94,885

Greenville, SC

3,143,679

-

235,000

12.24

15.68

(107,938)

Houston, TX

36,514,081

50,000

-

14.45

13.72

269,002

Jacksonville, FL

15,994,027

73,423

-

14.66

14.42

30,994

Little Rock, AR

6,422,699

-

-

11.30

12.48

(22,714)

Louisville, KY

43,630,770

300,000

-

11.80

11.89

228,712

Memphis, TN

6,108,640

-

26,000

14.77

14.66

6,481

Miami-Dade, FL

18,491,614

33,930

-

18.29

18.36

(12,903)

Nashville, TN

12,087,245

48,000

-

14.76

13.52

167,473

Orlando, FL

12,744,796

-

-

11.83

11.86

(3,379)

Raleigh/Durham/Chapel Hill, NC

13,657,917

-

-

6.49

6.08

55,964

Richmond, VA

17,066,905

-

112,000

10.76

10.70

10,479

Savannah, GA

825,240

72,072

-

15.21

14.18

68,561

Tampa Bay, FL

8,607,635

66,927

-

12.91

13.36

(39,132)

West Palm Beach/Palm Beach County, FL

10,130,113

-

-

17.79

16.69

110,753

South Total

341,916,319

2,111,114

1,029,801

15.10

14.88

1,123,278

*Absorption and vacancy figures for Birmingham account for direct space only

HIGHLIGHTS | Q4 2012 | OFFICE | NORTH AMERICA UNITED STATES | DOWNTOWN OFFICE |

HIGHLIGHTS | Q4 2012 | OFFICE | NORTH AMERICA

UNITED STATES | DOWNTOWN OFFICE | ALL INVENTORY

(continued)

MARKET

EXISTING INVENTORY (SF) DEC 31, 2012

NEW SUPPLY

Q4 2012

(SF)

UNDER

CONSTRUCTION

(SF)

DEC 31, 2012 NEW SUPPLY Q4 2012 (SF) UNDER CONSTRUCTION (SF) VACANCY RATE (%) SEP 30,

VACANCY RATE (%) SEP 30, 2012

VACANCY RATE (%) DEC 31, 2012

ABSORPTION

Q4 2012

(SF)

MIDWEST

Chicago, IL

159,986,353

297,763

-

13.45

13.23

347,362

Cincinnati, OH

18,047,286

-

-

18.12

18.09

5,408

Cleveland, OH

34,140,929

710,100

475,000

19.26

19.07

66,433

Columbus, OH

19,597,350

395,500

280,000

11.00

11.90

36,469

Detroit, MI

26,153,283

1,165,425

-

21.04

20.88

42,065

Grand Rapids, MI

5,461,588

-

-

23.24

22.34

49,026

Indianapolis, IN

23,453,317

-

18,000

13.71

13.34

94,650

Kansas City, MO

34,664,036

-

215,000

14.60

14.43

61,577

Milwaukee, WI

19,887,288

145,000

-

13.71

13.39

62,655

Minneapolis, MN

31,840,763

-

-

15.13

14.98

46,977

Omaha, NE

6,358,928

60,000

-

7.16

8.53

9,192

St. Louis, MO

27,493,907

-

-

16.52

16.66

(37,405)

St. Paul, MN

12,904,838

-

-

13.85

13.82

4,013

Midwest Total

419,989,866

2,773,788

988,000

14.98

14.86

788,422

WEST

Bakersfield, CA

3,020,093

-

-

8.86

7.62

44,571

Boise, ID

3,741,536

241,208

260,000

10.95

10.24

66,851

Denver, CO

34,251,235

39,656

112,000

12.43

12.26

70,574

Fresno, CA

3,284,713

-

-

11.40

11.66

(8,393)

Honolulu, HI

7,119,083

-

-

14.00

13.21

55,973

Las Vegas, NV

4,192,128

-

458,200

12.31

12.37

(2,488)

Los Angeles, CA

31,942,700

418,600

229,500

18.46

19.03

(178,200)

Oakland, CA

16,891,513

-

-

12.90

13.45

(92,321)

Phoenix, AZ

21,016,381

203,609

-

21.30

21.52

29,081

Portland, OR

33,287,613

100,083

-

9.77

9.89

(40,940)

Reno, NV

1,388,078

-

-

19.58

19.50

9,309

Sacramento, CA

18,949,701

130,000

-

9.80

9.59

39,662

San Diego, CA

10,149,972

-

-

20.14

19.84

30,448

San Francisco, CA

88,179,309

189,835

2,510,615

10.51

10.28

387,187

San Jose/Silicon Valley

7,601,845

318,000

-

23.69

24.73

(81,425)

Seattle/Puget Sound, WA

56,216,928

340,563

625,501

12.01

12.04

284,779

Stockton, CA

8,221,819

-

-

18.86

18.16

58,138

Walnut Creek/Pleasanton, CA

12,561,714

-

-

16.26

15.71

(4,731)

West Total

362,016,361

1,981,554

4,195,816

13.32

13.29

668,075

U.S. TOTAL

1,970,013,173

7,905,426

18,454,678

13.36

13.25

3,394,323

HIGHLIGHTS | Q4 2012 | OFFICE | NORTH AMERICA

UNITED STATES | DOWNTOWN OFFICE | CLASS A

MARKET

EXISTING INVENTORY (SF) DEC 31, 2012

AVG ANNUAL QUOTED RENT (USD PSF) DEC 31, 2012

QUARTERLY

CHANGE

IN RENT

(%)

ANNUAL

CHANGE

IN RENT

(%)

VACANCY RATE (%) SEP 30, 2012

VACANCY RATE (%) DEC 31, 2012

ABSORPTION

Q4 2012

(SF)

NORTHEAST

Baltimore, MD

13,228,621

14.93

0.7

5.9

14.93

14.92

1,726

Boston, MA

41,333,537

13.92

1.5

1.7

13.92

13.07

349,709

Hartford, CT

6,660,379

22.39

-1.0

-0.3

22.39

21.47

60,970

New York, NY – Downtown Manhattan

77,672,777

18.75

-0.1

-2.2

18.75

17.54

940,170

New York, NY – Midtown Manhattan

192,290,701

12.60

-1.2

0.7

12.60

12.76

(297,418)

New York, NY – Midtown South Manhattan

32,865,338

6.79

0.1

11.7

6.79

8.33

(504,207)

Philadelphia, PA

32,656,957

10.59

-0.5

-

10.59

10.52

19,612

Pittsburgh, PA

18,279,017

7.64

2.9

4.1

7.64

7.13

29,859

Stamford, CT

13,299,364

21.77

-1.9

-6.4

21.77

23.01

(164,957)

Washington, DC

85,704,698

11.90

0.3

2.1

11.90

11.92

(20,351)

White Plains, NY

4,885,999

17.00

-2.0

-4.3

17.00

18.10

(53,855)

Northeast Total

518,877,388

13.30

-0.2

1.2

13.30

13.22

361,258

SOUTH

Atlanta, GA

30,000,462

18.87

0.1

-1.3

18.87

18.53

101,522

Birmingham, AL*

3,322,353

11.56

-

1.0

11.56

11.34

7,962

Charleston, SC

1,043,494

3.33

1.2

10.1

3.33

2.55

8,134

Charlotte, NC

16,040,594

10.40

1.9

1.4

10.40

9.11

208,132

Columbia, SC

1,926,914

15.02

3.9

4.1

15.02

10.13

94,216

Dallas, TX

22,693,924

23.68

0.9

2.3

23.68

24.69

(230,826)

Ft. Lauderdale-Broward, FL

4,454,238

21.30

-0.4

-0.5

21.30

21.27

1,229

Ft. Worth, TX

5,850,052

11.69

0.9

0.9

11.69

10.54

67,382

Greenville, SC

1,871,715

8.83

6.1

-3.5

8.83

15.32

(121,511)

Houston, TX

26,119,764

10.69

0.4

5.2

10.69

9.75

244,855

Jacksonville, FL

6,830,482

15.40

0.3

2.0

15.40

14.97

29,314

Little Rock, AR

2,636,353

9.72

0.2

0.6

9.72

11.83

(3,212)

Louisville, KY

10,560,672

13.05

0.4

-4.6

13.05

14.57

100,131

Memphis, TN

1,966,542

18.26

-0.1

0.3

18.26

18.63

(7,338)

Miami-Dade, FL

9,758,448

21.50

-0.9

-3.2

21.50

21.31

18,821

Nashville, TN

3,953,423

20.50

-1.5

-6.7

20.50

18.37

84,077

Orlando, FL

5,784,868

16.57

-1.2

-2.1

16.57

15.93

37,028

Raleigh/Durham/Chapel Hill, NC

5,633,684

8.74

0.4

-3.1

8.74

8.33

22,893

Richmond, VA

5,895,522

7.46

0.1

4.6

7.46

7.37

4,979

Savannah, GA

642,460

13.02

7.5

7.2

13.02

7.65

97,201

Tampa Bay, FL

4,791,174

13.98

-0.5

2.0

13.98

15.22

(59,515)

West Palm Beach/Palm Beach County, FL

3,337,557

22.51

-0.3

3.2

22.51

20.69

60,785

South Total

175,114,695

15.62

0.7

1.0

15.62

15.40

766,259

*Absorption and vacancy figures for Birmingham account for direct space only

HIGHLIGHTS | Q4 2012 | OFFICE | NORTH AMERICA UNITED STATES | DOWNTOWN OFFICE |

HIGHLIGHTS | Q4 2012 | OFFICE | NORTH AMERICA

UNITED STATES | DOWNTOWN OFFICE | CLASS A

(continued)

MARKET

EXISTING INVENTORY (SF) DEC 31, 2012

AVG ANNUAL QUOTED RENT (USD PSF) DEC 31, 2012

QUARTERLY

CHANGE

IN RENT

(%)

ANNUAL

CHANGE

IN RENT

(%)

2012 QUARTERLY CHANGE IN RENT (%) ANNUAL CHANGE IN RENT (%) VACANCY RATE (%) SEP 30,

VACANCY RATE (%) SEP 30, 2012

VACANCY RATE (%) DEC 31, 2012

ABSORPTION

Q4 2012

(SF)

MIDWEST

Chicago, IL

60,846,877

37.36

0.3

0.7

14.52

14.05

284,974

Cincinnati, OH

8,815,068

21.96

-

-6.0

19.11