United States Investment Outlook

Transcription

Investment Outlook
United States | Q1 2016
WHAT TO
KNOW
JLL | United States | Investment Outlook | Q1 2016
2
WHAT YOU
WILL FIND
The effects of recent capital markets volatility on transactions is being
felt in early 2016, and the sheer bumpiness of this volatility is further
reflected in shifts throughout the quarter itself across global financial
WHERE
TO FIND IT
Top 7 investment
themes
11
Office
12
13
18
Overview
Key investment themes
Notable transactions
19 Industrial
20
21
25
Overview
26 Multifamily
27
28
32
Overview
33 Retail
34
35
39
Overview
40 Lodging
41
42
45
Overview
46 Net Lease
47
48
51
Overview
atypical downward S&P trending with crude oil pricing and a broad lack
THE EFFECTS
4
and real estate capital markets. What started with elevated VIX levels,
of consensus around Federal Reserve policy has since shifted into VIX
index declines by less than half the quarter’s peak. Regardless of what
some believe to be newfound, near-term stability, current pricing levels,
cycle longevity concerns and a heightened sensitivity to risk have
brought volatility into the real estate capital markets, driving an 11.2
percent decline in first-quarter volumes with early cautionary sentiment
expected to impact second-quarter volumes. However, strong property
fundamentals, a robust and historic level of active capital and alleviated
investor angst is expected to drive flat to moderate declines in activity
at year-end. Despite volume declines, pricing dynamics broadly remain
resilient, with spread levels healthy and cap rates compressing 31
basis points on average over the last 12 months across sectors. With
the latter stages of the cycle, the risk of macro or sector pressures
impacting markets naturally increases.
THIS YEAR we are monitoring markets closely with
a keen eye on a few factors:
• Impact of new regulations, referendums, elections
and the Fed
• Shifts to currently controlled financing standards
• Value-add underwriting
• Foreign investment levels
• Weak points in property markets, notably in
multifamily construction
3
TOP
1.
INVESTMENT THEMES
After a bumpy January and February spur heightened caution in markets, signs of stability emerge
late in Q1
2016 started off with uncertainty in the equity markets due to fears of a
global economic slowdown. This came amid a heightened focus on the
slowing Chinese economy and plunging oil prices. These market jitters
were felt throughout January, averaging 24 on the CBOE Volatility Index
(VIX) and reaching a peak of 29, its highest level since September 2015.
While January might have been the most volatile month, February also had
instances of heightened volatility, as when the S&P 500 sank to 1,829—its
lowest point since April 2014. Since January’s lows and February’s bottom,
however, the market has rebounded. From its lowest point, the S&P has
rebounded 14.3 percent and is now up 2.6 percent on the year. With this,
the VIX index declined to as low as 13 in early April, less than half of the
quarter’s peak and the lowest level on the indicator since August 2015.
Oil pricing has been a key factor in the decline and more recent rebound of
the equity markets. The commodity and S&P 500 were correlated
throughout the first-quarter as investors closely monitored OPEC’s
willingness to negotiate an agreement to curtail oil production to a
manageable amount. As a result, the markets rode the roller coaster of
volatile crude oil pricing throughout the quarter, having declined nearly
12.0 percent in the month of January alone and reached a 13-year low
below $27. While still at compressed levels, oil pricing has been trending
up in March and early April with four-week, rolling pricing growth
averaging 16.1 percent as of April 12. As the market has been gaining
ground, the atypically strong correlation between oil and markets
diverged for a short period of time but has since converged again. In the
near term, a continued focus on oil pricing is warranted, providing an
atypical yet relevant indictor for sentiment and the stability of the
markets. The decoupling of the two will be reliant on increased certainty
from OPEC on near-term production.
Volatility in the public markets drops after a bumpy six months
Volatility Index
S&P 500
Volatility Index
35
China slowdown;
RMB devaluation
Fear over first Fed rate
hike; Falling
commodity prices
30
25
2,500
China & Global
uncertainty; Oil
falls below $27
2,300
2,100
1,900
China slowdown; Oil
falls below $40; Fed
rate hike angst
Falling commodity
prices;
Currency volatility
1,700
1,500
Greece debt
crisis
20
1,300
1,100
900
15
700
Fed rate hike
500
Apr16
Mar16
Feb16
Jan16
Dec15
Nov15
Oct15
Sep15
Aug15
Jul15
Jun15
May15
Apr15
Mar15
Feb15
10
Jan15
S&P 500
40
Source: JLL Research, CBOE, Bloomberg (data as of April 6, 2016)
Key
dates
to
watch
6/2
OPEC Meeting,
Vienna
FOMC
meeting
6/16–17
6/23
“Brexit”
vote
11/8
U.S. presidential
election
FOMC
meeting
7/28–29
FOMC
meeting
9/16–17
FOMC
meeting
10/27–28
12/24
CMBS regulation
goes into effect
FOMC
meeting
12/15–16
4
All eyes on OPEC: Concerns about oil and global growth is being reflected in atypical correlations to equity markets
2,150
Strong correlation in 2016
60
2,070
42
55
2,100
50
40
2,000
35
1,950
S&P 500
45
38
Crude oil price
S&P 500
2,050
40
2,020
36
1,970
Recent
divergence
1,920
Correlation
back on
30
S&P 500
Crude Oil
20
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
Jul-15
Aug-15
Sep-15
Oct-15
Nov-15
Dec-15
Jan-16
Feb-16
Mar-16
Apr-16
1,850
25
1,870
32
30
28
1,820
26
Jan-16
Jan-16
Jan-16
Jan-16
Feb-16
Feb-16
Feb-16
Feb-16
Mar-16
Mar-16
Mar-16
Mar-16
Apr-16
Apr-16
1,900
34
Crude oil price
Historically not correlated
Source: JLL Research, CBOE, Bloomberg
2.
CMBS pricing follows the wave of market volatility with recent signs of needed stability
CMBS issuance takes a hit with market volatility
Equity market volatility causes gradual increase in CMBS Spreads
Volatility Index
$250.0
$200.0
$150.0
165 170 170 165
40
35
127.5 130
114.5120
30
25
90 90 90.5
140
99
20
$100.0
15
10
$50.0
5
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016 YTD
Source: JLL Research, Bloomberg, Commercial Mortgage Alert (through March 31, 2015)
Mar-15
Apr-15
May-15
Jun-15
Jul-15
Aug-15
Sep-15
Oct-15
Nov-15
Dec-15
Jan-16
Feb-16
Mar-16
Apr-16
0
$0.0
180
160
140
120
100
80
60
40
20
0
Monthly Peak AAA Spreads to Swaps
(bps)
issued deal or designate a B-piece buyer to take on that risk. This goes
into effect in December of this year. The direct impact of risk retention is
still unknown, but the overwhelming consensus among the investor
community indicates that CMBS pricing will be negatively impacted with
spreads likely to widen. Given recent volatility in the CMBS space,
competing lenders such as life companies, banks and, more recently,
debt funds are filling the gap with debt funds especially, popular in
secondary and tertiary markets. Life company lenders also recently
committed $63.4 billion to commercial mortgages at the end of 2015, the
highest in 11 years. Relative to levels earlier in the quarter, however,
CMBS spreads have since tightened with declining market volatility,
exhibiting needed stabilization in pricing in the sector.
CMBS issuance (billions of $US)
During the first-quarter, financial market volatility caused CMBS new
issuance to briefly halt. CMBS new issuance dropped to $19.0 billion
versus $27.0 billion this time last year, a 29.6 percent decline. With this
decline, spreads to swaps for AAA CMBS widened on a weekly basis,
reaching levels as high as 170 basis points versus 90 basis points during
the same period last year. The unreliability of pricing in the market
impacted deal closings, leading CMBS to fall out of favor on recent
acquisitions and refinancings. Full-year new issuance estimates have
since been significantly reduced to approximately $60.0 billion, a nearly
40.0 percent year-over-year decline. Issuance declines will be further
impacted by the modification to Dodd-Frank risk retention, which
requires CMBS issuers to retain a 5.0 percent portion of every new
Source: JLL Research, Commercial Mortgage Alert (data as of April 1, 2016)
5
3.
Capital deployment pressures heighten with increased caution, decline in deal flow and
continued discipline
to the expanded global buyer pool, increased caution, decreased deal
flow early in the year and continued discipline in markets.
Following three elevated years, fundraising slowing in 2016
Record levels of global dry powder in the markets
Private equity funds have been most successful in early 2016 in
deploying this capital, having accounted for 26.1 percent of investment
sales activity in the first-quarter—thanks to large, noteworthy acquisitions
by Blackstone and Starwood Capital, who collectively drove 68.7 percent
of all equity fund acquisitions. With minimal funds raised and the growing,
historic amount of capital sitting on the sidelines, it is becoming more
evident that investors are struggling to source desirable deals at target
return levels. As the cycle proceeds, the continued discipline of this
capital will be a key leading indicator for future risks of distress and
liquidity across markets.
$80.0
$140.0
$70.0
$120.0
Source: JLL Research, Preqin
(Data includes North American closed funds as of April 12, 2016)
2015
2014
2013
2012
$0.0
2005
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016 YTD
$0.0
$20.0
2011
$10.0
$40.0
2010
$20.0
$60.0
2009
$30.0
$80.0
2008
$40.0
North America
$100.0
2007
$50.0
2006
$60.0
Rest of the world
Source: JLL Research, Preqin
(Global data is an aggregate of historic closed funds as of April 1, 2016)
20162016…
YTD
Dry powder (billions of $US)
Capital raised (in billions $US)
So far in 2016, closed-end real estate funds have not raised capital equal
to that of the historic year in 2015. Fundraising for real estate started the
year with $12.7 billion through the first-quarter of 2016, a decline of 27.0
percent from this time last year. This comes following three years of
elevated fundraising which averaged $68.5 billion annually; as a point of
reference, this is $5.1 billion more than the average raised between 2005
and 2007. Over 50.0 percent ($6.4 billion) of the $12.7 billion has been
raised for value-add deals and is the fastest-growing segment, as it is 9.6
percent higher than the $4.5 billion raised last quarter. As a result of
fewer but larger acquisitions, global dry powder hit record highs once
again both in North America and elsewhere, with $133.0 and $104.0
billion, respectively, at the close of the first-quarter. With pressures of
placing capital, large investors are struggling to deploy raised funds due
Resurgence of private equity
60.0%
Institutional capital participation
60.0%
2015
2016 YTD
Since 2004
50.0%
40.0%
50.0%
40.0%
30.0%
30.0%
20.0%
20.0%
10.0%
10.0%
0.0%
0.0%
Industrial Multifamily
Office
Retail
Hotels
Private equity / investment fund participation
Industrial Multifamily
Office
Retail
Hotels
Source: JLL Research, Real Capital Analytics (Transactions larger than $5.0m; Excludes hotels)
6
4.
Slow start to 2016 in debt and equity markets parallels cautious investor sentiment
billion portfolio volumes with an acceleration to $163.7 billion last year—
the highest level since the historic high set in 2007—relative portfolio
volumes continue to rise. If looking at portfolios as a percentage of
overall activity, first-quarter activity exceeded the 34.5 percent seen at
year-end, reaching 35.5 percent of overall activity. While declining levels
of portfolios in the industrial and hotels sectors are paralleling overall
sector investment sale losses, peak expansionary portfolio levels in the
multifamily and office sectors led them to collectively drive over threefourths of portfolio activity in the first-quarter. Both sectors experienced
outsized portfolio levels relative to overall sector deal flow, representing
39.9 and 36.9 percent of overall activity, respectively.
Despite the slow start in the real estate capital markets, U.S. property
markets remain strong, deliveries controlled and active capital levels
robust, supporting stabilizing and calming investor sentiment as markets
look to find a floor. Moving forward in 2016, cautious first-quarter
sentiment is expected to impact second-quarter activity as well with an
Multifamily
Retail
Industrial
Hotels
Office
Forecast
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
20162016…
YTD
$600.0
$500.0
$400.0
$300.0
$200.0
$100.0
$0.0
Source: JLL Research, Real Capital Analytics (Transactions larger than $5.0m;
Includes portfolio, entity-level transactions)
Excluding multifamily, slow start felt across sectors
$40.0
80.0%
$30.0
60.0%
$20.0
40.0%
$10.0
8.6%
20.0%
1.0%
0.0%
$0.0
($10.0)
($20.0)
-52.5%
($30.0)
($40.0)
-25.8%
Q1 2013
Q1 2014
Q1 2015
-62.9%
Q1 2016
Year-to-date change (%)
-20.0%
-40.0%
-60.0%
-80.0%
Year-to-date change, Q1 2016 (%)
The continued expansion of portfolio transaction volumes is playing a key
role in those sectors growing. After three consecutive years of +$100.0
Heightened sensitivity to risk spurs early slowdown in 2016
Total investment sale
volumes (billions of $US)
• What is declining? Compared to the first-quarter of 2015, the hotels
(down 62.9 percent), industrial (down 52.5 percent) and retail (down
25.8 percent) sectors have all experienced notable declines early in
the year. The industrial sector, specifically, fell to its least active
quarter in nearly three years.
• What is growing? The multifamily sector (up 8.6 percent) reached its
second most active quarter of all time, with $35.4 billion of activity,
positioning the sector to see yet another record year of activity
following the same in both 2014 and 2015.
• What about office? Office-sector deal closings in the first-quarter
remained modestly positive, up 1.0 percent to $35.6 billion of activity.
anticipated uptick in the latter half of the year, a function of a strong and
expanding pipeline in the multifamily, office and increasingly retail
sectors. With this, 2016 is looking to be a transitional and stable year
with the U.S. forecasted to see activity flat at year-end.
Q1 investment sale volumes (billions of $US)
As the debt and equity capital markets have worked to find a floor,
increased cautionary investor sentiment early in 2016 over asset pricing,
instability in the debt markets, cycle longevity and a resulting heightened
near-term sensitivity to risk impacted first-quarter investment sales,
having declined year-over-year by 11.2 percent to $96.9 billion.
Investment sale indicators presented a mixed picture at the close of the
first-quarter:
Source: JLL Research, Real Capital Analytics (Transactions larger than $5.0m;
Includes portfolio, entity-level transactions)
Sector portfolio
transactions
(as a % of sector total)
Multifamily and office sectors leading portfolio volumes to rise
60.0%
40.0%
Rising
Stable
39.9%
36.9%
Declining
34.1%
24.2%
20.3%
20.0%
0.0%
Multifamily
Source: JLL Research,
Real Capital Analytics
2009
(Transactions larger than $5.0m)
2010
Office
2011
2012
Retail
2013
2014
Industrial
2015
Hotels
2016 YTD
7
Meeting the gap: REIT performance pressures benefitting dry powder in markets
5.7%
7.6%
15.1%
14.5%
13.6%
30.7%
14.4%
17.6%
21.0%
20.9%
20.3%
6.0%
20.5%
21.6%
21.3%
25.3%
81.3%
31.6%
57.8%
47.1%
38.0%
34.5%
Overall
10.7%
Industrial
Retail
15.2%
Office
As REITs have sold nearly four times as much product as they have
acquired, public and private groups alike are taking advantage of the
current gap between public and private markets. While REITs are
leveraging currently liquid markets to raise capital to buy back shares,
reduce debt and rightsize portfolios—to name a few, private equity and
investment funds have acquired 38.0 percent of REIT-disposed product
over the last five quarters, meeting pressures to place capital amid
record levels of dry powder on the sideline. Acquisitions had the highest
concentrations in the hotels and multifamily sectors. This latter-cycle
shifting of product is not over. With REIT returns down 82.0 percent
across property types in 2015 and 85.0 percent in 2016, respectively,
from the recent 2014 peak and a robust supply of capital in competitive
markets, REITs will continue to look to new deal structures, asset
dispositions and other opportunities to improve performance.
4.2%
Multifamily
• In the multifamily sector: Equity Residential closed on its $5.4 billion,
72-property portfolio disposition to Starwood Capital, with notable
single-asset sales by both Equity and AvalonBay;
• In the office sector: Blackstone closed on its $4.8 billion acquisition of
BioMed Realty Trust, and Brandywine Realty Trust exited a 58property, 3.9 million-square-foot suburban office portfolio to Och-Ziff
for $398.1 million, as well as Cira Square to South Korea–based Korea
Investment Management for an additional $354.0 million; and
• In the retail sector: DRA closed on its $2.3 billion acquisition of Inland
Real Estate Corp, and Macerich completed the closing of its all-in $2.3
billion, eight-property partial interest dispositions to Singapore-based
GIC and Heitman.
REIT disposition efforts benefitting dry powder in markets
Hotels
With market volatility negatively impacting REIT performance throughout
2015, REIT acquisition participation declined to 9.2 percent in the firstquarter, down from 15.2 percent in 2015. With this, REITs are acquiring
almost as little relative deal flow as they had in 2009, with a muted and
declining impact felt across all sectors, excluding hotels. However, while
less active on acquisitions, REITs have ramped up liquidity events to
raise capital, driving dispositions to rise 47.9 percent year-over-year and
reaching $23.7 billion—the highest level of such activity since 2007.
Nearly 75.0 percent of these dispositions reflect public-to-private and
portfolio transactions, the highest level again since 2007. Year-to-date,
the multifamily and office sectors have experienced the highest
concentration of REIT dispositions, accounting for more than threefourths of such activity. However, REIT pressure is being felt across
nearly all sectors:
Acquirers of REIT product, 2015 – Q1 2016
5.
Other
Public
Private
Institutional investors / SWFs
Private equity / Investment funds
Source: JLL Research, Real Capital Analytics
(Transactions larger than $5.0m; Excludes hotels)
8
6.
Cross-border down but far from diminished
With the decline in U.S. activity in early 2016—notably in segments with
high foreign participation last year such as primary office markets,
national industrial portfolios and Trophy hotels—cross-border
acquisitions were down in the first-quarter. $7.8 billion of foreign
transactions in the first-quarter puts the United States at a comparable
base to that seen in 2013 and 2014. Activity further points to a
normalization of activity across various key indicators relative to 2015
deal flow:
• The office sector reemerged as the most active sector, capturing
64.2 percent of total inbound capital following a year of industrialdriven volumes;
• Capital is selectively transacting in the retail and multifamily sectors,
as well as in secondary markets. Net leased assets remain the
gateway sector to secondary markets for most groups, with
Philadelphia seeing the two largest transactions of foreign-acquired,
net lease office transactions, both of which were over $100.0 million;
• The prevalence of portfolios shifted back from the majority to minority,
accounting for one-third of total deal flow—the longer-term norm for
this activity as well;
• Europeans emerged as the dominant driver of activity, increasing
participation from 23.9 to 29.0 percent of first-quarter deal flow, as
neighboring Americas nations and Asia both saw relative participation
Offshore investment sale volumes (billions of $US)
Multifamily
Hotels
Industrial
Office
Retail
$70.0
$60.0
Not all has reverted from 2015 activity: Partial interests continue to occur
at structurally higher levels, with relative activity levels increasing over
full-year 2015 in four of the five sectors. As a result, 27.3 percent of
foreign investments this year have been via partial interests relative to
the 14.0 percent average in the 2005-2007 period. With this, questions
remain unanswered and transparency low about the true impact of
changes in FIRPTA regulation on the prevalence of these transactions.
While strategic risks are present at the moment to ineligible sovereign
wealth funds and insurance companies, these transactions are expected
to remain a structural norm in the U.S. in 2016 and beyond.
The reversion to the norm is not expected to necessarily hold.
Transactional data will remain volatile as groups across global regions
evolve strategies to identify opportunities, whether that entails varied deal
structures, a deeper exploration into more niche subsectors or a
disciplined look at secondary markets. The pace of cross-border
transactions will increase throughout the year, with the buyer segment
increasingly an active yet more selective group.
Where is the capital focused? First quarter sees a shift from
industrial back to office product
Cross-border investment normalizing in 2016
$80.0
levels decline. This was led by German capital, which accounted for
14.1 percent of first-quarter acquisitions, driven almost entirely by
primary market office acquisitions.
64.2%
$71.7
Office
39.4%
Multifamily
$50.0
$40.7
Retail
$40.0
$33.4
$29.2 $28.3
$23.8
$30.0
$22.3
$19.1
$20.0
Hotels
$17.7
$9.2
17.5%
12.0%
13.9%
2016 YTD
7.6%
9.4%
17.6%
2015
10-year average
5.3%
15.5%
20.7%
5.4%
$13.0
$10.0
27.0%
$8.3
$7.8
$3.5
Industrial
36.1%
8.4%
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0%
Source: JLL Research, Real Capital Analytics (Transactions larger than $5.0m)
2016 YTD
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
$0.0
Inbound investment by sector
(as a percentage of overall inbound)
9
Fear factor remains, despite market rebound and lower volatility
Fear Barometer reflecting concern of a market sell-off
60
Fear Barometer
Volatility Index
50
40
30
20
Apr-16
Mar-16
Feb-16
Jan-16
Dec-15
Nov-15
Oct-15
Sep-15
Aug-15
Jul-15
Jun-15
May-15
Apr-15
10
Feb-15
Mar-15
Despite currently low volatility, recent unprecedented swings are
harboring fear among investors. While the recent rebound could be
attributed partly to negotiations for oil production to remain at current
levels, lack of noise out of China and continued strong U.S. employment
news, the underlying fear among investors remains. This is rooted for
some in a concern that markets could drop at any moment with catalytic
news related to China, oil, European political tension or the unknown.
This sentiment was reiterated by recent comments from the Fed, which
echoed a sense of caution with slower-than-expected global growth and
continued global economic and financial risk. The Credit Suisse Fear
Barometer, which measures investors’ appetite for down-side risk
protection over the next three months, hit its highest point since its
inception in 1994. This is a key indication—further reiterated in other
indices such as Citibank’s Economic Surprise Index—that investors are
expecting far worse than what economic statistics are showing, a factor
in recent volatility in CMBS pricing and the heightened sensitivity to
pricing dynamics.
Jan-15
7.
Source: JLL Research, Credit Suisse, CBOE, Bloomberg (data as of April 12, 2016)
10
Office
11
OFFICE
Limited opportunities and high barriers to entry in primary markets
benefitting expanding secondary market activity
U.S. Office property market
U.S. Office investment
-84
1.4%
$35.6
1.0%
12-month change in total vacancy (bp)
12-month net absorption (as a % of inventory)
Investment sales (YTD, billions of $US)
YTD investment sale growth (%)
1.7%
8.7%
4.5%
-41
12-month completions (as a % of inventory)
12-month rent growth (p.s.f., %)
Average cap rate (%)
12-month change in cap rate (bp)
Compressed vacancy pushes rental rates. Supply constraints persist
across the country as demand for quality and location remain high on the
list of must-haves for occupiers. In CBDs across the U.S., 11 markets are
recording vacancy rates below 10.0 percent with an average vacancy in
CBDs of 12.1 percent. The suburbs are recording an average vacancy of
16.3 percent.
Rents on the rise as available large blocks diminish. In Q1, new
developments was partially responsible for the 3.2 percent increase in
rents across the U.S. In particular in the Class A space, large block
supply is depleting with rents rising in tandem by 5.5 percent over the
past 12 months.
New supply outpaces occupancy growth. Development volume
increased in the first-quarter by 9.7 million square feet, a 31.8 percent
increase quarter-over-quarter. This marks the highest level of
development thus far in the cycle.
First-quarter pullback in investment volume after five years of
growth. Modest growth of 1.0 percent year-over-year recorded $35.4
billion of capital markets activity. Despite the softening, $35.4 billion still
makes it the second most active quarter of the past five years. While
primary market activity is down quarter-over-quarter, secondary markets
reach peak levels relative to primary.
Q1
Q2
Q3
Yield compression continues, though divergence appears in
secondary markets. Nationally cap rates have compressed 30 basis
points over the past 12 months from 4.8 to 4.5 percent. All primary
markets have recorded compression, while secondary markets are
bifurcating. One cluster of select leading secondary markets are slowing
in the cycle, while the other cluster of emerging secondary markets is
driving compression nationally with over 60 basis points of downward
movement in the past 12 months.
Foreign activity declines in the first-quarter, while European groups
overtake Asian as most active source. Foreign activity accounted for
12.1 percent of total volume in the first-quarter, a decrease quarter-overquarter and below the cycle norm. In the first-quarter, Germany
accounted for 37.0 percent of total foreign activity, shifting from Chinese
and Canadian groups, who dominated in 2015.
Primary and secondary cap rates continue to decline
10.0%
Q4
10-year Treasury (%)
Primary cap rates (%)
Secondary cap rates (%)
5.3%
5.0%
4.2%
1.8%
0.0%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016 YTD
$250.0
$200.0
$150.0
$100.0
$50.0
$0.0
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Office investment
sale volumes
(billions of $US)
Following five consecutive years of strong growth, office
transaction volumes increase by 1.0 percent year-over-year
Secondary-market activity increase driven by large portfolio
acquisitions and urban submarkets. While primary markets are
seeing moderate decreases in activity, diversification into secondary
markets is evidenced, leading secondary markets to drive U.S.
investment sale growth.
Source: JLL Research, NCREIF, Board of Governors of Federal Reserve
12
1
OFFICE THEMES
Compressed vacancy rates push rental rates
Supply constraints persisted across the country as demand for both
quality and location remain high on the list of must-haves for occupiers.
Across CBDs, 11 markets posted vacancy rates below 10.0 percent, and
below the CBD average vacancy rate of 12.1 percent. Compared to the
suburbs, which came in at a 16.3 percent vacancy rate, six suburban
markets reported single-digit vacancy rates—each benefitting from
proximity to dynamic, urban CBDs that have captured occupier demand
accordingly over the course of this cycle.
CBD
Oakland
Portland Central City
Austin
New York
(Midtown South)
Raleigh-Durham
Seattle (Downtown)
San Francisco
Charlotte
Philadelphia CBD
Salt Lake City
Boston
Total
Total
vacancy
Suburb vacancy
rate
rate
5.1%
Nashville
4.5%
6.5%
Salt Lake City
5.4%
6.7% Boston (Cambridge)
6.7%
6.9%
Portland-Eastside
7.2%
7.6%
7.7%
8.5%
8.5%
8.6%
9.2%
9.6%
San Francisco
Seattle (Eastside)
Portland-Vancouver
7.5%
9.3%
9.3%
During the first-quarter, new developments were partially responsible for
the 3.2 percent spike in rents seen across the 50 markets that JLL
tracks, but rent growth continues to be highly variable at the class level.
Quarterly growth in CBD Class A submarkets continues to exceed the
national average by 30 basis points, but this gap is lower than in earlier
quarters. With the readily available supply of large, Class A blocks in the
suburbs depleting, landlord confidence in that sector has risen
appreciably. Asking rents in this segment increased by 1.9 percent over
the quarter and 5.5 percent over the year. The spillover into Class B
space has also been notable as well, with a 6.3 percent annual jump
in rents.
Over the course of 2016, rental rate increases will continue but may slow
as markets in the peaking phase of the cycle reach an inflection point
while welcoming new supply across markets. In the longer term, the
eventual cool-down of the labor market and further economic uncertainty
globally will likely signal a slowdown in leasing dynamics starting in 2017
and moving into 2018.
2
New supply outpaces occupancy growth, but not
for long
During the first-quarter, total U.S. development volume increased by 9.7
million square feet—a 31.8 percent quarter-over-quarter increase in
construction starts—to bring the total development pipeline to 96.8
million square feet. This marks the highest level of development thus far
in the cycle as consistent expansionary activity has encouraged
developers to break ground where supply constraints persist. Despite
improved fundamentals in most U.S. office markets, however, many
secondary and tertiary markets await minimal new supply, and where
development is under way, high preleasing rates have reduced the
supply relief tenants would like to see. Primary markets, which compose
44.8 percent of the total office market, also contribute the largest share
of developments to the total pipeline with 53.8 million square feet.
Conversely, among the 24 tertiary markets that JLL tracks, only 11.3
million square feet (or 1.4 percent of total inventory) is currently under
construction. Additionally, eight markets, including Jacksonville, Tampa
and West Palm Beach, remain without any projects in the pipeline.
As the development cycle nears its peak in 2016, deliveries will
diminish slowly through 2019
50,000,000
Completions (s.f.)
TOP
Speculative (pre-leased)
Speculative (available)
BTS
40,000,000
30,000,000
20,000,000
10,000,000
0
Source: JLL Research
2016
2017
2018
2019
13
3
4
First-quarter pullback in capital markets activity
after five consecutive years of growth
Despite softened growth, occupancy markets
remain strong and disjointed from capital markets
First-quarter 2016 volumes increased a modest 1.0 percent year-overyear after five consecutive years of strong increases in office capital
markets activity. Despite this increase, $35.4 billion of investment sales
still makes it the second most active quarter of the last five years, a
function broadly of 2015 deal closings. Current volatility in the macro
economy, caution over pricing levels and scarcity of assets on the
market drove declines in most primary markets. Chicago, following a
very strong year in 2015 and the first acquisition of an office asset priced
at over $1.0 billion, saw volumes decrease to $472.6 million. Silicon
Valley also recorded a sharp decline after 2015 sales volume reached
$3.1 billion and per-square-foot pricing of $1,300, while first-quarter 2016
volumes in Silicon Valley dropped to $147.0 million. Instability in energy
markets is further suppressing capital markets activity in Houston, with
less than $100.0 million in transactions year-to-date in 2016. While
primary market activity overall is down quarter-over-quarter, Boston and
Los Angeles posted strong first-quarters with $2.5 billion and $1.8 billion
in transactions, respectively. Los Angeles activity was boosted by the
Westside portfolio acquisition, totaling 1.7 million square feet, by Douglas
Emmett Realty and Qatar Investment Authority for $1.3 billion, while in
Boston, Blackstone’s acquisition of BioMed Realty Trust, 21.0 percent of
asset square footage being in Cambridge, elevated overall sales volume.
In secondary markets, however, investment activity remains strong,
reaching peak levels relative to primary markets in the first-quarter, with
two markets recording transaction volumes over $1.0 billion. As we move
further into 2016, flat growth to moderate declines in activity are
projected as a result of these dynamics.
Despite the slowdown in investment sales, office leasing fundamentals
remain strong, with rents increasing across the U.S. by 3.2 percent. At
7.7 million square feet of absorption, take-up has slowed from the latter
part of 2015, although the lack of expansionary activity is likely due to
supply constraints in single-digit occupancy markets. The first-quarter
saw a realized divergence in occupancy and capital markets
fundamentals, especially in the primary markets. Overall primary
markets saw a positive absorption reading, indicating that strong leasing
fundamentals are catching up to the capital markets, which drove pricing
in the early stages of the cycle. As an example, Chicago, the primary
market with the largest decrease in investment sales, recorded the
largest quarterly absorption figure of any market in the U.S. with 1.7
million square feet. Seattle came in after Chicago in terms of absorption
and posted investment volumes slightly higher than average, although
below the high levels recorded at earlier points in the cycle.
On the other hand, leasing and capital markets fundamentals continue to
more so move in tandem in the secondary markets. Austin, however, the
highest secondary market for absorption, posted a moderate decrease in
volume quarter-over-quarter. Other secondary markets leading in
absorption for the quarter—Philadelphia, San Diego and Phoenix—are
continuing to see upward trending investment volume. Across the U.S.
this cycle, strong capital markets activity outperformed occupier markets,
which had been slower to recover after the downturn. In early 2016, this
outperformance has reversed, driving disjointed indicators across most
markets—reflective of an underlying improvement in income
fundamentals across more markets.
Following five consecutive years of strong growth, office
transaction volumes increase by 1.0 percent year-over-year
Occupational markets remain strong yet disjointed from investment
sales activity in Q1, notably in primary markets
7,000
Q1
Q1 2016 highest absorption markets
(thousands of s.f.)
Office investment sale volumes (billions of $US)
$250.0
Q2
$200.0
Q3
Q4
$150.0
$100.0
Chicago
Seattle
Silicon Valley
Austin
Philadelphia
Los Angeles
6,000
5,000
4,000
3,000
2,000
1,000
$50.0
0
-1,000
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
$0.0
2013
2014
2015
2016
14
Primary market investment volumes
(millions of $US)
Secondary markets have strongest first-quarter in three years, as
primary markets in aggregate decline
$20,000
$18,000
$16,000
$14,000
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
$0
Primary
Secondary
2013 Q1
2014 Q1
Source: JLL Research (Assets larger than 50,000 s.f.)
2015 Q1
2016 Q1
Nationally, cap rates remain in compression mode, declining 30 basis
points in the past 12 months from 4.8 to 4.5 percent. At this level,
national cap rates are below the prior peak of 4.8 percent, leading
investor concerns over current pricing. Across the primary markets, all
have recorded compression in the last 12 months by 39 basis points in
aggregate. Of these, while New York and Chicago cap rates remain flat,
West Coast markets Seattle, Silicon Valley and San Francisco continue
to see strong cap rate compression, having decreased over 30 basis
points over the last 12 months. However, cap rates in three primary
markets—Houston, Boston and Los Angeles—have not yet surpassed
their respective prior peaks. While Houston is unlikely to see further
compression due to the slowdown in energy markets, strong property
market fundamentals and resilient investor demand in Boston and Los
Angeles are expected to drive continued compression, notably in highbarrier-to-entry submarkets.
Secondary markets are seeing a dichotomous trend as two clusters
emerge: one leading national cap rate compression and the other
showing signs of slowing. The secondary markets driving compression—
Nashville, Minneapolis, Salt Lake City, Phoenix and Charlotte—have
each recorded over 60 basis point of downward movement in the past 12
months. These markets are emerging as destinations for diversifying
capital and, as a result, are seeing cap rates compress as the risks
associated with smaller secondary markets recede. Meanwhile, select
leading secondary markets are beginning to move in the opposite
direction, indicating a moderation of investor confidence. RaleighDurham, Tampa and St. Louis cap rates are softening, with Dallas
stabilizing. In 2016, cap rate compression will continue across most
markets, though at modest levels, with perceived fully priced secondary
markets beginning to show signs of stabilization or softening.
Cap rates continue to compress, with nearly 94.0 percent of
markets seeing compressing or stabilizing yields
Compressing
Stable
Softening
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
In the first-quarter of 2016, 37.0 percent of total transaction volumes
flowed into secondary markets, totaling $7.6 billion. Quarter-over-quarter,
primary markets accounted for the overall moderation in volume growth,
while secondary markets recorded a modest increase. In secondary
markets in particular, this was boosted by large portfolio and entity-level
acquisitions. In the largest transaction of the quarter, Blackstone
acquired BioMed Realty Trust, taking over their life sciences-centric
office and lab portfolio for $4.8 billion, boosting activity in San Diego as
well as some of the primary markets, such as Boston’s Cambridge
submarket, the San Francisco Peninsula and Seattle. In another
noteworthy secondary market portfolio, Och-Ziff Capital Management
purchased 58 properties of suburban product from Brandywine Realty
Trust for $398.1 million, totaling 3.9 million square feet located along the
Northeast Corridor from New Jersey to Virginia.
Outside of the large portfolio acquisitions in the secondary markets,
increased activity was concentrated in urban submarkets. In particular,
Philadelphia, Atlanta, New Jersey and Oakland boosted secondary
market activity with urban volumes increasing in aggregate by 165.6
percent year-over-year. Though secondary markets are recording
stronger investment volume growth than primary markets, there is not a
comparable level of institutional activity. Institutional acquisitions
decreased, while purchases by private equity groups increased. The
largest acquisition by this investor group was 70 and 90 Hudson Street in
Jersey City in the Northern New Jersey market, which was acquired for
$299.0 million by Spear Street Capital. The most active buyer in
secondary office this quarter was Shorenstein, who purchased a Trophy
asset in Pittsburgh and Class A assets in Philadelphia and Atlanta for a
total of $566.2 million. While the primary markets are seeing activity
decline, the diversification into secondary markets remains strongly
evidenced, leading these markets to drive U.S. investment sale growth.
This will continue through the year. However, despite resurgent
economic and property market fundamentals in select small- and
midsized markets such as Austin, San Diego and Phoenix, institutional
capital remains disciplined and selective.
6
Momentum in yield compression continues, though
divergence appears, with select secondary markets
beginning to show signs of softening
Annual cap rate fluctuations
5
Secondary market activity increase driven by large
portfolio acquisitions and urban submarkets
Source: JLL Research, NCREIF. (Includes 32 major office markets; Stable defined as
markets seeing fluctuations within 10 basis points year-over-year.)
15
As foreign activity declines in first-quarter,
European overtake Asian groups as most active
source
7
Foreign activity made up 12.1 percent of total volume in the first-quarter,
totaling $2.6 billion—a decrease of 20.5 percent year-over-year and
slightly below established current cycle norms on a percentage basis in
recent years. A factor in this decline statistically is the decline in primary
market activity, where this capital remains focused with selective
diversification into secondary markets. Foreign investment into the office
sector reached a peak in 2015 of $22.0 billion, equating to 20.9 percent
of total volume. In 2015, groups from Canada and China were the most
aggressive in purchasing U.S. office real estate, accounting for 40.9
percent of total acquisitions. In the first-quarter of 2016, the foreign buyer
pool has shifted, with groups from Germany accounting for 37.0 percent
of the total. This was driven by Deutsche Bank and Jamestown, who
acquired assets in New York, Silicon Valley and Seattle. New inbound
entrants to the market decreased other than smaller groups from the
United Kingdom and Canada, who were active in Chicago, Atlanta and
New York. In 2016, it is likely that further increases in inbound capital
from European groups, including Germany, will be evident given ongoing
economic and political concerns with resilient capital from Asia as well.
Germany dominates as top origin of inbound capital, surpassing active Asian and Canadian capital from prior two years
MOST ACTIVE FOREIGN INVESTORS
16.4%
9.0%
13.5%
18.5%
24.0%
5.6%
2014
6%
9.5%
35.1%
2015
10%
12%
2%
Q1
2016
37%
21.9%
15.5%
15.3%
15.8%
22%
Norway
Germany
Canada
China
Germany
Qatar
Canada
Singapore
Germany
South Korea
South Korea
Canada
South Korea
All others
Hong Kong
All others
China
United Kingdom
Source: JLL Research (Assets larger than 50,000 s.f.)
16
Continued cap rate compression evident to sub-5.0-6.0 percent in most primary and rising secondary markets in the CBD, while suburban
markets sit between 6.0-8.0 percent
U.S. core product office CBD cap rates
Seattle
4.25 WA
– 5.50%
MT
Portland
4.50 –OR6.50%
ME
ND
VT
MN
ID
NH Boston
NY
4.00– 5.00%
MA
Detroit
CT
9.50 – 10.50% Pittsburgh
MICleveland
NewRIYork
Chicago
8.00 – 9.00%
3.25-3.75%
Philadelphia
7.50
–
8.50%
4.75-5.50%
NJ
5.50– 7.00%
Columbus
Indianapolis
DE
OH – 9.00%
PA
8.00
IN
IL – 9.50%
Washington, DC
8.50
Cincinnati WV
4.00 –MD
6.00%
8.50 – 9.50%
VA
Minneapolis
WI
6.00-7.00%
SD
WY
Sacramento
5.75-6.75%
San Francisco
NV
3.00 – 4.00%CA
East Bay
6.00-7.00%
Los Angeles
4.80-6.00%
San Diego
6.00-7.00%
IA
NE
UT
Denver
CO
5.25-7.25%
Kansas City
7.00-8.00%MO
KS
Phoenix
AZ
7.00-7.50%
KY
Raleigh
Charlotte NC
6.50 – 7.50%
6.25 – 7.50%
TN
OK
NM
AR
Dallas
5.00-7.00%
TX
Austin
4.50-5.25% Houston
6.00-6.50%
MS
AL
Atlanta
5.00-6.00%
GA
LA
SC
Orlando
Tampa FL
6.00– 7.00%
6.00-7.00%
Miami
4.50 – 6.00%
U.S. core product office suburban cap rates
Seattle
WA
5.50-6.25%
MT
Portland
6.00%-7.50%
OR
ME
ND
VT
MN
ID
SD
WY
Sacramento
6.75-7.50%
East Bay
NV
6.00-7.00%
CA
Silicon Valley
5.00 – 6.00%
Los Angeles
4.00-7.00%
San Diego
5.00-6.50%
4.00 – 5.00%
5.00 – 6.00%
6.00 – 7.00%
7.00 – 8.00%
8.00 – 9.00%
9.00% +
IA
NE
UT
Denver
CO
6.00-8.00%
Phoenix
AZ
5.00-7.00%
NH Boston
NY
MA 6.00-7.00%
Detroit
CT
New Jersey
8.00 – 9.00% Pittsburgh
MI
RI
Cleveland 7.50 – 8.50% 7.00 - 8.50%
Chicago
Philadelphia
8.00
–
9.00%
7.00-8.00%
NJ
6.00 – 7.00%
Indianapolis Columbus
DE
PA
8.00OH
– 9.00%
IN
Washington, DC
IL8.00– 9.00%
WV
Cincinnati
6.00 – MD
8.00%
8.50 – 9.00%
VA
Minneapolis
WI
7.00-8.00%
KS
MO
KY
TN
NM
OK
Dallas
5.50-7.50%
TX
Austin
5.00 – 6.00% Houston
6.50-8.00%
AR
MS
Raleigh
Charlotte 7.00
NC – 8.00%
6.75 – 8.00%
Atlanta
6.00-8.00%
GA
AL
LA
Tampa
6.25-7.50%
SC
Orlando
6.50-.8.00%
FL
Miami
6.00 – 7.00%
Source: JLL Research, January 2016
17
Notable primary market transactions, Q1 2016
Market
Property
Buyer
Multiple - National Portfolio
Biomed Realty Trust, 108Blackstone
Property Portfolio
New York
Seller
Price ($)
Size (s.f.)
Price (p.s.f.)
Biomed Realty Trust
$4,800,000,000
3,400,000
$1,412
388-390 Greenwich Street Citigroup
SL Green
$2,000,000,000
2,634,670
$759
New York
787 Seventh Avenue
CalPERS
AXA Investment
$1,932,900,000
1,761,781
$1,097
Los Angeles
Blackstone, 4-Asset
Westside Portfolio
Douglas Emmett Realty (60%) /
Blackstone
Qatar Investment Authority (40%)
$1,340,416,500
1,725,501
$777
New York
5 Times Square
RXR Realty
David Werner
$800,000,000
1,101,779
$726
New York
George Comfort & Sons /
Loeb Partners Realty, 2Asset Gramercy Park and
Grand Central Portfolio
Jamestown
George Comfort &
Sons / Loeb Partners
Realty
$563,499,651
1,565,000
$360
Seattle-Bellevue
2001 8th Ave
Deutsche Asset & Wealth
Management
AEW Capital
Management
$370,000,000
516,985
$716
Los Angeles
Pasadena Towers I&II
CBRE Global Investors
Beacon Capital
Partners
$257,000,000
439,650
$585
Washington, DC
1615 L Street, NW
Carr Properties
Spitzer Enterprises
$229,000,000
417,852
$548
San Francisco Peninsula
Bayhill Office Center
Google
Hudson Pacific
Properties / Farallon
Capital Partners
$215,000,000
515,000
$417
Price ($)
Size (unit)
Price (per unit)
$354,000,000
862,692
$410
Notable secondary market transactions, Q1 2016
Market
Property
Buyer
Seller
Philadelphia
Cira Square
Coretrust Capital Partners / Korea Brandywine Realty
Investment Management
Trust
Northern New Jersey
70 & 90 Hudson St
Spear Street Capital
CBRE Global
Investors
$299,000,000
857,940
$349
San Diego
Santa Fe Summit - Intuit
Campus
Intuit
Kilroy Realty
$262,300,000
465,812
$563
Atlanta
Bank of America Plaza
Shorenstein Properties
CWCapital
$220,000,000
1,294,590
$170
Northern New Jersey
Metropark Office Center
Metropark Investor LLC
Tishman Speyer
$200,000,000
918,656
$218
Philadelphia
1700 Market Street
Nightingale Properties
$198,000,000
841,172
$235
Oakland-East Bay
Kaiser Center
Rockpoint Group
Swig Company
$197,000,000
811,005
$243
Northern New Jersey
Princeton Pike
JFR Global Investments
Prism Capital
Partners
$156,000,000
800,546
$195
Pittsburgh
One Oxford Centre
Oxford Development
Company
$148,752,900
1,011,000
$147
Charlotte
Carillon Tower
KBS Realty Advisors
Hines
$147,000,000
476,308
$309
18
Industrial
19
INDUSTRIAL
Shift from national to regional portfolios and single-asset activity
resetting industrial deal sizes to historic norms
U.S. Industrial property market
U.S. Industrial investment
-70
1.9%
$8.5
-52.5%
1.6%
3.1%
5.1%
-29
Continued but moderated rent growth anticipated in 2016 amid
sound fundamentals. Despite increased development volumes,
quarterly net absorption was 7.3 percent higher than new construction in
the first-quarter of 2016. This caused the U.S. vacancy rate (6.2 percent)
to drop 10 basis points from year-end 2015. Vacancy, after 24
consecutive quarters of net absorption gains, is now at a 16-year low.
Amid heightened volatility, decline of portfolio opportunities driving
down investment volumes. As investment volumes receded in the firstquarter, investment strategies also shifted and were marked by the return
in prevalence of single-asset transaction volumes, as single-asset activity
represented the bulk of investment in the U.S. The investment volume
pendulum is expected to remain shifted toward single-asset activity
throughout 2016, as a scarcity of large-scale portfolio availabilities has
become pronounced.
With shifts in overall deal sizes, cross-border participation was
stifled in early 2016. The scarcity of large-scale portfolio availabilities in
2016 shifted the lion's share of investment activity into transactions that
fell between $20.0 and $150.0 million in the first-quarter, and this is likely
to contribute to an overall shift toward this range throughout 2016. These
first-quarter trends represent hurdles in gaining or expanding exposure to
the U.S. industrial sector for cross-border investors. As a result, cross-
Market-specific portfolios emerging as effective way to build scale.
With many domestic industrial investors being outbid by new-to-thesegment institutional capital in 2015 on large-scale portfolios and thus
increased competition, some investors increased a focus on regional,
secondary markets to search for non-fully priced assets. Seattle-Bellevue
experienced the highest volume of market-specific portfolio investments
of any JLL tracked market, with just under $600.0 million in the past year
alone. Other markets such as South Florida (Miami) and Washington, DC
also continue to attract investors looking to build footprints in regional
secondary markets that have diverse and expanding populations.
Class A compression endures in most markets, although select
non-core markets soften. Institutional-grade cap rates sustained a pace
of compression or stability throughout most markets with a limited few
exceptions where cap rates have softened. Persistent expected rent
growth, tightening tenant demand and the scarcity of available assets will
further foster increases in valuations throughout 2016. Although cap rate
compression continued in Class A assets, the buyer pool in the firstquarter receded a modest amount, as buyers were more selective of
transaction targets, particularly in secondary markets.
Escalation in global market volatility further widens spreads
10.0%
10-year Treasury yield (%)
Investment volumes down amid heightened volatility
$80.0
Q1
Q2
Q3
Q4
$60.0
5.0%
$40.0
$20.0
Average weighted primary cap rate (%)
4.93%
128
bps
189 bp
spread
differential
316
bps
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016 YTD
0.0%
$0.0
2006
Industrial investment
sale volumes
(billions of $US)
border buyer participation fell from 40.5 percent of total volume in fullyear 2015 to 5.3 percent in the first-quarter.
20
Amid heightened volatility, decline of portfolio
opportunities driving down investment volumes
First-quarter year-over-year investment volumes were down 52.5
percent, which at first glance appears to be a drastic reduction. However,
if the closing of the largest industrial transaction in the history of the
segment (IndCor) is excluded from the first-quarter of 2015, first-quarter
volumes were only down 11.4 percent and remain 10.2 percent above
the 10-year first-quarter average. This is indicative of the asset class’s
ability to weather volatility and continue to attract investment even during
uncertain economic environments. The appetite for industrial assets
remains prevalent and expanding, as investors continue to describe
themselves as under-allocated to the sector.
Investment volumes down amid heightened volatility
$70.0
Q2
Q4
National vacancy rate
Net absorption
(in millions of s.f.)
Q1
Q3
Total vacancy
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
Q2
$60.0
Q3
Q4
IndCor
Acquisition
$50.0
$40.0
$30.0
$20.0
$10.0
2016
2015
2014
2013
2012
2011
2010
2009
$0.0
Warehouse rents to continue moderate growth in 2016
300
200
100
0
-100
-200
Q1
2008
The first-quarter of 2016 showed sustained strength in most markets as
trend lines continued to favor warehouse leasing activity. Vacancy rates
remained taut in most U.S. markets as tenant demand exceeds available
space, and a push to secure modern and efficient space drives vacancy
rates lower. Despite increased development volumes, quarterly net
absorption was 7.3 percent higher than new construction in the firstquarter of 2016. This caused the U.S. vacancy rate (6.2 percent) to drop
10 basis points from year-end 2015. Vacancy—after 24 consecutive
quarters of net absorption gains—is now at a 16-year low.
Speculative construction is back in a big way in Atlanta (15.3 million
square feet) and Central Pennsylvania (8.6 million square feet)
compared to two years ago. In this time period, it was up roughly 100.0
percent in Dallas–Fort Worth and Chicago (6.7 million square feet) as
well, and volumes are generally consistent in the Inland Empire over the
same time period. Although vacancy rates are tight in these markets,
there will likely be a lag between when new supply delivers and when it
is leased. This is especially true in the big-box segment (500,000 square
feet and greater), which comprises 49.4 percent of these markets’
collective spec construction. As a result, total rent growth over the next
12 months is expected to be slower than it was over the course of the
prior 12 months. Atlanta, for instance, had annual warehouse asking rent
growth of 7.3 percent during the quarter; the forecast calls for 3.0 percent
annual growth by year-end 2016. Similar dynamics are expected across
other major industrial markets amid new construction starts. Fortunately,
industrial development is fairly nimble, with the average warehouse
facility taking nine to 12 months to complete; if a size segment becomes
overbuilt, developers can pull back on planned groundbreakings,
mitigating oversupply risks to the sector.
2
2007
Continued but moderated rent growth anticipated in
2016 amid sound fundamentals
2006
1
INDUSTRIAL THEMES
Industrial investment sale volumes
(billions of $US)
TOP
As investment volumes receded in the first-quarter, investment strategies
also shifted and were marked by a return in prevalence of single-asset
transaction volumes, as single-asset activity represented the bulk of
investment in the U.S. The ratio between single-asset and portfolio
transactions experienced a drastic shift of the pendulum, as an almost
exact reversal of deal volume occurred: single-assets represented the
vast majority of volumes, outpacing portfolio activity on a 3:1 basis
21
year-over-year. The investment volume pendulum is expected to remain
shifted toward single-asset activity throughout 2016, as a scarcity of
large-scale portfolio availabilities has become pronounced.
Single-asset transactions significantly lead activity in first-quarter
100%
26%
80% 32% 38%
15%
44% 51%
34% 41% 30%
26%
56%
60%
40%
68% 62% 74%
20%
85%
56% 50%
66% 59% 70%
74%
44%
Decline in deal sizes stifles foreign participation in early 2016
0%
3
With shifts in overall deal sizes, cross-border
participation was stifled in early 2016
The scarcity of large-scale portfolio availabilities in 2016 shifted the lion’s
share of investment activity into transactions that fell between the $20.0
and $150.0 million range in the first-quarter, and this is likely to
contribute to an overall shift toward this range throughout 2016. The firstquarter was indicative of this trend, as 50.5 percent of total investment
volumes fell in this range—a stark contrast to the first-quarter of 2015 in
which comparable deal sizes drove a minor 21.6 percent of volumes. As
the year progresses, single-assets and regional portfolios are likely to
drive acquisition activity for the majority of investors, creating strategic
investment issues for some investor groups, notably offshore investors.
Shift in overall deal size expected throughout 2016
17.7%
26.0%
5.8%
2.7%
3.1%
2015
44.7%
<$20.0 million
$20.0 - $49.9 million
$50.0 - $74.9 million
$75.0 - $99.9 million
$100.0 - $149.9 million
+$150.0 million
9.0%
30.5%
Q1 2016
7.2%
3.9%
2.9%
46.6%
FDI participation as % of total volume
Total industrial investment volumes by
transaction type
Single asset transactions
Portfolio/entity-level transactions
Cross-border investment into the industrial sector sent waves into the
investment environment in 2015, as foreign direct investment (FDI)
constituted over 40.0 percent of all investment volumes. Cross-border
investors became particularly attracted to the industrial sector, as
industrial assets provided an avenue to gain exposure to investmentgrade tenants and e-commerce economic activity with minimal day-today management requirements and decreased ongoing capital
requirements. 2015 offered the ability for cross-border investors to
deploy capital at scale as several industrial aggregators searched for
buyers after building massive footprints throughout the country. Firstquarter trends such as the scarcity of large-scale portfolio availabilities
and shift toward deal sizes between $20.0 and $150.0 million represent
hurdles in gaining or expanding exposure to the U.S. industrial sector for
cross-border investors. As a result, cross-border buyer participation fell
from 40.5 percent of total volume in full-year 2015 to 5.3 percent in the
first-quarter.
2015 Q1
Offshore total:
60.0%
2015
Offshore total:
50.0%
40.0%
30.5%
30.0%
20.0%
10.0%
2016 Q1
Offshore
total:
5.3%
9.0%
7.2%
3.9%
2.9%
46.6%
0.0%
$0.0
$1,000.0
$2,000.0
$3,000.0
Average FDI deal size (millions U.S.$)
There are several factors contributing to this reduction, none more telling
than the lack of available large-scale portfolios that meet the typically
higher (+$300.0 million) investment size standards associated with
select active cross-border investors. With this in mind, only 2.9 percent
of deals even exceeded $150.0 million in the first-quarter compared to
the 56.4 percent of total volumes last year. This deal size generally falls
below minimum transaction size requirements established by crossborder investors, creating a dilemma for investors looking to expand
industrial exposure. In 2015, the surge of cross-border capital was
predominantly ushered in by FDI’s ability to gain exposure into the U.S.
industrial sector through single acquisitions, with average cross-border
deal sizes exceeding $2.5 billion. Several investment strategies drove
these massive deals, including:
• The full fee interest of a portfolio or entity (GLP/GIC purchase
of IndCor),
• Joint-venture transactions with U.S. sponsors (Norges Bank
Investment Management/Prologis purchase of KTR) and
• Syndications of acquired platforms (China Life’s investment with GLP).
22
4
Market-specific portfolios emerging as effective way
to build scale
As large-scale portfolio transactions forged the headlines in 2015, a
visible normalization toward smaller deal sizes, below $150.0 million,
began to emerge in certain markets. With many domestic industrial
investors being outbid by new-to-the-segment institutional capital in 2015
on large-scale portfolios and thus increased competition, some investors
increased a focus on regional secondary markets to search for non-fully
priced assets. As future economic and demographic shifts elevate the
prospects of these historically geographically isolated markets, the shift
toward building scale through regional and market-specific portfolio
acquisitions has largely benefited investors seeking less competitive
yet fundamentally sound non-core markets. As an example, SeattleBellevue experienced the highest volume of market-specific portfolio
investments of any JLL tracked market, with just under $600.0 million in
the past year alone. Other markets such as South Florida (Miami) and
Washington, DC also continue to attract investors looking to build
footprints in regional secondary markets that have diverse and
expanding populations.
Secondary market, regional portfolio volume
(in millions $US)
Regional portfolios utilized to build scale in secondary markets
$700.0
$600.0
Market-specific portfolios emerging as effective way to build scale
Portfolio
4.5
4.0
Single Asset
Most active
primary markets
Most active
primary markets
3.9
3.6
3.5
3.0
2.5
2.3
2.2
2.1
2.0
1.5
1.0
0.5
1.2
1.4
1.1
1.0
0.9
0.4
0.7
0.5
0.3
0.2
0.3
0.4
0.40.5
0.0
Q2 2015
Q3 2015
Q4 2015
$500.0
As investors continue to broaden investment strategies and as the
industrial sector continues to grow in its sophistication, market-specific
and regional portfolio transactions are one investment strategy investors
can adopt to gain exposure to an expanding population, growing
geographic economy or rapidly changing supply chain. However, it does
not end here, as the investor focus will continue to evolve, exploring
other untapped areas or subsectors for industrial investment: Urban infill,
light industrial and light manufacturing for the “creative economy”; noncredit tenanted facilities; shared industrial space; and cold storage are
just some of the various avenues with emerging interest.
Industrial investment sale volumes (in m.s.f.)
One strategy that has been too costly and complicated for offshore
capital is the aggregation of single-assets or smaller regional portfolios
that fall below $150.0 million. With this in mind, cross-border capital
focused on gaining exposure to the U.S. industrial sector will have to
evolve its approach for successful execution, whether that be through
expanding U.S.-focused resources, establishing a domestic partnership
or contributing capital to new industrial-focused fund vehicles—to name
a few.
Source: JLL Research (All transactions larger than 200,000 s.f.)
Q1 2016
$400.0
$300.0
$200.0
$100.0
$0.0
Source: JLL Research (All portfolio Transactions larger than 200,000 s.f.)
23
Compressing
Institutional-grade cap rates sustained a pace of compression or stability
throughout most markets with a limited few exceptions where cap rates
have softened. Despite recent monetary policy tightening and increased
volatility resulting from global economic and financial markets, the trend
is indicative of strong U.S. industrial fundamentals and the continued
steadfast appetite for institutional-grade industrial assets. As the
availability of industrial assets remains very tight, investors are forced to
compete for limited supply, particularly for single-assets and marketspecific and regional portfolios. Persistent expected rent growth,
tightening tenant demand and the scarcity of available assets will further
foster increases in valuations throughout 2016. Looking forward,
softening may begin to occur as the Federal Reserve looks to increase
short-term rates and record-low cap rate levels begin to draw concern
from investors. As new product continues to deliver, global trade
continues to be a laggard and dialogue on the timing for a recessionary
correction become more prevalent, investors may be more cautious
when underwriting acquisitions. However, we have yet to see these shifts
occur, as moderate rent growth is expected throughout 2016.
Nationally, in a broader asset context, Class A industrial assets across
almost all U.S. markets continued compression, with the notable
secondary market exceptions of Phoenix, Reno and St. Louis, which all
softened approximately 25 basis points. Although cap rate compression
Stable
Softening
Annual cap rate fluctuations
5
Continuation of cap rate compression throughout markets
Class A compression endures in most markets,
although select non-core markets soften
Source: JLL, NCREIF. (Includes 27 major industrial markets; Stable defined as markets
seeing fluctuations within 15 basis points year-over-year)
continued in Class A assets, the buyer pool in the first-quarter receded a
modest amount, as buyers were more selective of transactions targets,
particularly in secondary/supporting markets. Industrial buyer pools
remained robust in the first-quarter of 2016; however, their overall
acquisition velocity declined roughly 30.0 percent from last year in most
markets, as buyers avoided the risk spectrum due to heightened
concerns about the global economic and financial markets in the first half
of the quarter.
Class A compression endures in core markets, while limited few supporting markets soften
Seattle
4.00 -WA
5.00%
MT
Portland
5.00 - 6.00%
OR
WY
Salt Lake City
5.50 – 6.50%
UT
Denver
CO
5.50 - 6.50%
Kansas City
6.00
KS – 6.75%
AZ
Phoenix
5.25 - 6.25%
OK
NM
WI
NY
MI
NH
Boston
MA 6.25 - 7.00%
New CT
Jersey
RI
Eastern PA
5.00 - 6.00% 4.50 - 5.25%
IA
NJ – S. N.J.
Columbus Harrisburg Phila.
PA
5.75 –OH
6.50% 5.25 - 6.00% DE
5.50
– 6.00%
Indianapolis
IN
IL
Cincinnati WVBaltimore/DC
5.50 - 6.50%
MD
5.75 – 6.50%
5.50
- 6.00%
VA
Louisville
KY
St. Louis
6.00 – 6.50%
6.50 – 7.25%
Nashville
NC Charlotte
TN
Memphis
6.00 – 6.50%
6.00 – 6.50%
6.00 – 6.50%
Chicago
4.75 - 5.75%
NE
Las Vegas
6.00 – 6.75%
VT
Minneapolis
6.00 - 6.75%
SD
NV
Southern California Inland Empire
4.00 - 5.00%
4.50- 5.50%
San Diego
5.75 – 6.75%
U.S. core Class A
Industrial cap rates
4.00 – 5.00%
5.00 – 6.00%
6.00 – 7.00%
7.00 – 8.00%
8.00 – 9.00%
9.00% +
MN
ID
Reno
5.75– 6.75%
Sacramento
5.75 – 6.75%
SF Bay Area
CA
4.00 - 5.00%
ME
ND
SC
AR
Dallas
4.90- 5.50%
TX
MS
AL
Atlanta
5.00 –GA5.50%
LA
Houston
5.25 - 6.25%
Orlando
FL
6.25
- 7.00%
Tampa
6.25 – 7.00%
Miami
4.50 – 5.25%
Source: JLL Research, April 2016
24
Notable portfolio transactions, Q1 2016
Market
Property
Buyer
Seller
Price ($)
Size (units)
Price (per unit)
Indianapolis
TDC Indianapolis Portfolio
Olympus Ventures / Biynah
Industrial Partners
Transpacific
Development Co.
$167,000,000
3,858,513
$43
Multistate
7-building Ares Distribution
Industrial Property Trust
Portfolio
Ares Management
$114,500,000
2,558,708
$45
South Florida
Southern Florida Industrial
Portfolio (90% Partial
Invesco
Interest)
Easton Group
$98,000,000
676,832
$145
Multistate
15-building Brennan
Investment portfolio
GFH Capital Ltd.
Brennan Investment
Group
$92,962,000
1,448,215
$64
Oakland-East Bay
2-building Westcore
Fremont Portfolio
UBS
Westcore Properties
$60,500,000
419,984
$144
Denver
Dartmouth Industrial Park
Cabot Properties
TA Realty
$53,225,000
663,411
$80
South Florida
Light Industrial Asset
Portfolio
Adler Kawa
Prologis / Norges
Bank
$38,000,000
352,053
$108
Chicago
Yorkbrook Park
Venture One
TA Realty
$36,975,000
736,275
$50
Atlanta
Oakbrook North Port.
Rothenberg-Rosenfield Inc.
Sperry Equities
$36,670,000
709,695
$52
Los Angeles
BLT Enterprises Industrial
Portfolio (Camarillo &
Oxnard)
ZDI Inc.
BLT Enterprises
$28,000,000
271,759
$103
Price ($)
Size (unit)
Price (per unit)
$105,000,000
507,000
$207
Notable single-asset transactions, Q1 2016
Market
Property
Buyer
Seller
Inland Empire
1001 Columbia Ave,
Riverside
GE Asset Management
Cole REIT Advisors III
Inland Empire
2250 W Lugonia Ave,
Redlands
Ashley Furniture Industries
McShane
Development
$79,040,000
1,013,331
$78
Atlanta
212 Bohannon Rd, Fairburn
Deutsche Asset & Wealth
Management
TPA Group
$77,250,000
1,129,750
$68
Philadelphia-C. PA
325 S. Salem Church Rd,
York
AEW Capital Management
Endurance Real
Estate / American
Realty Advisors
$60,000,000
785,400
$76
Charlotte
6200 Gordon Food Service,
GFS
Concord
Childress Klein
$54,050,000
300,000
$180
Chicago
525 Northwest Ave,
Northlake
Prudential Investment
Management, Inc.
Bridge Development
Partners
$48,750,000
588,233
$83
Seattle-Bellevue
32901 32nd Ave S,
Federal Way
Industrial Realty Group
Weyerhaeuser
campus
$47,737,815
461,673
$103
Portland
9555 NE Alderwood Rd,
Portland
Clarion Partners
Capstone Partners
$46,600,000
491,200
$95
Indianapolis
5202 Exploration Dr,
Indianapolis
Gramercy Property Trust
KTR Capital Partners
$37,000,000
225,586
$164
Central Valley
811 Zephyr Dr, Stockton
Industrial Property Trust
Ares Management
$34,304,000
512,000
$67
25
Multifamily
26
MULTIFAMILY
Investors broaden attention to well-positioned, suburban Sunbelt
product amid sustained strength in absorption and rents
U.S. Multifamily property market
U.S. Multifamily investment
-10
1.6%
$35.4
8.6%
12-month change in total vacancy (bps)
1.8%
4.7%
4.5%
-10
12-month rent growth (per unit, %)
12-month change in cap rate (bps)
Barriers to homeownership persist on constrained supply, outsized
price gains. The supply of existing homes available for sale in March
slipped 1.5 percent compared to the March 2015 figure. A tighter supply
has contributed to houses staying available for shorter amounts of time,
currently averaging 47 days, down 12 days from February. These
tightening conditions have driven the U.S. median sale price for a
previously owned home to increase 5.7 percent in March – the 49th
consecutive month of year-over-year gains.
Signs of a pullback in multifamily construction emerging. The
seasonally adjusted annual rate of multifamily construction for the month
of March was 312,000, essentially matching the rate from one year prior.
This figure reflects a six-month trend of multifamily construction starts
falling at or below the current 12-month rolling average. Multifamily
permits, a leading indicator of starts, additionally declined 12.4 percent
year-over-year.
Despite supply-driven softening in select markets, multifamily
vacancy remains low; rent growth high. Vacancy softened from the
current cycle peak by 10 basis points in 2015, finishing the year at 4.4
percent. This represents the fourth year in a row of sub-5.0 percent
vacancy nationally. This has yet to impact rent growth, which grew 80
basis points nationally year-over-year to 4.7 percent.
$100.0
$0.0
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Multifamily
investment sale
volumes
(billions of $US)
Multifamily investment sales are up 8.6 percent compared to the
first-quarter of 2015, the largest first-quarter figure on record
$200.0
Q1
Q2
Q3
Q4
Sunbelt markets taking the lead on absorption and rent growth
indicators. Absorption has maintained its strength with markets in
aggregate absorbing 1.6 percent of inventory. Several Sunbelt markets
saw notable upticks in absorption year-over-year, ranging from 50 to 110
basis points, and is now absorbing inventory at a pace of 2.0 percent or
greater. This is driving rent growth gains above the national average.
Multifamily continues to be the straw that stirs the drink. The
multifamily asset type saw nearly $35.4 billion of investment sales
activity during the first-quarter of 2016. This figure represents an 8.6
percent increase compared to the first-quarter of 2015 and the largest
first-quarter volume on record. Additionally, first-quarter sales volumes
represent the second-largest figure of the last 15 quarters, only eclipsed
by the unprecedented fourth quarter of 2015.
Private equity investment rising, concentrated in portfolios and
garden-style product. With over $8.2 billion of activity this quarter,
private equity investors were a key driver of investment sales. Private
equity transactions demonstrated a sizable shift toward suburban,
garden-style product, which has lagged behind the largely urban-centric
expansion thus far fueled by investments across acquisitions of existing
product and new developments.
Despite sustained, historic levels of deal flow and concerns on
recent deliveries in select markets, cap rates remain stable
10.0%
10-year Treasury (%)
Primary cap rates (%)
Secondary cap rates (%)
4.8%
5.0%
4.3%
1.8%
0.0%
2002
2004
2006
2008
2010
2012
2014
2016
27
TOP
1
MULTIFAMILY THEMES
Structural barriers to homeownership persist on
constrained supply, outsized price gains
Consistent job-growth gains have encouraged home buyers, as the
domestic economy looks to solidify its footing after a rocky start to the
year. The national unemployment rate was little changed in March,
recorded at 5.0 percent, as employers added 215,000 jobs for the month.
More importantly, the U.S. has added 2.8 million jobs in the last year, as
the labor force participation rate grew for the fourth month in a row—the
first time this has occurred since 1992. These improvements in labor
markets have translated to housing, as existing home sales for March
were reported at a 5.33 million seasonally adjusted annual rate, rising
5.1 percent from the previous month, and the March figure was 1.5
percent higher than the previous year’s rate. Additionally, the supply of
existing homes available for sale slipped to 1.98 million, down 1.5
percent compared to the March 2015 figure. A tighter supply has
contributed to houses staying available for shorter amounts of time,
currently averaging 47 days, down 12 days from February. These
tightening conditions have driven the U.S. median sale price for a
previously owned home to increase to $222,700, the 49th consecutive
month of year-over-year gains, having increased 5.7 percent in March.
S&P/Case-Shiller HPI, (Y-o-Y % change)
Home price values exceed averages in the West, Southeast
14.0%
12.0%
10.0%
8.0%
11.8%
10.8%10.5%
10.2%
7.4%
6.9% 6.8%
6.0%
4.0%
2.0%
0.0%
6.0% 5.8% 5.7%
4.9%
Home sales in the Northeast region saw the greatest gains overall,
seeing the rate of sales increase 11.1 percent since February and 7.7
percent year-over-year. The Case-Shiller Home Price Index additionally
has reflected sustained increases in pricing in several metros,
concentrated primarily in the Western region and Florida. The eight
markets that compose the Western region have seen growth ranging
from 11.8 percent in Portland to 6.0 percent in Las Vegas over the
course of the last year, while Tampa and South Florida grew 7.4 percent
and 6.8 percent, respectively. While job-growth gains are translating into
steady, incremental gains in homeownership, many renters are still
unable to position themselves to successfully exit rental markets. These
outsized gains in house prices will continue to serve as barriers to entry
for homebuyers who may not otherwise have sufficient ability to make a
rapidly appreciating capital expenditure.
2
Signs of a pullback in multifamily
construction emerging
The seasonally adjusted annual rate of multifamily construction for the
month of March was 312,000, comprising 28.7 percent of total
construction starts for the month and essentially matching the rate from
one year prior. This figure reflects a six-month trend of multifamily
construction starts falling at or below the current 12-month rolling
average of 384,000, reflecting a steady slowing of new starts. The
Southern region of the country saw the largest amount of multifamily
starts for March at a seasonally adjusted annual rate of approximately
146,000. However, the Western region saw the greatest relative increase
in multifamily starts, increasing in excess of 40.0 percent to a seasonally
adjusted annual rate of approximately 84,000. Multifamily construction
permits, which serve as a leading indicator of starts, also saw declines in
March. The seasonally adjusted annualized rate was recorded at
324,000, down for the third straight month and 12.4 percent
year-over-year.
Comparatively, the seasonally adjusted annual rate of single-family
construction starts was recorded at 764,000 in March. This figure
comprised 70.2 percent of total construction starts, up from the 65.5
percent average of the last 12 months, with average annual single-family
housing starts up 14.5 percent as of March. Single-family construction
starts have historically comprised approximately 76.0 percent of total
housing starts, representative of a somewhat normalizing housing starts
landscape. As housing permitting data and subsequent starts continue to
Source: JLL Research, S&P Dow Jones Indices LLC
28
move toward their respective long-run averages, the multifamily asset
type stands to benefit, as several markets continue to work through
influxes of recently delivered product in the second half of 2015. While
near-term softening is anticipated in select markets, an optimistic yet
more measured approach to units under construction will ensure that
adequate demand will meet newly delivered product and ultimately
support continued strength in leasing fundamentals.
Housing starts, (Y-o-Y % change)
Multifamily construction starts steady and slowing
250.0%
Total
Single-family
Multifamily
200.0%
150.0%
100.0%
50.0%
0.0%
Jan-16
Aug-15
Mar-15
Oct-14
May-14
Dec-13
Jul-13
Feb-13
Sep-12
Apr-12
Nov-11
Jun-11
Jan-11
-50.0%
Source: JLL Research, U.S. Census Bureau
3
Despite supply-driven softening in select West
Coast markets, vacancy remains low and rent
growth high
Multifamily leasing fundamentals have held their overall positions of
strength heading into 2016. Vacancy softened from the current cycle
peak of 10 basis points in 2015, finishing the year at 4.4 percent. This
represents the fourth year in a row of sub-5.0 percent vacancy nationally
and a new equilibrium from the previous cycle peak of 5.7 percent set in
2005 and 2007. Western region markets saw the greatest vacancy
increases over the course of the past year, as Portland, Silicon Valley,
Denver and Seattle softened between 60 and 130 basis points. The
greatest softening occurred in markets that are working to absorb a
sustained amount of delivered product in 2015. The national percentage
of completions with respect to inventory increased 10 basis points yearover-year to 1.8 percent of inventory, setting a 13-year peak. In the case
of Portland and Denver, the respective 80 and 40 basis point gains in
completion percentages over the course of the past year have resulted in
new deliveries making up approximately 4.0 percent of each market’s
inventory, more than double the national rate. Comparatively, Seattle
and Silicon Valley have maintained a steady, heightened pace of
deliveries since 2013 and currently have seen the pace of deliveries at
3.5 percent and 2.3 percent of their respective markets. It is imperative to
note that even with the sustained influx of deliveries, these markets are
still below or now only approaching their long-run vacancy rate averages.
In spite of the sustained level of deliveries now spurring at least nearterm softening in leasing fundamentals, this has yet to impact rent
growth, which grew 80 basis points nationally year-over-year to 4.7
percent. Despite supply concerns in select markets, Western region
markets made their presence felt here as well, as Seattle and Portland
each sustained 200 basis point gains in annual rent growth, currently at
8.3 percent and 7.5 percent, respectively, alongside outsized gains in
both Western region primary markets (San Francisco, Los Angeles) and
Western region secondary markets (Phoenix and Sacramento). The
current strength in leasing fundamentals in the Western region serves as
a microcosm for national trends and indicates that there will be a long
runway and a strong potential for muted softening to an unparalleled new
leasing market equilibrium.
4
Sunbelt markets taking the lead on absorption and
rent growth indicators
Multifamily absorption has maintained its strength with markets in
aggregate absorbing 1.6 percent of inventory. National absorption has
remained in the range of 1.6 percent to 1.7 percent of inventory dating
back to the fourth quarter of 2013, and this consistency is more
impressive when considering the simultaneous heightened pace of
deliveries. Absorption remains positive across the 40 tracked markets,
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
U.S. vacancy: 4.4%
Jacksonville
Austin
Raleigh-Durham
Houston
Orlando
Palm Beach
Boston
Nashville
Seattle-Bellevue
Denver
Atlanta
Portland
Dallas-Ft. Worth
Las Vegas
Washington, DC
Phoenix
Charlotte
Fort Lauderdale
Northern New Jersey
Salt Lake City
Tampa
Miami
San Francisco
Minneapolis
Silicon Valley
Chicago
Milwaukee
Pittsburgh
Baltimore
Philadelphia
Los Angeles
New York
Orange County
Inland Empire
San Diego
Oakland-East Bay
Sacramento
Vacancy (%)
Despite vacancy losses, West Coast markets outperforming U.S.
Source: JLL Research, Reis
29
4.0%
60 bps
3.5%
3.0%
2.5%
20 bps
50 bps
30 bps
100 bps
110 bps
100 bps
2.0%
50 bps
20 bps
1.5%
20 bps 0 bps
Q4 2014
1.0%
Q4 2015
0.5%
United States
Minneapolis
Jacksonville
Denver
Houston
Fort Lauderdale
Boston
Charlotte
Northern New Jersey
Atlanta
Source: JLL Research, Reis
5
Continued national pricing momentum, driven by regional strength
50.0%
45.0%
43.0%
41.0%
40.0%
35.0%
30.0%
25.0%
20.0%
29.0%
26.0%
25.0%
25.0%
24.0%
22.0%
20.0%
21.0%
20.0%
15.0%
12.6%
10.0%
5.0%
0.0%
Miami
Absorption (as a percentage of inventory)
Markets in the Southeastern region driving recent absorption gains,
accounting for five of the top 10 markets
Pricing has remained strong across individual markets according to
RCA’s Commercial Property Price Index, with positive year-over-year
growth across essentially every market, excluding Chicago, Philadelphia
and Baltimore, which saw modest declines. Washington, DC led all
tracked markets in pricing growth, of approximately 43.0 percent. The
sustained strength in leasing market fundamentals for the markets of the
Western region and Sunbelt have translated into asset pricing as well,
with each region represented twice in the top five year-over-year price
gainers by market: Orlando saw pricing growth in excess of 40.0 percent,
while Miami saw a 25.0 percent pricing gain. Unsurprisingly, the San
Francisco Bay Area and Denver each saw investment sale pricing gains
in excess of 25.0 percent over the past year as well. Cap rates remain
largely unchanged across primary and secondary markets in the quarter.
Continued robust levels of multifamily-focused capital, a diversification
into garden-style product—a play for yield—and expanding dispositions
of new developments will be key drivers of growth in 2016.
RCA CPPI Index, year-over-year growth (%)
with particular strength in the Sunbelt. Miami, Atlanta, Charlotte and Ft.
Lauderdale each saw notable upticks in absorption year-over-year,
ranging from 110 basis points to 50 basis points and now absorbing
inventory at a pace of 2.0 percent or greater. As a result of this sustained
strength, Atlanta, Charlotte and Ft. Lauderdale each saw annual rent
growth gains of 90 or more basis points. This trio of markets are now
demonstrating annual rent growth in the mid-5.0 percent range.
Comparatively, the annual rent growth gains of Raleigh-Durham and
Miami, respectively at 4.4 percent and 4.2 percent, may be “below
average” for the current environment, yet both figures would be strong in
essentially any other context. Both figures additionally outpace figures
the BLS released on year-over-year growth of average weekly wages, as
Miami-Dade County has seen 3.9 percent annual growth, while Wake
and Durham counties have grown at the respective paces of 2.5 percent
and 2.9 percent. The Sunbelt’s delayed path to economic recovery from
the previous decade’s recession has it currently positioned to exhibit the
resilient strength of leasing market fundamentals, proving that these
peaks are not purely a Western region phenomenon but are now
diversifying across absorption and rent figures.
Multifamily continues to be the straw that stirs
the drink
The multifamily asset type saw nearly $35.4 billion of investment sales
activity for the first-quarter of 2016. This figure represents an 8.6 percent
increase compared to the first-quarter of 2015 and represents the largest
first-quarter volume on record. Additionally, the first-quarter sales volume
figure represents the second-largest figure of the last 15 quarters, only
eclipsed by the unprecedented fourth-quarter 2015 volume of
$49.2 billion.
0.0%
Source: JLL Research, Real Capital Analytics
6
Private equity investment rising, concentrated in
portfolios and garden-style product
Private equity investors were a key driver of investment sales in the firstquarter of 2016. With over $8.2 billion in activity in the quarter, this figure
more than doubled comparable activity from the first half of 2015.
Starwood Capital Group–related acquisitions drove overall activity,
comprising 87.2 percent of total equity fund acquisitions this quarter. Two
significant portfolio transactions drove this activity: the nearly $5.4 billion,
69-property portfolio of 23,262 units from Equity Residential, and the
nearly $1.4 billion dollar, 19,614-unit, entity-level acquisition of Landmark
Apartment Trust. The acquisition of Landmark’s 71 property holdings is
30
Private equity transactions additionally demonstrate a sizable shift
toward suburban, garden-style product, having lagged behind the largely
urban-focused expansion thus far with investments across acquisitions of
existing product and new developments. The shift toward suburban
product has been focused on higher-quality assets, being those that
either delivered during the previous cycle or were renovated in the last
decade. As a result, given the thus far controlled development cycle in
the suburban multifamily markets, these are well positioned to sustain
stronger levels of renter demand relative to older vintage product. The
Praedium Group’s acquisition of Villas at Towngate in the Inland Empire
market serves as an example of this shift. The 394-unit asset, which
delivered in 2006, was acquired for $68.5 million and is positioned to
benefit from tight multifamily fundamentals and earn a higher yield than
similarly positioned stock in primary markets, such as Los Angeles. The
shift toward suburban product has been enabled for larger groups by
portfolio activity, which has increased 8.3 percent year-over-year. With
underlying confidence in the multifamily sector and compressed yields
for CBD product, investors will continue to look to new strategies to place
capital and earn higher yields—garden-style assets and portfolios being
two recent examples of these.
Equity fund activity driven by portfolio acquisitions
Portfolios
Equity fund acquisition by transaction type
concentrated in the Southern United States, with high concentrations in
Atlanta, Charlotte, Nashville, Orlando, Raleigh and Tampa in addition to
notable holdings in Dallas–Ft. Worth and Austin.
Single assets
100.0%
13.5%
90.0%
80.0%
39.2%
49.0%
52.2%
70.0%
60.0%
78.8%
50.0%
86.5%
40.0%
30.0%
61.8%
51.0%
47.8%
20.0%
10.0%
21.2%
0.0%
Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016
JLL Research, Real Capital Analytics (Transactions larger than $5.0m; Assets over 50 units)
Primary markets compress 20 basis points; overall cap rates tighten 10 basis points year-over-year
Seattle-Bellevue
4.0WA
– 4.5%
MT
Portland
4.3 – 4.8%
ME
ND
VT
MN
ID
OR
NH
Minneapolis WI
4.5 – 5.5%
SD
NY
WY
Northern California
3.6 – 4.3%
NV
CA
Los Angeles
3.6 – 4.3%
Denver
UT
Las Vegas
5.0 – 5.3%
Inland Empire
4.5 – 5.3%
San Diego
4.0 – 4.5%
IA
NE
IL
IN
CO4.5 – 5.5%
KS
MO
Charlotte
NC
4.8 - 5.3%
Nashville
TN
AZ
Phoenix
4.9 – 5.3%
U.S. core Class A
Multifamily cap rates
4.00 – 5.00%
5.00 – 6.00%
6.00 – 7.00%
7.00 – 8.00%
8.00 – 9.00%
9.00% +
New Jersey
3.3 – 4.1%
4.3 – 5.0%
NJ
Columbus Pittsburgh
Philadelphia
6.5%
6.0 OH
– 7.0% 5.8 – PA
4.8 – 5.5%
Washington, DC
Cincinnati WV
4.5MD– 5.5%
5.8 - 6.5%
VA
Raleigh
KY
4.8 – 5.3%
MI
Chicago
4.0 – 5.0%
4.5 – 5.0%
OK
NM
AR
Albuquerque
5.8 – 6.3%
Dallas-Fort Worth
4.0 – 5.5%
AustinTX
4.0 – 5.5%
San Antonio
5.0 – 6.0%
Houston
5.0 - 6.0%
MS
LA
Boston
3.8 – 5.0%
MA
CT
New York
RI
AL
Atlanta
4.3 –GA
5.3%
SC
Central-North Florida
5.2 FL
– 5.5%
South Florida
4.0 – 5.0%
Source: JLL Research, April 2016
31
Notable portfolio transactions, Q1 2016
Market
Property
Buyer
National
Equity Residential Portfolio
Starwood Capital Group
(69 properties)
Southeastern region; Texas
Seller
Price ($)
Size (units)
Price (per unit)
Equity Residential
$5,793,436,158
23,262
$249,052
Landmark Apartment REIT
Buyout (Entity-level; 71
Starwood Capital Group
properties)
Landmark Apartment
REIT
$1,219,433,998
19,614
$62,172
Southeastern region; Texas
Landmark Apartment
Portfolio (15 properties)
Milestone Apartments REIT
Landmark Apartment
REIT
$467,276,761
4,172
$112,003
Silicon Valley
Equity Residential
California Portfolio (51
properties)
Sand Hill Property Co / ADIA
Equity Residential
$348,388,745
1,813
$192,161
New York
Elghanayan NY Portfolio
(2 properties)
SW Wasserman
Liora Elghanayan
$310,000,000
330
$939,394
Southeastern region
Crecent Communities
UBS / Berkshire Group
Crescent
Communities
$238,900,000
1,064
$224,530
Florida
Wilson Company Florida
Starwood Property Trust
The Wilson Company
$127,542,902
1,602
$79,615
Los Angeles
Prometheus Real Estate
Decron Management Corp
CA Portfolio (2 properties)
Promethes Real
Estate
$126,500,000
390
$324,359
San Antonio
Western Rim Properties
Pure Multi-Family REIT
Western Rim
Properties
$117,500,000
760
$154,605
Raleigh-Durham
Blackstone Carolinas
CWS Capital Partners
Blackstone
$115,600,000
740
$156,216
Seller
Price ($)
Size (unit)
Price (per unit)
Market
Property
Buyer
New York
Rivertower at Sutton
GreenOak / Slate Property Group Equity Residential
$390,000,000
323
$1,207,430
New York
The Buchanan
Madison Realty Capital / USAA
Real Estate
David Tausik /
Cotswold Group
$270,000,000
289
$934,256
Chicago
North Water Residences
Invesco
DRW Trading
$240,312,000
398
$603,799
New York
The Chelsea
Greystar
LaSalle Investment
Management
$211,250,000
204
$1,035,539
New York
Riverton Houses
A&E Real Estate / Harvard
Management Co
CWCapital
$201,000,000
1,228
$163,681
Northern New Jersey
Oakwood Village
AION Partners
AIG
$183,371,173
1,224
$149,813
New York
Avalon Kips Bay
Dermot Co / SPI Holdings
AvalonBay
$173,000,000
209
$827,751
San Diego
Eaves Rancho San Diego
R&V Management Corp
AvalonBay
$158,000,000
676
$233,728
Northern New Jersey
Halstead 800 Madison
AvalonBay
DSF Advisors
$129,700,000
214
$606,075
New York Boroughs
248 N 8 Street
Greystar
Adam America RE
$125,000,000
169
$739,645
th
32
Retail
33
RETAIL
With increased asking rents and heightened investor sensitivity to
pricing, retail investment diversifying into secondary markets
U.S. Retail property market
U.S. Retail investment
-36
0.8%
$17.4
-25.8%
0.6%
2.6%
4.7%
-42
Though retail had a slow first-quarter, retail likely to pick up
throughout 2016. This quarter saw a divergence between active capital
and opportunities throughout the country for retail located in markets and
submarkets of focus. The early downward trend in retail investment sales
is consistent with overall U.S. declines in the early months of the year,
with real estate markets reacting to global economic factors.
Secondary markets are experiencing increased growth in retail
volumes, while oversaturated primary markets see decline. Those
secondary markets characterized by population growth and expanding
employment opportunities saw an influx of investment this quarter,
focused on lifestyle centers and malls.
With an increase in asking rents and historic low cap rates, New
York retail investment activity lags in the first-quarter. New York
retail volume has decreased by 80.8 percent year-over-year due to a lack
of Trophy product on the market and the long-term hold strategies
required for investment. Though there is considerable demand for Trophy
retail assets, owners of such assets are waiting for optimal timing to
place such investments on the market.
Grocery-anchored assets remain in high demand, despite a slow
first-quarter. Although investment volumes decreased by 27.6 percent,
all investor types have seen steady relative growth in grocery assets
year-over-year with private investors acquiring most aggressively
this quarter.
Retail yields continue to decline in the first-quarter of 2016 with
historic low cap rates in primary and secondary markets
10.0%
10-year Treasury yield (%)
Average primary market retail cap rate (%)
Average secondary market retail cap rate (%)
$50.0
4.9%
4.6%
1.8%
$25.0
Source: JLL Research, Real Capital Analytics (transactions larger than $5.0m)
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
0.0%
$0.0
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
Retail investment sale
Overall U.S. retail volumes decline 25.8 percent in first-quarter
$100.0
Q1
Q2
Q3
Q4
$75.0
High asking rents and shifts in luxury shopping patterns drive
investments from urban retail assets in primary to secondary
markets. While primary markets experienced a decline in urban
investment by 68.6 percent due in part to investor sensitivity to pricing,
secondary market urban investment increased by 186.7 percent. Pricing
divergence is evident throughout primary and secondary markets,
making urban property more affordable to those investors seeking assets
in the growing secondary markets.
Source: JLL Research, NCREIF, Board of Governors of Federal Reserve System
34
TOP
1
RETAIL THEMES
Quarter-over-quarter U.S. retail volume by asset type
$20.0
Urban
Freestanding
Strip center
Mall
Specialty center
Community/neighborhood center
$15.0
$2.8
$4.2
$10.0
$7.3
$0.3
$5.0
$5.0
$0.0
$0.8
$0.7
$1.5
$0.6
Q1 2013
$1.7
$2.0
$0.2
$1.6
$1.7
$1.4
$2.9
$2.7
$1.4
$1.1
Q1 2014
Q1 2015
Q1 2016
Sourcd: JLL Research, Real Capital Analytics (Transactions over $5.0m, including
shopping centers over 125,000 s.f. and all urban)
Secondary markets see increased activity this
quarter, while oversaturated primary markets lag
Across U.S. retail, leading gateway markets such as Miami and New
York are experiencing declined activity. However, other primary markets
are experiencing continued retail growth, benefitting from the
oversaturation of those declining markets. Of note, Los Angeles and
Chicago were the first and third most active retail investment markets
this quarter, respectively. Both cities have remained active over the past
five years with steady growth compared to those markets that
experienced spikes in retail in recent years. For example, Miami’s overall
retail volume rapidly grew to over $1.3 billion in 2014 and $1.4 billion in
2015, from $412.5 million in 2013, and experienced a 17.0 percent
decline in overall retail volume this quarter. Both Chicago and Los
Angeles vacancy is down 10 basis points quarter-over-quarter since
year-end, and both saw a continued increase in overall retail rents,
supporting the increase in retail investment and development.
Population and job growth boosting secondary market activity
$1.0
Retail investment sale volumes, Q1 2016 (billions of $US)
After two consecutive years of elevated U.S. retail volumes, retail activity
decreased by 25.8 percent during the first-quarter of 2016 year-overyear, falling short of expectations. The early downward trend in retail
investment sales is consistent with overall U.S. declines in the early
months of the year, with real estate markets reacting to increased
macroeconomic volatility, resulting from declining emerging market
growth, decreased oil pricing and evolving Federal Reserve policy, to
name a few. However, this slow start is not indicative of full-year 2016
sentiment. This quarter, the retail market saw a divergence between
active capital and opportunities throughout the country for retail located
in markets and submarkets of focus. This discrepancy is especially
apparent in the lack of desirable assets in historically strong retail
markets like New York and Miami. Despite a slow first-quarter in retail,
we anticipate strengthened activity in the remainder of the year based on
the current pipeline with elevated interest from buyers who appeared
inactive in this first-quarter. This will further benefit from increasing
development activity, up 18.1 percent to 29.4 million square feet from
last quarter.
Retail investment sale volumes
(billions of $US)
2
Though retail had a slow first-quarter, recent activity
not indicative of full-year sentiment
$0.9
$0.8
$0.7
$0.6
$0.9
Primary
markets
$0.7
Secondary /
Tertiary markets
$0.7
$0.6
$0.6
$0.5
$0.4
$0.3
$0.2
$0.3
$0.3 $0.3 $0.3 $0.3
$0.2
$0.1
$0.0
Source: JLL Research, Real Capital Analytics (Transactions over $5.0m, including shopping
centers over 125,000 s.f. and all urban)
35
Meanwhile, secondary markets characterized by growing populations
and employment are also seeing increased retail volumes, concentrated
in lifestyle centers and malls. Kansas City, having the second highest
investment volumes for the quarter, increased in volume by 192.0
percent from the first-quarter of 2015 and had total retail volumes of
$723.4 million. This large increase in Kansas City retail investment sales
included the acquisition of Country Club Plaza, the first ever developed
lifestyle center in the U.S., for $512.4 million by Taubman and Macerich
in a joint venture. Kansas City, as an emerging retail market for
investors, is the first city to implement Google Fiber and has a population
growing at a rate of 3.1 percent, making it a prime candidate for retail
expansion moving forward. In a similar vein, Denver retail volume
increased by an overwhelming 881.0 percent quarter-over-quarter. Like
Kansas City, Denver too is set for growth, with one of the fastest growing
populations in the country and a job growth rate of 2.7 percent. In the
future, we will likely see an increase in retail activity in those markets
experiencing population and job growth, mainly from domestic investors
comfortable with the markets.
New York’s high rents and low cap rates lead to
delay in retail investment sales in the first-quarter
Amid a historically atypical high rent environment, New York occupancy
lagged this quarter, which may contribute to perceived uncertainty in the
leasing markets and thus underwriting in select corridors. Because rents
are much higher in New York, tenants are hesitant to expand into prime
neighborhoods, leading to a delay in retail investment sales. Year-overyear, New York City has seen a 2.3 percent rent increase with an
extremely low average cap rate of 4.1 percent, a nearly 50 basis point
premium to overall primary retail markets. New York City is seeing by far
the highest rents in the country, averaging $86 per square foot and
reaching as high as $4,000 per square foot in certain prime urban retail
corridors. Miami and San Francisco follow New York with the second
and third highest rents in the country at $38 and $33 per square foot,
respectively—nearly 44.0 percent less than New York City.
Average asking rents, Q1 2016 ($ p.s.f.)
$86
$38
$33
$28 $26
4.0%
3.0%
Urban retail volume decreased by 60.4 percent this quarter
Source: JLL Research, PPR, NCREIF
6.0%
5.0%
$6.0
2.0%
$19 $16 $15
$15 $12
For urban product, macro shifts and high prices
driving a shift from primary to secondary markets
Primary markets across the U.S. experienced a drop in urban retail
transactions in the first-quarter of 2016. The global economy is seeing a
decline in luxury shopping sales, impacting the desirability of select
urban product in primary markets and persuading concerned investors to
look elsewhere. Upscale brands are having more difficulty maintaining
storefront properties in prime urban retail corridors due to new shopping
patterns of today’s consumer. A major facet of luxury shopping, travel
and tourism expenditures, decelerated at an annual rate of 1.7 percent in
the fourth quarter of 2015 after increasing by 4.5 percent in the third
quarter of 2015 and 8.4 percent in the second quarter of 2015. With
tourist spending down, changing luxury shopping patterns and typically
strong designer brands issuing forthcoming sales warnings, select urban
assets are seeing a resulting decline. For example, at the beginning of
the second quarter, Burberry announced a 3.0 percent sales decline in
the Americas, and Prada, which opened 21 new stores between 2013
and 2015, announced that it would offset these new openings with store
closures in response to recent underperformance.
New York retail capital markets slowing in early 2016
$100
$90
$80
$70
$60
$50
$40
$30
$20
$10
$0
4
1.0%
0.0%
Retail investment sale
3
Overall retail investment volume in New York has decreased by almost
$2.4 billion, or 80.8 percent, year-over-year. High barriers to entry and
typical long-term investment strategies for Manhattan retail product kept
the number of active deals low and thus retail volumes down in the firstquarter compared to prior years. Although transaction volume has
decreased, it is not due to a lack of investor appetite in the New York
retail market. Rather, there is a mismatch between investor supply and
demand, with considerable demand for Trophy product but a lack of
availability of such assets. Long-term owners of Trophy assets are
waiting for optimal timing to place such investments on the market, and
when these assets are placed on the market, they are fetching premium
buyers at premium prices. For example, the highest priced transaction in
the first-quarter was the 4,500-square-foot Chanel storefront located in
the heart of SoHo, purchased by Invesco for $115.4 million, setting a
storefront per-square-foot pricing record. The overall decline in premier
New York retail has paralleled a decline in foreign investment in New
York this quarter, down 65.6 percent after a rise in recent years. Though
New York retail investment is starting to slow in 2016, we have yet to see
whether this trend will persist or if resilient pricing in the market will begin
to soften. The present owners of Trophy assets in New York are in it for
the long haul, holding barriers to entry high for the most desirable
retail product.
Primary markets
Secondary markets
$4.0
$2.0
$0.0
$4.0
$2.7
$0.8
$1.3
$0.0
$0.1
$0.1
$0.4
Q1 2013
Q1 2014
Q1 2015
Q1 2016
Source: JLL Research, Real Capital Analytics (Transactions over $5.0m, including
shopping centers over 125,000 s.f. and all urban)
36
5
Despite low volume in first-quarter, groceryanchored assets remain in high demand
Though grocery-anchored investment sale volumes were down quarterover-quarter by 27.6 percent, grocery volumes have been on a steady
incline since 2012. Last year, grocery-anchored investment volumes hit a
peak for this cycle, reaching $5.9 billion, an annual increase of 20.9
percent. Since 2008, we have seen a pattern of growth in grocery assets
with investors holding properties for longer terms. Throughout this cycle,
REITs and private investors have invested the most aggressively in
grocery, with steady growth from both since 2013. REIT acquisition
activity in retail has been in decline and volatile since 2014, with a recent
volume decline of nearly $6.7 billion from the first-quarter of 2015, having
the majority of investments in lifestyle centers and anchored shopping
centers. Private investment in retail, on the other hand, has steadily
increased since 2009 with sustained interest in grocery. Similar to private
investors, institutional investors have also increased overall retail
investments throughout the cycle and increased grocery investment
since 2013. There is and will continue to be high demand for groceryanchored deals throughout the country, with investors seeking solid
returns on investment, finding the subtype low-risk and attractive. Of note
this quarter, grocery-anchored volumes were bolstered by the acquisition
of Inland Real Estate Corporation, concentrated in the Midwest, by DRA
Advisors for approximately $2.3 billion. Moving forward, private investors
with long-term hold strategies will likely remain active in this segment
with hopes of supplementing other real estate holdings that prove
more volatile.
Despite first-quarter decline, grocery assets remain in demand
$7.0
Grocery-anchored retail investment sales (billions of $US)
Amid ongoing changes in urban leasing markets, urban retail investment
volumes in primary markets totaled $1.3 billion in the first-quarter of
2016, declining by 68.6 percent from the first-quarter of 2015. However,
urban volumes reached $388.7 million in secondary markets, increasing
186.7 percent. This activity paralleled the recently large price disparity
between the market groups. As an example, when looking at major
primary and secondary markets on the West Coast, the average price for
a San Francisco urban property in the first-quarter of 2016 was $17.5
million compared to $9.1 million in San Diego, nearly half the transaction
size. This price differential is prevalent throughout primary and
secondary markets, making urban property more affordable to those
investors seeking such assets in the growing secondary markets. As
such, investors, specifically private investors and REITs who have
favored primary market urban assets throughout the cycle, are venturing
into comparable product in secondary markets. Foreign investors, which
largely remain focused on primary urban product, are increasing activity
in secondary markets as well, up 86.1 percent to a still minor $172.5
million. Lagging urban acquisition activity in these markets will continue
to provide opportunities to both domestic and foreign buyers with local
sponsors key to both buyer segments.
$6.0
$5.0
$1.9
$1.4
$4.0
$3.0
$1.3
$0.9
$2.1
$2.0
$1.5
$1.3
$1.0
$0.0
$0.3
$0.3
2012
$2.4
$0.6
$0.9
$1.0
$0.3
$0.3
$0.4
2013
2014
2015
Equity Fund
Institution/Advisor
REIT/REOC
User/Other
$0.2
$0.4
2016
YTD
Private
Source: JLL Research, Real Capital Analytics (Transactions over $5.0m, including shopping
centers over 125,000 s.f. and all urban)
37
New York and San Francisco lead primary markets to sub-5.0 percent cap rate levels
Seattle
WA
5.5-6.5%
MT
ME
ND
VT
MN
ID
OR
SD
WY
Sacramento
6.0-6.8%
San Francisco
4.5-5.8%CA
IA
NE
NV
Los Angeles
5.0-6.0%
San Diego
5.0-6.0%
UT
Denver
CO
6.0-7.0%
Phoenix
AZ
6.2-7.2%
U.S. core Class A
Retail cap rates
4.00 – 5.00%
5.00 – 6.00%
6.00 – 7.00%
7.00 – 8.00%
8.00 – 9.00%
9.00% +
NM
NH Boston
NY
MA
Detroit
5.5-6.5%
CT
6.5-7.0% Pittsburgh
MICleveland
NYC - RI
Manhattan
Chicago
6.0-7.0%
4.0-5.0%
6.0-7.5%
Philadelphia
NJ
6.0-7.0%
Indianapolis Columbus
5.5-6.5%
DE
OH
PA
IN
6.0-7.0%
IL 7.0-8.0%
Washington, DC
Cincinnati WV
MD
5.5-6.5%
6.5-7.5%
VA
KY
Raleigh
Charlotte NC 7.0-8.0%
TN
7.0-8.0%
Minneapolis
WI
7.0-8.0%
KS
MO
OK
Dallas
6.1-7.3%
TX
Austin
6.0-7.0 % Houston
6.0-7.0%
AR
MS
AL
Atlanta
5.8-7.0%
GA
SC
LA
Tampa
6.0-7.5%
FL
Orlando
6.5-7.0%
Miami
5.5-6.5%
Source: JLL Research, Real Capital Analytics, April 2016
38
Market
Property
Buyer
Seller
Price ($)
Size (units)
Price (per unit)
Chicago
Midwest Acquisition
DRA Advisors
Inland Real Estate
Corp.
$2,300,000,000
9,333,689 (retail)
N/A
Los Angeles
Runway at Playa Vista
(Mixed-use)
Invesco, RE
Lincoln Property
Company/ Phoenix
Property
$269,329,990
217,000
(retail)
$1,221
Silicon Valley
Eastridge Mall
Pacific Retail Capital Parners /
Silverpeak Real Estate Partners
GGP
$225,000,000
785,804
$286
Los Angeles
One Colorado Shopping
Center
Blackstone
Trident Capital Group
$200,999,000
260,699
$771
Los Angeles
Paseo Colorado
Cypress Equities
DDR
$135,000,000
556,271
$243
New York
Chanel
Invesco, RE
Spring & Wooster,
LLC
$115,388,000
4,500
$25,641
Washington, D.C.
Ballston Quarter
QIC
Forest City
$94,300,000
310,704
$303
Los Angeles
El Monte Shoppng and
Automotive Center
Merlone Geier Partners
Decron Properties
$84,500,000
473,347
$179
New York
775 Washington St.
The Harch Group/ Toms Capital
Robert Aldrich
(Zegna)
$71,000,000
21,169
$3,354
Seattle
2200 Westlake Ave (Retail) Weingarten Realty/ Bouwinvest
Vulcan Inc.
$66,210,046
73,800
$897
Price ($)
Size (unit)
Price (per unit)
Notable secondary / tertiary market transactions, Q1 2016
Market
Property
Buyer
Seller
Kansas City
Country Club Plaza - Retail Taubman/Macerich
Highwoods Properties
$ 518,800,000
804,000
$645
Denver
FlatIron Crossing
Heitman
Macerich
$ 427,100,000
722,855
$591
Westchester County
Ridge Hill
QIC
Forest City
$ 364,100,000
1,300,000
$281
Denver
Twenty Ninth Street Retail Heitman
Macerich
$ 350,000,000
704,713
$497
Northern New Jersey
Quaker Bridge Mall
Miller Capital Advisory/CalPERS Deutsche AWM
$ 337,500,000
357,221
$945
Oakland-East Bay
Jack London Square
CIM Group
National Real Estate
Advisors/Ellis
Partners
$ 250,000,000
434,000
$576
All Others - OK,TX
Texas Retail Portfolio
Global Fund Investments/Migdal
Insurance
TIAA CREF
$ 247,500,000
N/A
N/A
New Orleans
The Shops at Canal Place O'Connor Capital Partners
Berger Company,
Inc./Robert Ogden
$ 199,075,000
217,092
$917
Kansas City
Legends Outlets Kansas
City
Walton Street Capital/Legacy
Development
KKR/RED Legacy
$ 193,500,000
658,453
$294
Denver
Cherry Creek Shopping
Center
Invesco RE/ Oliver McMillan
AmCap Inc./Hart
Realty Advisors
$ 169,600,000
335,000
$506
39
Lodging
40
LODGING
Transaction activity and RevPAR growth soften following an
extraordinary 2015, but underlying fundamentals remain strong
U.S. Lodging property market
U.S. Lodging investment
-30
2.7%
$5.2
-62.9%
12-month change in total occupancy (bp)
Year-to-date RevPAR growth
1.3%
3.2%
7.8%
4
12-month supply growth (as a % of inventory)
Year-to-date ADR growth
• National lodging supply growth is expected to remain moderate.
However, the outlook for individual markets varies widely. Among
major hotel markets, New York, Miami and Denver face relatively
high near-term supply growth, while Orlando, San Francisco and
Atlanta have relatively constrained pipelines.
Hotel cap rates remain near historic lows
20%
Yield on 10-year Treasuries
Avg. target hotel cap rate, primary markets
Avg. target hotel cap rate, secondary markets
H1 2015
H1 2014
H1 2013
H1 2012
H1 2011
H1 2010
H1 2009
H1 2008
H1 2007
H1 2006
H1 2005
H1 2004
H1 2003
H1 2002
H1 2001
0%
• U.S. hotel transaction volume declined significantly from $13.4
billion in Q4 2015 to $5.2 billion in Q1 2016. While the level of deal
volume in Q4 2015 was extraordinary, transaction activity in Q1 2016
was approximately in line with average quarterly volume in the
current cycle.
• Share prices for publicly traded lodging REITs finally began to
show signs of recovery in Q1 2016, following a year of consistently
downward-trending performance. As of mid-April, the Dow Jones
U.S. Hotel & Lodging REITs Index was up approximately 23 percent
from its mid-January trough.
• Cap rates for hotel assets generally increased only marginally in
Q1 2016. Recent market surveys suggest that cap rates increased
between 10 and 20 basis points during the last six months for most
hotel asset types, while cap rates for select segments actually
declined marginally or held steady.
Overall U.S. hotel transaction volume by quarter
$60
Q1
Q3
$40
Q2
Q4
$20
$2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
• RevPAR growth for U.S. hotels softened noticeably in the firstquarter of 2016, rising only 2.7 percent from the amount recorded
for the first-quarter of 2015. Peaking hotel occupancy is largely to
blame for the deceleration in national RevPAR growth.
• Historically, supply growth has not been highly correlated with
RevPAR growth in the top-25 U.S. lodging markets in either the
short term or long term. In the long term, supply and demand growth
have borne a strong relationship, but in the short term, this
relationship breaks down as well. Therefore, while substantial supply
growth in select markets will likely be well absorbed in the long term,
the short-term outlook is more uncertain.
Hotel investment sale volume
(billions of $US)
While key indicators show that the U.S. hotel industry remains strong, the
sector experienced some softening in Q1 2016 relative to its
extraordinary performance in 2015. RevPAR growth slowed from 6.3
percent in 2015 to an inflationary rate in Q1 2016, while hotel transaction
activity declined more than 60.0 percent relative to the level of deal
volume recorded in Q4 2015. However, recalling that hotel occupancy
climbed to a historic high and annual deal volume soared to the secondhighest level on record in 2015, RevPAR growth and deal volume in Q1
2016 represent a return to normalized levels. Accordingly, given a strong
outlook for lodging demand in the context of robust economic growth in
the U.S., we maintain a positive outlook for the sector in 2016.
41
TOP
1
LODGING THEMES
RevPAR growth varied widely among the top-25 U.S.
lodging markets in Q1 2016
RevPAR growth for U.S. hotels softened noticeably in the first-quarter of
2016, rising only 2.7 percent from the amount recorded for the firstquarter of 2015. This growth rate represents a meaningful deceleration
following annual RevPAR growth of 8.0 percent in 2014 and 6.3 percent
in 2015, and peaking hotel occupancy is largely to blame for the
phenomenon. Having eclipsed the prior historical record in 2015,
occupancy at the national level likely has little room left for further
growth, especially considering that supply growth has begun to gradually
drift higher. As a result, whereas in recent years both occupancy and
ADR have contributed to material RevPAR growth, ADR gains are likely
to be the sole driver of RevPAR gains at this point in the cycle. As of Q1
2016, these dynamics have certainly begun to take effect, with year-todate occupancy declining 0.5 percent and ADR increasing 3.2 percent
compared to Q1 2015.
20.0%
15.0%
10.0%
5.0%
0.0%
-5.0%
-10.0%
-15.0%
Los Angeles
San Francisco
Norfolk
Nashville
Atlanta
Anaheim
Tampa
Orlando
Dallas
Oahu
Washington DC
St Louis
Total U.S.
Seattle
Detroit
Minneapolis
San Diego
Philadelphia
Phoenix
New York
Denver
Boston
Miami
Chicago
New Orleans
Houston
Q1 2016 YTD RevPAR Growth
RevPAR growth varied widely by market in Q1 2016
Source: Smith Travel Research
same time, a tight supply profile in Los Angeles and San Francisco is
allowing for double-digit rate growth in these markets, and after lagging
behind the nation for years, the Norfolk lodging market appears to be finally
breaking out with 11.2 percent year-to-date RevPAR growth, driven by
sizeable occupancy and rate gains.
2
Supply growth ticks up but remains moderate at the
national level
As of March 2016, the number of hotel rooms under construction
amounted to 3.0 percent of the existing rooms supply in the U.S.,
marking a slight increase from the new supply pipeline as of year-end
2015, when the number of hotel rooms under construction equated to 2.8
percent of the nation’s existing hotel rooms inventory. Historically, actual
supply growth in the year ahead has equaled approximately half of the
active construction pipeline, expressed as a share of the existing lodging
stock, suggesting that supply growth over the next 12-month period is
likely to remain below the long-term average of approximately 2.0
percent at the national level.
While national supply growth is expected to remain moderate, the
pipeline of rooms under construction is generally larger in the top-25
U.S. markets, several of which are poised to absorb large supply
increases in the next few years. New York and Miami are facing the most
significant near-term growth in supply, with hotel rooms under
construction representing 13.7 percent and 8.2 percent, respectively, of
existing rooms supply. Denver, Houston, and Seattle also face large
supply increases, with rooms under construction ranging from
approximately 6 to 7 percent of existing rooms supply. At the other end
of the spectrum, new supply remains limited in a number of large hotel
markets; hotel rooms under construction amount to less than 2 percent
of existing supply in seven of the top-25 U.S. markets, including
Atlanta, Orlando, New Orleans, San Francisco, Norfolk, St. Louis and
Oahu Island.
The performance of the top-25 U.S. lodging markets now varies widely.
Whereas 23 of the top-25 markets sustained positive RevPAR growth in
2015, a total of nine markets are currently experiencing year-over-year
RevPAR declines as of Q1 2016. A number of the markets experiencing
RevPAR declines have absorbed outsized supply increases in the last
year; New York, Houston and Miami absorbed the largest supply
increases, ranging from approximately 5 to 6 percent of existing supply in
the past year, and Denver and Boston also sustained moderate supply
increases that have likely contributed to negative RevPAR growth. At the
42
The relationship between long-term supply growth and RevPAR
growth has been weak
National supply growth is expected to be moderate but the outlook
varies considerably by market
2.0%
6.0%
5.0%
4.0%
3.0%
1.0%
0.0%
14.0%
12.0%
10.0%
*Supply and RevPAR CAGR reflects the 2001-2015 period;
data prior to 2001 not available for Anaheim.
8.0%
6.0%
Source: JLL Research, Smith Travel Research
4.0%
Norfolk
Atlanta
Orlando
New Orleans
Tampa
Chicago
Detroit
Anaheim
Top-25 Markets
Philadelphia
Dallas
Seattle
Denver
2.0%
0.0%
Source: JLL Research, Smith Travel Research
3
Supply Growth (1991-2015 CAGR)
RevPAR Growth (1991-2015 CAGR)
Houston
Denver
Dallas
Minneapolis
Phoenix
Orlando
New York
Atlanta
Philadelphia
Seattle
St. Louis
New Orleans
Nashville
Norfolk
Miami
Chicago
Washington DC
Tampa
Boston
Detroit
San Diego
Los Angeles
San Francisco
Anaheim*
Oahu
16.0%
New York
Hotel rms under construction (% of existing supply)
Since year-end 2015, the new supply pipeline has ticked up noticeably in
a number of markets but abated in others. Most notably, the number of
hotel rooms under construction in Denver jumped from 4.1 to 6.5 percent
of existing supply, leaving it third in the nation in terms of the scale of its
prospective near-term supply growth. At the same time, supply growth in
Houston has abated somewhat, with the number of hotel rooms under
construction declining from 7.1 to 6.5 percent of existing supply; hotel
developers are increasingly reticent to start new projects in the market
given RevPAR declines in the wake of recent supply growth and waning
demand in its energy-sensitive economy.
Historically, supply growth has not been highly
correlated with RevPAR growth in the top-25
U.S. markets
Given that supply growth in select markets has begun to generate a
degree of investor angst, a review of the historical relationship between
supply growth and RevPAR growth in the top-25 U.S. lodging markets is
warranted. Intuitively, all else being equal, markets with significant
supply growth can be expected to experience less RevPAR growth than
markets with constrained supply growth. Of course, all else is hardly ever
equal, and as a result, the correlation between supply growth and
RevPAR growth for a given market in a given year is fairly weak.
JLL compared annual RevPAR growth to annual supply growth during
the period from 1991 through 2015 for each of the top-25 U.S. lodging
markets and found that the two variables have a correlation of -0.28,
which implies that annual supply growth explains less than 8% of the
variation in annual RevPAR growth for the top-25 U.S. lodging markets
over the last twenty-five years. The correlation between long-term supply
growth and long-term RevPAR growth is hardly any better, as average
annual supply growth between 1991 and 2015 explains only about 10%
of the variation in average annual RevPAR growth during the same
period among the top-25 U.S. lodging markets. The implication is that the
current new supply pipeline does not necessarily tell us a great deal
about either the short-term or long-term prospects for RevPAR growth in
individual markets.
With respect to long-term growth prospects, the lack of a relationship
between supply growth and RevPAR growth appears to stem from a
strong correlation between supply growth and demand growth. Demand
growth over the last 25 years appears to explain approximately 75
percent of the variation in supply growth during that time among the top25 U.S. markets, as hotel developers respond well to demand indicators
in the long term. However, the relationship breaks down significantly in
the short term, with the correlation between supply growth and demand
growth in a given year essentially nonexistent. Therefore, while
substantial supply growth in select markets such as New York and Miami
will likely be well absorbed in the long term, the short-term outlook is
more uncertain.
4
Transaction activity returns to a more “normalized”
level in Q1 2016 following a blockbuster 2015
U.S. hotel transaction volume declined significantly from $13.4 billion in
Q4 2015—and $14.1 billion in Q1 2015—to $5.2 billion in Q1 2016,
representing a reduction in sales activity of more than 60 percent. While
a decline of this magnitude certainly sounds alarming, a historical review
of hotel transaction activity suggests that the current level of deal
volume represents a return to normality.
Hotel acquisitions activity soared to near-record levels in 2015. In fact,
the first, fourth, and second quarters of 2015 achieved the second, third,
and fourth highest levels of quarterly transaction volume, respectively,
since JLL began tracking hotel sales activity more than 15 years ago.
Additionally, deal volume has historically been lowest in the first and third
quarters of the year, presumably due to the tendency for a lull following a
high level of activity at year-end as well as during the summer months.
Therefore, while the level of deal volume in Q1 2016 amounts to a
sizeable decline in comparison to the prior quarter, it is approximately in
43
line with average quarterly transaction volume in the current cycle. Since
2010, transaction volume for all quarters averaged $5.7 billion per
quarter, and acquisitions activity in the first-quarter averaged $5.3 billion.
In fact, with the exception of Q1 2015, transaction activity in Q1 2016
was higher than the first-quarter’s level of deal volume for every year of
the current cycle, including 2014.
Transaction activity returns to the current cycle average in Q1 2016
$16.0
Quarterly Hotel Transactions Volume
$14.0
Average Q1 Hotel Transactions
Volume, 2010-2016
$12.0
However, as of mid-April 2016, REIT share prices have trended in an
upward direction once again. The Dow Jones U.S. Hotel & Lodging
REITs Index rose approximately 23 percent from its mid-January trough,
leaving the index 30 percent below its early 2015 peak. While share
prices remain depressed and new asset acquisitions are generally still
not accretive, the improvement in sentiment is encouraging and hardly
limited to the hotel sector’s segment of the financial markets. The S&P
500 is now up nearly 15 percent from its mid-February low; the price of
U.S. crude oil increased from less than $30 per barrel in mid-February to
approximately $41 per barrel at present; and 10-year fixed-rate AAA
CMBS spreads have narrowed back to 135 basis points in March after
having peaked at 168 basis points in February. As volatility in the
financial markets appears to have abated, investors’ confidence in
pursuing new hotel acquisitions is expected to improve as well.
6
$8.0
$6.0
$4.0
$2.0
$0.0
Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1
2014
2015
2016
2013
2011 2012
2010
Hotel cap rates remain near historic lows
Nascent recovery in share prices for hotel REITs
appears to be taking shape
Following a year of consistently downward-trending performance, share
prices for publicly traded lodging REITs finally began to show signs of
recovery in Q1 2016. The Dow Jones U.S. Hotel & Lodging REITs Index
declined approximately 43 percent between its late January 2015 peak
and its mid-January 2016 trough, exerting a palpable drag on publicly
traded hotel REITs acquisitions activity.
140
January 26,
2015:
146.96
Index
April 18,
2016:
103.49
110
January 19,
2016:
$84.44
6.0%
5.0%
Full service hotels, primary markets
Full service hotels, secondary markets
Select service hotels, all markets
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Apr
80
10.0%
7.0%
120
90
11.0%
8.0%
130
100
12.0%
9.0%
Dow Jones U.S. Hotel & Lodging REITs Index
150
13.0%
H2 2008
H1 2009
H2 2009
H1 2010
H2 2010
H1 2011
H2 2011
H1 2012
H2 2012
H1 2013
H2 2013
H1 2014
H2 2014
H1 2015
H2 2015
5
160
Cap rates increased only marginally in Q1 2016
Per our most recent Hotel Investor Sentiment Survey in October 2015,
investors’ targeted capitalization rates declined to 6.5 percent for fullservice hotels in primary markets compared to 6.8 percent a year prior.
Targeted capitalization rates for full service hotels in secondary markets
averaged 7.6 percent, amounting to a decline of about 20 basis points
from 7.8 percent a year prior. Cap rates in both primary and secondary
markets were at their lowest level since we introduced the Hotel Investor
Sentiment Survey in 2000.
Average target hotel cap rates
Billions
$10.0
2015
Source: Bloomberg
2016
44
Target hotel cap rates in select primary and secondary U.S. markets
Seattle
WA
7.1%
MT
ME
ND
VT
MN
ID
OR
NH
WI
SD
NY
WY
San Francisco
5.9%
IA
NE
NV
Denver
CO
7.7%
UT
CA
IL
KS
Los Angeles
6.6%
NJ
San Diego
6.9%
Hawaii
6.4%
OH
IN
PA
MO
OK
TX
Houston
8.3%
MS
AL
DE
NC
AR
Dallas
7.5%
New York
6.0%
VA
KY
TN
NM
RI
Boston
6.5%
Washington, DC
MD
6.8%
WV
AZ
Phoenix
7.8%
Philadelphia
7.9%
MI
Chicago
7.1%
MA
CT
Atlanta
7.6%
GA
LA
SC
Orlando
8.1%
FL
Miami
6.5%
Primary hotel markets
Secondary hotel markets
Source: JLL Research, Hotel Investor Sentiment Survey
Price
Rooms
HEI Hotels & Resorts
Magna Hospitality Group
Garrison Investment Group
Fundamental Advisors LP
$186,900,000
$158,000,000
$137,000,000
$125,100,000
384
369
1,103
245
Price (per
key)
$510,000
$428,000
$124,000
$511,000
Westmont Hospitality Group
Convergent Capital Partners
$120,500,000
250
$482,000
Hospitality Properties Trust
KHP Capital Partners
$114,000,000
221
$516,000
Summit Hotel Properties, Inc.
Arc Hospitality Trust
Noble Investment Group LLC
Summit Hotel Properties, Inc.
$109,000,000
$108,300,000
386
707
$282,000
$153,000
Hersha Hospitality Trust
Perseus Realty Partners
$106,500,000
238
$447,000
Laurus Corporation
$90,000,000
292
$308,000
$80,500,000
284
$283,000
Wheelock Street Capital
JMI Realty
Lowe Enterprises Investors
Brookfield Hotel Properties,
Thayer Lodging Group
Host Hotels & Resorts
Cornerstone Real Estate Advisers
$76,000,000
$74,500,000
350
281
$217,000
$265,000
Moody National Companies
Moody National Companies
$74,100,000
234
$317,000
Nakash Holdings
Walton Street Capital
$73,000,000
184
$397,000
Market(s)
Property
Buyer
Seller
Seattle-Bellevue
New York
Various
Boston
Carey Watermark Investors
Ascott Residence Trust
Gatehouse Capital
Xenia Hotels & Resorts, Inc.
Colorado Area
Seattle Marriott Bellevue (95% Stake)
Sheraton Hotel Tribeca New York
Garrison 10-Hotel Portfolio
Hotel Commonwealth Boston
Hyatt Regency Clearwater Beach
Resort & Spa
Kimpton Hotel Monaco Portland
Portland
Noble 2-Hotel Portfolio
Summit 6-Hotel Portfolio
Hilton Garden Inn Washington DC
Georgetown Area
Vail Cascade Resort
San Diego
Marriott San Diego Del Mar
Southwest Value Partners
San Diego
Minneapolis
Marriott San Diego Mission Valley
Hilton The Marquette Hotel Minneapolis
Springhill Suites Seattle Downtown
South Lake Union
Hotel Lincoln Chicago
Tampa
Portland
Atlanta, Nashville
Various
Washington, DC
Seattle
Chicago
Note: For part equity sales, the price per room pertains to the full implied value
45
Net Lease
46
NET LEASE
With non-traded REIT fundraising and volumes down, emerging
buyer segments filling the gap
U.S. Net Lease investment
U.S. Office Net Lease investment
$8.8
6.1%
$3.9
6.3%
U.S. Retail Net Lease investment
$2.9
6.8%
$2.0
5.3%
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
$0.0
2015
$20.0
2014
2005
$40.0
1.8%
2013
Q4
5.3%
2012
Q3
6.3%
2011
Q2
6.8%
2010
Q1
2005
Net lease investment
sale volumes
(billions of $US)
$60.0
9.0%
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
2009
Net lease investment down 44.1 percent year-over-year
Cap rates demonstrate moderate compression across sectors,
averaging 30 basis points since year-end
2008
Non-traded REIT acquisitions decrease 48.9 percent, coinciding
with equity funding decline of 57.1 percent year-over-year.
Regulatory changes and rockiness in the CMBS markets shifted nontraded REITs out of the top buyer position, creating opportunities for
other active buyers attracted to net lease yields.
Pricing remains competitive as office product leads cap rate
compression with a 70-basis-point decrease year-over-year. As
net lease industrial cap rates are plateauing, office and retail cap
rates continue to compress, with notable diversification into
secondary markets.
2007
Sale leaseback transaction volumes declined 56.1 percent after
three years of expanding activity. While early 2016 saw an increase in
industrial sale leasebacks, the office sector continues to drive activity.
Additional built-to-suit deliveries and a strong pipeline of transactions will
drive activity gains through the remainder of the year.
Appetite for net lease product expands for institutional and foreign
buyers. A shift in buyer type is enabling deeper sector penetration as
institutional and foreign investors are increasingly showing a preference
for net lease assets—specifically with strong credit and long-term leases.
2006
Amid U.S. economic volatility, sales volume saw a general decline
across all net lease sectors in the first-quarter, down 44.1 percent.
Foreign investment, sale leaseback volumes and portfolio transactions
dropped to the lowest comparable quarterly levels in the cycle to-date
following a peak year of activity in 2015. A decline in non-traded REIT
fundraising decreased acquisition activity further across the U.S.
10-Year Treasury (%)
Office net lease cap rate (%)
Industrial net lease cap rate (%)
Retail net lease cap rate (%)
Q1 2016
U.S. Industrial Net Lease investment
Source: JLL Research, Real Capital Analytics (Transactions larger than $5.0m), NCREIF
47
TOP
1
NET LEASE THEMES
Declining activity in early 2016 not indicative of fullyear sales potential
While investor demand is rising and diversifying for the net lease sector,
a heightened sensitivity to perceived risk resulting from recent volatility
has narrowed the profile of “desirable product” in early 2016, resulting in
presently constrained opportunities for this capital. Sales volume saw a
general decline across all net lease sectors in the first-quarter, as foreign
investment, sale leaseback volumes and portfolio transactions dropped
to the lowest comparable quarterly levels in the cycle to-date following a
peak year of activity in 2015. This additionally was spurred by a decline
in non-traded REIT fundraising and thus decreased activity in
acquisitions across the U.S.:
• Despite remaining active, foreign net lease investments decreased
69.9 percent year-over-year. Interest from foreign capital sources has
remained strong, with transactions expected to normalize as
speculative fears decline.
• Sale leaseback transactions decreased 56.1 percent across all
sectors, with retail leading the decline.
• Portfolio activity has normalized after an increase in industrial
portfolios in 2015, bringing portfolios as a percentage of total net lease
volume closer to historic norms, dropping from 40.5 to 36.3 percent
year-over-year. Only two portfolio transactions over $1.0 billion closed
in the first-quarter, compared to 12 in the first-quarter of 2015. Activity
is expected to pick up through the remainder of the year as a result of
an adequate pipeline.
The most notable transactions in the first-quarter were in primary
markets across all sectors. New York, Los Angeles and Chicago
accounted for 28.0 percent of sales volume in the retail sector, while the
industrial sector was driven by sales in Chicago, Philadelphia and the
Inland Empire with a combined $2.7 billion of activity. Boston,
Washington, DC and San Diego led the office sector with a combined
$2.0 billion in net lease sales volumes.
A decrease in real estate equity raises and a lack of preferred
opportunities have been accompanied by volatility in the global financial
and CMBS markets, resulting in a regression of sales volumes for the
quarter. Numbers are expected to stabilize in the months to come, as the
market finds equilibrium from recent volatility, notably in the debt
markets and energy sector. While non-traded REITs once drove pricing
compression, decreased fundraising from this buyer segment will
continue to compress the competitive landscape of future pricing for
alternate buyer types, specifically private buyers and 1031 investors who
are less affected by volatility in the financing markets.
Secondary market deal flow concentration picks up in early 2016
Portfolio concentration normalizes to 36.3 percent after peak year
2015
2014
2013
2012
2011
Total single-asset sales
Q1 2016
Total portfolio sales
2010
33% 35% 25% 29% 29% 26% 28% 38% 28% 40% 36%
2009
Secondary market sales
47%
10-year
average
2008
47%
67% 65% 75% 71% 71% 74% 72% 62% 72% 60% 64%
2007
51%
50%
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2006
48%
44%
3%
Net lease investment sale volumes
47%
40%
2015
53%
40%
10%
Q1 2016
Primary market sales
Tertiary market sales
57%
46%
12%
9%
2014
38%
47%
38%
7%
2013
2007
47% 52%
37%
8%
2012
51%
46%
6%
2011
40%
7%
2010
11%
2009
43%
8%
2008
9%
2006
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
48
2
Increased built-to-suit deliveries and strong
transaction pipeline to drive quarterly sale
leaseback activity gains in 2016
3
Sale leaseback transaction volumes declined after three years of
expanding activity—down more than 50.0 percent in the first-quarter.
While early 2016 saw an increase in industrial sale leasebacks, the office
sector continues to drive activity. Four of the eight largest sale leaseback
transactions were in the office sector, three of which were in primary
markets. The three largest office sale leasebacks in the first-quarter were
notably headquarters, including Macy’s office sale leaseback in New
York for $170.0 million, CNA headquarters’ for $108.0 million in Chicago
and Weyerhaeuser’s in Seattle for $70.5 million. In a period of increasing
office rent growth and diversifying investor demand, net lease office
pricing is compressing, down 70 basis points over the last 12 months.
This is happening regardless of sale leaseback volume declines in the
year. Credit and leasehold remain key components of valuations,
notably for assets with investment-grade tenancies and leaseholds with
10 or more remaining years of term, commanding a 14 basis point
premium over average office net lease product.
Overall sale leaseback transactions decreased 56.1 percent
Drop-off in non-traded REIT fundraising impacting
competitive net lease acquisition landscape
Non-traded REITs are facing more hurdles than ever before with
increasing scrutiny and new rulings from security regulators and changes
in fiduciary standards. Consequently, non-traded REIT fundraising has
decreased 57.1 percent year-over-year, suggesting further acquisition
activity throughout the first half of 2016 will remain compressed. As a
result of decreasing active capital, non-traded REIT acquisitions declined
by 48.9 percent year-over-year. This has driven REIT participation rates
in the sector to rapidly shift from the most to least active buyer group
over a six-month period. The buyer segment led acquisition market
share with penetration rates of 39.8 and 48.4 percent in 2014 and 2015,
respectively, but declined to 8.2 percent in first-quarter 2016. These
shifts are also impacting the typical profile of non-traded REIT assets,
with most of the first-quarter’s acquisitions being industrial assets in
secondary markets as opposed to office assets in primary markets.
However, in the largest acquisition of the quarter, Griffin Capital’s
Essential Asset REIT II acquired a $35.8 million, Toshiba Tech–leased
asset in Raleigh-Durham in a sale leaseback transaction, which traded
at a 6.1 percent cap rate with slightly more than 12 years of remaining
lease term.
$60.0
Non-traded REIT fundraising declines impacting buyer landscape
Sale leaseback
$25.0
$50.0
Nontraded REIT fundraising
Nontraded REIT sales volumes
$20.0
$40.0
Billions of $US
$30.0
$15.0
$10.0
$5.0
$20.0
Source: JLL Research, Real Capital Analytics (Transactions larger than $5.0m),
Robert A. Stanger & Co.
Q1 2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
$0.0
While activity declined this quarter, volume is expected to increase in the
months to come yet likely will decline year-over-year. This will be
supported by an expanding net lease office inventory amid rising buildto-suit deliveries—with an additional 13.0 million square feet of assets
expected to deliver over the next nine months, with highest
concentrations in Salt Lake City, Boston and Columbus—and a strong
pipeline of sale leaseback transactions entering the market for sale.
These notably will be driven by the office sector in secondary markets.
Q1 2016
2015
2014
2013
2012
2011
2010
2009
2008
$10.0
2007
$0.0
2006
Net lease Investment sale volumes (billions of $US)
Single tenant
Regulatory challenges and rockiness in the CMBS markets have put a
significant strain on equity raises for non-traded REITs. As cap rates
continue to compress and interest rates continue to be the cause of
speculation, investors are losing confidence in REITs’ abilities to acquire
accretive assets, impacting overall net lease sales activity. While nontraded REITs once drove pricing compression, decreased activity could
lessen the competitive landscape of future pricing. This will provide
opportunities for other active buyers attracted to current net lease yields,
seeking diversification and favoring the less-capital-intensive nature of
the sector.
49
4
Emerging focus from domestic institutions and
cross-border capital for net lease product
Despite overall net lease sales volume declines, single-tenant
acquisitions by institutional buyers increased 9.0 percent year-over-year,
a result of the ongoing focus on diversification and yield in the latter
stages of the cycle. The impact of these buyers relative to overall activity
has thus increased 58.2 percent year-over-year. The largest transaction
of the quarter was Cira Square in Philadelphia, a redeveloped CBD asset
leased by the Internal Revenue Service (IRS) with 14 years of remaining
lease term. The property was acquired by South Korea–based Korea
Investment Management (KIM) for $354 million, or $410 per square foot.
Overall, the largest institutional transactions of the quarter closed in
Philadelphia, Atlanta and New York and varied across the office,
industrial and retail sectors.
After peak levels in 2014 and 2015, REIT participation rates are
declining as institutional and equity fund buyers emerge
2014
2015
Q1 2016
Competitive pricing in primary markets in 2015 led investors to shift their
focus into secondary markets, creating broader competition for 2016.
Investor selectivity across markets and sectors continues to drive pricing
activity. The office sector presents the greatest challenges with
accelerated cap rate compression and continued investor preference.
80%
60%
40%
Primary and secondary markets leading office net lease cap rate
compression, down 70 basis points since year-end
Q1 2016
2015
2014
2013
2012
2011
2010
Office cap rates on average 180 basis points lower than net lease
10.0%
5.0%
Source: JLL Research, CoStar, Real Capital Analytics
(Transactions larger than $25.0m and over 100,000 square feet)
Q1 2016
2015
2014
2013
0.0%
2012
Overall Office
All Single Tenant Office
Less than 10 years remaining lease term
Greater than 10 years remaining lease term
2011
A shift in buyer type is enabling deeper sector penetration for buyers where
non-traded REITs once reigned. Institutional and foreign investors are
expected to remain active through the remainder of the year, bringing
opportunity to owner-users looking at sale leaseback opportunities as well as
net lease owners looking at monetizing assets across primary and secondary
markets. Assets with strong credit and term will remain key for these buyers.
0.0%
2010
The Philadelphia transaction as well as others in active markets additionally
reflect an expanding appetite for net lease product with term from crossborder investors. While down on a relative basis year-over-year, foreign
investors made up 9.2 percent of all net lease sales in the first-quarter, down
from 17.2 percent in the first-quarter of 2015. In relative terms, this remains
slightly lower than average levels of foreign investment into the net lease
sector over the last 10years, having averaged 12.6 percent of overall activity.
While foreign capital at-large has been focused on primary markets, net
lease product is proving to be a key gateway for these users into secondary
markets, having accounted for 18.8 percent of all cross-border, secondary
market investments since 2014. Buyers out of South Korea and the United
Kingdom are driving 93.0 percent of 2016 deal flow.
2009
Primary office markets (%)
Secondary office markets (%)
Tertiary office markets (%)
Overall net lease (%)
2009
#REF!/ REOC
REIT
2008
High Net Worth
5.0%
2008
Corporate / User
2007
Developer / Property company
2007
Primary Secondary
Equity fund
2006
Primary Secondary
2006
Primary Secondary
Institution / Advisor
10.0%
Net lease office cap rates (%)
20%
0%
Overall net lease cap rates continued to compress with a 46 basis point
reduction year-over-year. As net lease industrial cap rates are
plateauing, office and retail cap rates continue to compress across
primary and secondary markets. This is driving overall cap rates to
decline. Net lease retail product led cap rate compression earlier in the
cycle with peak compression of 70 basis points in 2015, but office has
since caught up. Office cap rate compression was the highest seen for
the sector in this cycle—70 basis points over the last 12 months. Office
assets with 10 or more years of remaining lease term outperformed the
overall sector by a multiple of 3.0 on the metric with a 215 basis point
decrease in cap rates during this period, reinforcing the impact of
increasing competition from new players in the sector. On the market
level for the office sector, on the heels of increased competition and
resulting primary market compression in recent years, secondary
markets have picked up steam, with Phoenix, San Diego, Dallas and
Fort Lauderdale leading compression.
Cap rate (%)
100%
5
Pricing environment remains competitive, with net
lease office product leading cap rate compression
in early 2016
50
Tenant
Sector
Market
Property
Buyer
Facebook
Office
San Francisco
Facebook HQ, 1601
Willow Rd
Facebook
Macy's
Office
New York
422 Fulton St
Tishman Speyer
Northrop Grumman
Office
Washington, DC
Palantir
Technologies
Office
Google Fiber
Seller
Price ($)
Size (s.f.)
Deutsche Asset &
Wealth Management
$202,358,000
1,024,090
Macy's
$170,000,000
378,000
McKinley & Pierce
Bldgs, 7555 Colshire Northrop Grumman
Dr
Dividend Cap
Diversified Prop
Fund
$158,400,000
574,558
New York
430 W 15th St
TIAA
Atlas Capital Group
$117,000,000
98,087
Industrial
Atlanta
Fairburn Logistics
Center, Bohannon
Rd
Deutsche Asset &
TPA Group
Wealth Management
$120,000,000
1,129,750
Restoration
Hardware
Industrial
Dallas-Fort Worth
1303 W Pioneer
Pkwy
CBRE Global
Investors
Deutsche Asset &
Wealth Management
$75,000,000
860,445
Federal Supply
Service (GS)
Industrial
Philadelphia
1900 River Rd
STAG Industrial
Management
UrbanAmerica
$61,500,000
1,048,631
Chanel
Retail
New York
139 Spring St
Invesco
Lisa Fromartz
$115,388,000
4,500
B&B Italia
Retail
New York
138 Greene St
Ascot Properties
Thor Equities
$38,500,000
55,000
Off Broadway Shoe
Warehouse
Retail
Los Angeles
6263 Topanga
Canyon Blvd
CA Home Builders
Paragon
Commercial Grp
$27,000,000
28,433
Notable secondary market transactions, Q1 2016
Tenant)
Sector
Market
Property
Buyer
Seller
Price ($)
Size (s.f.)
Cira Square, 2970 Market St
Coretrust Capital
Partners / Korea
Investment
Management
Brandywine Realty
Trust
$354,000,000
862,692
San Diego
Santa Fe Summit, 7525-7555
Torrey Santa Fe Rd
Intuit
Kilroy Realty Corp
$262,300,000
465,812
Office
Philadelphia
Saint-Gobain HQ, 20 Moores
Rd
90 North RE
Partners
E Kahn
Development
$123,182,736
320,000
Quintiles
Office
Raleigh-Durham
Quintiles Plaza, 4820 Emperor
N/A
Blvd
Franklin Street
Properties
$86,025,000
259,531
AmeriPlex Bakery
Industrial
Indianapolis
AmeriPlex Bakery, 5202
Exploration Dr
Gramercy Property
Trust
Prologis
$37,000,000
225,586
Affordable Interior
Systems, Inc.
Industrial
Boston
25 Tucker Rd
James R Wiersma
Calare Properties
$31,485,000
588,868
Boston Scientific
Industrial
Boston
500 Commander Shea Blvd
FedEx
Boston Scientific
$31,000,000
378,248
Grocery Outlet
Retail
San Diego
1002 Market St
Zephyr Partners
Bosa Properties
$27,000,000
18,056
Walmart
Supercenter
Retail
Fort Lauderdale
2500 W Broward Blvd
Steve Rhodes
Gatlin Development
Co
$26,060,000
189,543
BJ's Wholesale
Club, Inc.
Retail
Baltimore
4701 O'Donnell St
Inland Real Estate
Group
Skylar Development
LLC
$23,500,000
89,000
Internal Revenue
Service (GSA)
Office
Philadelphia
Intuit
Office
Saint-Gobain
51
For more information, please contact:
Investor
Sean Coghlan
Director, Investor Research
+1 215 988 5556
sean.coghlan@am.jll.com
Hotels
Kent Michels
Director, Hotels Research
+1 312 228 2927
kent.michels@am.jll.com
Multifamily
Michael Morrone
Analyst, Multifamily Research
+1 312 228 2304
michael.morrone@am.jll.com
Retail
Arielle Einhorn
Analyst, Retail Research
+1 312 228 3466
arielle.einhorn@am.jll.com
Debt & Equity
Ronak Sheth
Research Analyst
+1 312 228 3471
ronak.sheth@am.jll.com
Industrial
Peter Kroner
Sr. Analyst, Industrial Research
+1 312 228 2744
peter.kroner@am.jll.com
Office
Rachel Johnson
Analyst, Office Research
+1 312 228 3017
rachel.johnson@am.jll.com
Net Lease
Sarah Henry
Sr. Analyst, Net Lease Research
+1 312 702 4248
sarah.henry@am.jll.com
Click for more research on: Hotels, Industrial, Multifamily, Office & Retail.
About JLL
JLL (NYSE: JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased
value by owning, occupying and investing in real estate. A Fortune 500 company with annual fee revenue of $4.7 billion and gross revenue of $5.4
billion, JLL has more than 230 corporate offices, operates in 80 countries and has a global workforce of approximately 58,000. On behalf of its clients,
the firm provides management and real estate outsourcing services for a property portfolio of 3.4 billion square feet, or 316 million square meters, and
completed $118 billion in sales, acquisitions and finance transactions in 2014. Its investment management business, LaSalle Investment Management,
has $57.2 billion of real estate assets under management. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For
further information, visit www.jll.com.
About JLL Research
JLL’s research team delivers intelligence, analysis and insight through market-leading reports and services that illuminate today’s commercial real
estate dynamics and identify tomorrow’s challenges and opportunities. Our more than 400 global research professionals track and analyze economic
and property trends and forecast future conditions in over 60 countries, producing unrivalled local and global perspectives. Our research and expertise,
fueled by real-time information and innovative thinking around the world, creates a competitive advantage for our clients and drives successful
strategies and optimal real estate decisions.
© 2016 Jones Lang LaSalle IP, Inc.
All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the
accuracy thereof.

United States Investment Outlook

Transcription

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