See the latest commercial real estate trends in U.S. Trophy and Class A office space. Our annual U.S. Skyline Review contains a building-by-building and floor-by-floor assessment of 43 office market centers across the country—the market-makers of the U.S. office sector. Click through here for a sneak peek. More information at http://www.us.jll.com/united-states/en-us/united-states-skyline-review

1. Themes that shape the U.S. Skyline
Infographics from the U.S. Skyline Review | Spring 2014

2. Collision of the workforce and workplace
“If you build it, they will come” can be thrown out...In the 80s
and 90s, supply and demand eventually met and thus filled up
office buildings in core and even challenged locations. The
millennial generation’s shift into the driver seat of the
workforce over the next five years will position buildings and
micromarkets with unique offerings, a sense of place and a
heartbeat to dominate demand patterns. Ironically, this does
not mean Main and Main buildings will be the winner, but in
many cases, could be the loser, as owners who bet on
location only and not experience are left behind until they can
recreate an ideal setting for tomorrow’s tenant.

3. Reinvented frontiers
A significant shift in demographics and urban in-migration
have fueled Skyline population growth to nearly triple the rate
of growth of overall cities. Consequently, once derelict or
largely ignored urban microsegments will see a renaissance
over the next three to five years. Parking lots will be
transformed into Trophy office towers; warehouses into
multifamily units, rail depots into retail experiences and dim
streets into lively blocks. Look for areas like Downtown
Atlanta, South Park Los Angeles, Midtown Village in
Philadelphia, Middle Market San Francisco, the Arts District in
Dallas, Mount Vernon Triangle in Washington, DC and the
West Side in New York to lead growth in the years ahead with
a more vibrant offering than traditional office corridors.

4. Flight to the middle
In recent quarters, high-end and value conscious tenant
demand have left few space options at the extremes of the
Skyline, positioning mid-tier buildings for tightening ahead.
This scarcity, particularly in the form of large blocks of space,
will position the mighty middle to capture future tenant activity.
However, in order for owners of those second- and thirdgenerational buildings to be successful, repositioning and
investment will be needed to maximize window line, minimize
column spacing and offer more side core opportunities, among
other attributes.

5. Rightsizing overload
Corporates across industries are reevaluating workplace
strategies and implementing new solutions to attract and
retain talent, improve the workplace culture and wring out cost
savings. Law firms are seeing their per attorney space shrink
from 900 square feet per attorney to as efficient as 550 square
feet per attorney, consulting firms are seeing optimization
levels increase by nearly 50.0 percent and 75.0 percent of
corporates are proactively solving for future space
optimization. However, in recent months, we have seen a
plateauing in the frequency of rightsizing and even a
overcorrection from some larger companies and firms. Cost
savings remain important, but culture and retention are
trumping that in an improved economic environment.

6. Cards stacked against tenants
Demand levels are increasing, space options are decreasing
and rents are going up. However, that is just the cover story;
the underlying message shows a Skyline with intense capital
demand, which will translate into rent growth ahead coming
more from investment demand than leasing demand due to
aggressive competition and underwriting ultimately yielding
even higher rents and lower concessions. Further, on the
back-end of those sales, tenants can expect to see the tax
component of operating expenses jump significantly due to
record sales prices recorded.

7. The United Nations of Skyline
Canada, China, Chile, Korea, Qatar and Norway are just a few
of the countries where capital placement in the Skyline has
been prominent in recent years. Demand currently sitting on
the sidelines is even higher than the levels we have seen
invested into the Skyline over the past 24 months. As a result
of this globalization, domestic institutions and REITs will be
increasingly left to reevaluate investment strategies, consider
joint ventures, move farther along the risk curve (and thus out
of the Skyline) and expand their geographic focus from a
handful of gateway cities to core product in the top 30 to 40
Skylines, shifting activity to many secondary Skylines ahead.

8. Supply
Space crunch is prevalent in luxury and value
While construction activity across the Skyline has
picked up in recent quarters (reaching 17 million
square feet), the overwhelming amount of
construction activity is concentrated in three
markets: New York, Houston and San Francisco.
The additional 40 Skylines JLL tracks have an
average of just 198,550 square feet of space under
construction. In fact, 10 Skylines have vacancy
levels below 10.0 percent with seven of those
Skylines showing no current development and two
of those Skylines seeing just one crane in the air.
This dynamic has caused a space crunch in SuperTrophy or AA buildings across most Skylines. In
New York, of the most sought-after Trophy
buildings, half had vacancies of less than 5.0
percent. In Chicago, only three buildings priced
above $40.00 per square foot have occupancy
levels below 90.0 percent. Trophy assets in
Uptown Dallas all have occupancies above 85
percent and CBD’s Trophies are far outperforming
the broader market with respect to occupancy and
rents.
A similar tightening exists in Skyline value options.
In Washington, DC, buildings priced ($45.00 NNN
$+/-$70.00 FS) or below posted occupancy levels
16.0 percent higher than the overall Trophy market.
In Miami, properties priced $40.00 per square foot
or below demonstrated vacancy levels that were
29.1 percent lower than the overall Skyline.

9. Supply
Space crunch is prevalent in luxury and value
Secondary Skylines
accounting for some
of the sharpest drops
in vacancy:
11.9%
13.4%
U.S. Skyline
historical
equilibrium
direct vacancy
U.S. Skyline
direct vacancy
as of YE 2013
Orange County
(-460bp)
Detroit and Fort Lauderdale (-420bp)
Washington, DC (-340bp)
Orlando (-330bp)
Baltimore (-320bp)

10. Supply
Space crunch is prevalent in luxury and value
Only
4 Skylines still post direct vacancy rates above 20.0%
Cincinnati
Cleveland
Dallas
Phoenix
11 Skylines now have single-digit direct vacancy rates
Bellevue
Charlotte
Houston
Philadelphia
Pittsburgh
Portland
Raleigh
Richmond
San Francisco
St. Louis
Washington, DC

11. Supply
Space crunch is prevalent in luxury and value
50.0%
of office construction
nationally is taking
place in Skylines...
percent of Skylines are
seeing construction...
66.0%
despite
representing
just
for a total of
17
million square feet
14.8%
of office
inventory
nationwide

12. Supply
Space crunch is prevalent in luxury and value
Skylines with the highest rate of construction to existing inventory is a mix of primary and
secondary geographies:
Newark
(12.7%)
Houston
(9.8%)
Richmond
Austin
(8.4%)
(8.3%)
Washington, DC
Orange County
(7.3%)
(7.2%)

13. Demand
Activity and growth levels continue to expand and diversify
The Skyline once again led demand and
occupancy gains versus the broader U.S. office
market, besting countrywide levels by 45.0 percent
and doubling the gains of the overall CBD. Overall,
the Skyline registered just shy of 10 million square
feet of occupancy gains in 2013, following nearly
22.4 million square feet of net absorption in the
three years prior. However, the main difference
between then and now is market participation with
70.0 percent of Skylines demonstrating consistent
net absorption over the past two years.
of the frequency of that trend. Approximately 15.5
percent of Skyline transactions involved rightsizing
in 2013 with the vast majority stemming from law
firms and banks and financial institutions. However,
even within these sectors (and the accounting /
consulting sector), evidence of an overcorrection
by certain tenants has arisen. Further, looking at
the growth industries across the Skyline (energy,
tech, health care and media), few of those uses
can operate in a remote environment like some of
the traditional office sectors can.
Ahead, both opportunities and challenges await
landlords. Rightsizing has dominated the office
sector over the past three years, yet recently, we
have noticed a slowdown and potential plateauing
Yet, one of the key challenges for landlords ahead
is the lack of near-term large-block tenant demand
with 2017 and 2018 tenants touring the market
becoming the norm, not the extreme.

14. Demand
Activity and growth levels continue to expand and diversify
Activity and growth levels continue to expand and diversify
Net absorption as percent of inventory
(and percent of markets seeing
occupancy growth)
1.0%
1.3%
1.5%
1.6%
61.9%
71.4%
2010
2011
2012
2013

15. Demand
Activity and growth levels continue to expand and diversify
Energy, tech, media and healthcare dominate tenant growth
Accounting / consulting:
Architecture, construction
engineering:
21% Growing
59% Stable
20% Shrinking
25% Growing
70% Stable
5% Shrinking
Law:
Healthcare:
32% Growing
68% Stable
0% Shrinking
Banking / finance:
22% Growing
64% Stable
14% Shrinking
Media:
22% Growing
51% Stable
27% Shrinking
Energy:
74% Growing
26% Stable
0% Shrinking
Technology:
41% Growing
53% Stable
6% Shrinking
63% Growing
32% Stable
5% Shrinking

16. Demand
Activity and growth levels continue to expand and diversify
Rightsizing what?
In 2013, the number of
transactions where tenants
grew doubled
the amount where
tenants gave back space
Rightsizing has been
dominated by
2 industries,
which accounted
for
of
all rightsizing.
83.3%
2013
Skyline
transactions
that exhibited
2013
Skyline
transactions
that exhibited
growth:
30.2%
rightsizing:
15.5%
To shrink or to grow?
Banking /
Finance
Law
Banks and law firms
11
20,000 s.f.
saw their
real estate footprint
grow
Banks and law firms
20,000 s.f.
5
saw their
real estate footprint
shrink

17. Demand
Activity and growth levels continue to expand and diversify
More Skylines experiencing net new growth as opposed
to net new contraction:
Skylines that saw highest
concentration of expansions:
Atlanta
Austin
Bellevue
Boston
Chicago
Columbus
Detroit
Houston
San Diego
Tampa
Skylines that saw highest
level of rightsizing:
Charlotte
Cleveland
Sacramento
Washington, DC

18. Rents
Growth to spread across geographies and pricing segments
While the Skyline segment of the market remains
somewhat bifurcated from a rental standpoint,
rents are beginning to grow across markets from
industry-heavy primary Skylines to now even
diversified secondary Skylines. Nearly two-thirds of
Skylines are reporting consistent rental increases
at a rate 1.4 times faster than the U.S. office
market as a whole, referencing the tight
fundamentals in core product. Despite the rent
increases, stubbornly high tenant improvement
allowances and only a slight reduction in rental
abatement are indicative of a more challenging
landscape for landlords and a welcome leftover of
the lingering downturn to tenants across
most cities.
From a geographical perspective, rental growth
remains highest in tech- and energy-dominant
Skylines; however, these markets, which have
seen large upticks in new construction, may be the
first geographies that switch from landlordfavorable positions to neutral positions in 2016 due
to the new supply. Conversely, markets without
significant speculative development (all markets
besides Houston, San Francisco and New York)
will see leverage for landlords extended over the
next 24 to 30 months with a trickle down in
tightening from the top-down and the bottom-up of
the Skyline.

19. Rents
Growth to spread across geographies and pricing segments
Rents for Skyline properties reach $40.73 p.s.f., the first time they
have broken $40.00 p.s.f. on record; with rental growth of 3.4 percent in 2013
$36.69
$29.16
2 0 05
$37.86
2007
2008
$30.81
2 0 06
$34.58
$34.51
$36.25
2009
2010
2011
$39.39
$40.73
20 1 2
2 0 13

20. Rents
Growth to spread across geographies and pricing segments
Increased demand and shrinking
space options mean leverage in
the Skyline is shifting away
from tenants to landlords
2016:
Tenant-favorable
Skylines
2.3%
2015:
11.6%
2014:
18.6%

21. Rents
Growth to spread across geographies and pricing segments
Industry-driven Skylines are posting fastest rental growth over time:
Largest rent growth past 12 months :
Largest rent growth past 36 months :
9.6%
Bellevue: 9.2%
Fort Worth: 7.9%
Portland: 6.3%
Austin, Denver: 5.1%
80.7%
Bellevue: 18.2%
Houston: 17.7%
New York: 16.9%
Orange County: 16.4%
San Francisco:
San Francisco:
Largest rent growth since 2005 :
69.8%
San Francisco: 69.1%
Austin: 53.9%
Denver: 52.4%
Salt Lake City: 49.7%
Houston:

22. Investment
Foreign capital shifts domestics along the risk curve
2013 saw a resurgence of investment sale activity
with primary and secondary Skylines seeing yearover-year growth of 43.4 and 20.0 percent,
respectively, on a square footage basis. While the
broadening of transaction activity across
secondary markets spurred a modest softening of
cap rates, primary markets saw average cap rates
compress below pre-recession levels, now pegged
at 4.8 percent.
A resurgence of activity in New York, exhibited by
nearly 5.1 million square feet of transactions and
pricing exceeding $1,000 per square foot in three
transactions, was a key primary market growth
factor. However, Los Angeles surpassed New York
sales volumes due to Brookfield Office Properties’
4.9 million-square-foot acquisition of the MPG
Office Trust portfolio - the largest trade of 2013
nationally. Foreign capital demonstrated significant
growth with investments in New York, Washington,
DC and Boston, accounting for 50.2 percent of
buyers in primary Skyline transactions in 2013.
Foreign investment is notably flowing from China
and Norway, both of which saw U.S. investments
surpass $1.0 billion.
While primary markets showed notable growth this
year, secondary market pricing gains per square
foot exceeded primary markets—a trend
evidenced in Raleigh, Miami and Philadelphia.
Transaction activity in these markets continues to
be driven by REITs and domestic institutional
buyers, spurring growth across 14 secondary
markets and expanding bidder profiles to
institutional investors.

23. Investment
Foreign capital shifts domestics along the risk curve
Foreign investment
activity continues to
fly into the Skyline
from all parts of the
globe: $1.9b (2012)
versus $5.2b (2013),
accounting for 50.2%
of buying activity
in 2013 in
primary markets
$2.1b 2013
$0.8b 2013
$0.7b 2013
New York
Washington, DC
Boston
($0.0b 2012)
($0.3b 2012)
($0.0b 2012)
$0.5b 2013
$0.4b 2013
$0.0b 2013
Chicago
Seattle
San Francisco
($0.0b 2012)
($0.0b 2012)
($1.6b 2012)
Origins of large foreign investors in Skyline assets:
China:
Norway:
Australia:
South Korea:
Canada:
$1.4b
$1.2b
$0.8b
$0.5b
$0.4b

24. Investment
Foreign capital shifts domestics along the risk curve
Investment activity across the Skyline
to highest levels since 2007
Square feet transacted
in the Skyline in 2013:
63.9 m.s.f.
jumps
Percent of Skyline
markets that have
seen sales volumes
(s.f. basis) grow
since 2011:
68.3%
Percent increase in
Skyline sales volume
(s.f. basis) from
2012 to 2013:
30.8%
Liquidity growing in secondary
markets with institutions
edging out REITs as
primary buyers
Percent of 2013
sales transactions
acquired by REITs in
secondary markets:
38.6%
Percent of 2013 sales transactions acquired
by institutional buyers in secondary markets:
39.4%

25. Investment
Foreign capital shifts domestics along the risk curve
Cap rates continue to
for core assets:
San Francisco:
compress to record lows
3.2% (average low 4s)
Boston: 3.7% (average high 4s)
New York: 3.8% (average low 4s)
Minneapolis: 4.0% (average low 6s)
Seattle: 4.2% (average high 4s)
Washington, DC: 4.2% (average low 5s)
Atlanta: 4.2% (average low 6s)
Austin: 5.2% (average low 6s)
Houston: 5.3% (average high 5s)
Denver: 5.5% (average low 6s)
Appetite for risk varies greatly
across buyer types
Over the past 24 months, occupancy of Skyline
properties acquired by…
(and percent of those assets classified as Trophy)
Foreign:
88.9% (64.7%)
REITs:
87.2% (50.0%)
Domestic institution / advisor:
86.7% (50.9 %)
Developer / property company:
79.6% (20.0%)
Equity fund:
68.2% (16.7%)

26. Interested?
Intrigued?
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commercial real estate
trends and statistics
with our complete
2014 U.S. Skyline Review.
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