INSIGHTSTRENDS OPPORTUNITIE S

++

Q2 2015

HOW TO RENEGOTIATE LEASES ON YOUR TIMETABLEBy Bradley Fulkerson Managing Director, Tenant Advisory Services Transwestern

INSIGHTSTRENDS OPPORTUNITIES

++

2Q 2015 EDITION

© 2015 TRANSWESTERN transwestern.com

Transwestern is a privately held real estate firm specializing in agency leasing, management, tenant advisory, capital markets, research and sustainability services. The fully integrated global enterprise leverages competencies in office, industrial, retail, multifamily and healthcare properties to add value for investors, owners and occupiers of real estate. As a member of the Transwestern family of companies, the firm capitalizes on market insights and operational expertise of independent affiliates specializing in development, real estate investment management and research. Transwestern has 34 U.S. offices and assists clients through more than 180 offices in 37 countries as part of a strategic alliance with Paris-based BNP Paribas Real Estate.

STRATEGICALLY ENHANCING CLIENT SERVICES A Message from Chip ClarkePresident | Americas Transwestern

PREPARE FOR PARADIGM SHIFT IN OFFICE LEASINGBy Steve PurpuraExecutive Managing Partner, Northeast Market LeaderTranswestern

NATIONAL ECONOMY OFF TO A GOOD START IN 2015By David Weisel Chief Executive Officer Delta Associates

CURRENT SERIES OF DEVELOPMENT DIFFERS FROM PREVIOUS CYCLESBy Carleton Riser President Transwestern Development Co.

transwestern.com Q2 2015 INSIGHTS + TRENDS + OPPORTUNITIES

STRATEGICALLY ENHANCING CLIENT SERVICES

The most successful companies in the U.S. must continuously enhance strategies to prevail as market leaders, and Transwestern is no different. We never cease to implement improvements to the services we provide. In that vein, we are pleased to announce a new nationwide initiative called the All Energy New Business Pursuit Plan, which manages client relationships and requirements across multiple markets. By creating a real-time database with up-to-date information on client activities, we can jointly, proactively and more skillfully service these important accounts. As in everything the company does, our ultimate objective is to increase the value of our clients’ investments.

As part of Transwestern’s goal of continuous improvement, we routinely share our expertise on real estate trends that impact the space owned and occupied by clients. Examining trends and topics of interest to the industry is one of a myriad of ways Transwestern brings value to clients and friends of the firm. Case in point, an article in this month’s Insights + Trends + Opportunities concerns an important movement that has not yet begun trending. Steve Purpura, Transwestern’s executive managing partner and Northeast market leader, discusses how real estate leasing will change in light of the millennial mindset. As the next generation of real estate decision-makers graduates onto the scene, owners may want to examine alternative strategies to capitalize on a shifting landscape.

Also in the second-quarter edition, Transwestern Development Co. President Carleton Riser sheds light on commercial lender requirements impacting the capital markets environment and how those factors have affected office development in this cycle. And Delta Associates, Transwestern’s research affiliate, provides an economic overview of the United States and how the current climate is impacting our industry.

After examining the economic landscape, we at Transwestern are fairly optimistic 2015 will be a strong year for real estate. Accordingly, our hope is that the information in this newsletter will assist you in achieving your business objectives this year.

Best regards,

Chip Clarke President | Americas

A Message from Chip Clarke

NATIONAL ECONOMY OFF TO A GOOD START IN 2015,BUT THERE’S ROOM FOR IMPROVEMENTBy David Weisel Chief Executive Officer Delta Associates

The national economy began 2015 with momentum exceeding expectations, but recent gross domestic product (GDP) and job growth data have caused concerns about whether the strong performance can be sustained through the remainder of the year. Even with room for improvement, the economy has been performing well overall, and we expect increasing strength over the next few years.

JOB GROWTH

The U.S. added 3.1 million new payroll jobs (not seasonally adjusted) during the 12 months ending March 2015, with the private sector accounting for the vast majority of growth. The 12-month growth rate of 2.3 percent compares well to the 25-year annual average of 1.0 percent or 1.2 million jobs per year. Month-to-month (seasonally adjusted) gains were robust at the end of 2014 and in the first two months of 2015, but preliminary payroll job growth in March 2015 was only 126,000 (preliminary), the first time in 13 months that growth was below 200,000.

For the 12 months ending March 2015, the top job gain sectors were Professional/Business Services, Education/Health Services, Leisure/Hospitality and Retail Trade – adding a total of 2.0 million new jobs, or 65 percent of net new employment. Construction/Mining has been consistently strong over the past couple of years. The Financial Services and Manufacturing sectors recorded weak job growth in 2013, but gained momentum towards the end of 2014 and in the first three months of 2015. The public sector has now added jobs for 10 consecutive months after shedding jobs during the previous 44; nearly all of this growth was at the state and local government level.

UNEMPLOYMENT

Initial unemployment claims have fallen steadily since their peak in March 2009. As of mid-April 2015 the four-week, seasonally-adjusted moving average for initial claims stood at 284,500, down 11.0 percent from one year ago and 25 percent below the 15-year average.

The seasonally adjusted unemployment rate declined to 5.5 percent as of March 2015 from 6.6 percent one year earlier, despite a minimal 0.5 percent growth in the labor force. In general, we anticipate that the unemployment rate will edge down over the next year as the economic expansion continues, hiring accelerates and uncertainty dissipates. However, in the short term, unemployment may tick up as improved conditions encourage more people to rejoin the labor force.

In March 2015, the average hourly wage increased only slightly to $24.86, a 2.1 percent increase from one year prior. Wage growth is weak partly because job growth has been concentrated in lower-paying industries. Also, younger workers entering the workforce tend to hold down the overall average hourly wage. On a positive note, workers have found increasing success in finding full-time employment – meaning bigger paychecks.

GROSS DOMESTIC PRODUCT (GDP)

Real GDP growth was weak in the first quarter of 2015, after three consecutive quarters of strong growth. After annualized growth of 4.6 percent, 5.0 percent and 2.2 percent in the preceding quarters, GDP growth was an anemic 0.2 percent in the first quarter of 2015 (the government’s advance estimate). According to the Federal Reserve Bank of Philadelphia, real GDP growth is forecasted to be 3.2 percent in 2015 overall, although this forecast may be revised downward in light of the most recent economic data. Looking ahead, real GDP growth is forecast to average 2.9 percent in 2016, 2.7 percent in 2017 and 2.7 percent in 2018.

HOUSING MARKET

Home prices in the 20 major metro areas covered by S&P/Case-Shiller increased 5.0 percent during the 12 months ending February 2015. The housing market has slowed nationally on a year-over-year basis and is now more consistent with the pace of overall economic growth. Inventory or the number of homes for sale is gradually normalizing, easing pricing pressure.

FEDERAL BUDGET

The Congressional Budget Office (CBO) projects that the federal budget deficit will be 40 percent smaller in 2015 than it was in 2013. The U.S. will still be running a deficit – meaning we are not paying down debt, it is just increasing more slowly – but that is still substantial progress in two years. In its March 2015 update, the CBO reported that 2015 will be the sixth consecutive year that the deficit’s share of the GDP has decreased since peaking in 2009 at 9.8 percent. The CBO projects a $486 billion deficit in 2015, or 2.7 percent of the GDP. Nevertheless, without material changes to current law, the deficit is projected to rise between 2016 and 2025.

transwestern.com Q2 2015 INSIGHTS + TRENDS + OPPORTUNITIES

PAYROLL JOB GROWTHUnited States | Year-Over-Year

Source: Bureau of Labor Statistics, Delta Associates; May 2015.-500

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Private SectorPublic Sector

THO

USAN

DS O

F NE

W P

AYRO

LL J

OBS

Note: Data are not seasonally adjusted.

Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q1 15Q2 14 Q3 14 Q4 14

PAYROLL JOB GROWTH BY SECTORUnited States | 12 Months Ending March 2015

0 100,000 300,000 500,000 700,000

Federal Government

Information

State and Local Government

Other Services

Wholesale Trade

Financial Activities

Transportation/Utilities

Manufacturing

Construction/Mining

Retail Trade

Leisure/Hospitality

Education/Health

Professional/Business Services

JOB CHANGESource: Bureau of Labor Statistics, Delta Associates; May 2015.Note: Data are not seasonally adjusted.

INITIAL UNEMPLOYMENT CLAIMSUnited States | Four-Week Moving Average

250,000

300,000

350,000

400,000

450,000

500,000

550,000

600,000

650,000

700,000Peak in Initial Unemployment Claims Week of 3/28/09 = 659,250

15-Year Average = 380,105

INIT

IAL U

NEM

PLOY

MEN

T CLA

IMS

Source:Federal Reserve Bank of St. Louis, Delta Associates; May 2015. Note: Data are seasonally adjusted.

2010 2011 2012 2013 2014 2015

Week of 03/07/15 = 284,500

UNEMPLOYMENT RATEUnited States

0%

2%

4%

6%

8%

10%

12%

1980 1985 1990 1995 2000 2005 2010 2015*

U.S.

UNE

MPL

OYM

ENT R

ATE

Note: Through March 2015; seasonally adjusted.Source: Bureau of Labor Statistics, Delta Associates; May 2015.

0%

1%

2%

3%

4%

5%

2007* 2008 2009 2010 2011 2012 2013 2014 2015

AVERAGE HOURLY EARNINGS

12-M

ON

TH P

ERCE

NTA

GE G

ROW

TH

12-Month Percentage Growth | 2007 — March 2015

Average 2007-2008 = 3.3%

Average 2009-2014 = 2.1%

* Data available starting March 2007.Source: Bureau of Labor Statistics, Delta Associates; May 2015.

(6,000)

(5,000)

(4,000)

(3,000)

(2,000)

(1,000)

0

1,000

2,000

3,000

4,000Full-timePart-time

EMPLOYMENT LEVELS BY JOB STATUS12-Month Percentage Growth | 2007 — March 2015

2010 2011 2012 2013 2014 2015

12-M

onth

Net

Cha

nge

in E

mpl

oym

ent

(Tho

usan

ds)

Note: Data are seasonally adjusted.Source: Bureau of Labor Statistics, Delta Associates; May 2015.

GDP GROWTHUnited States

(10%)

(8%)

(6%)

(4%)

(2%)

0%

2%

4%

6%

2007 2008 2009 2010 2011 2012 2013 2014 2015

ANN

UAL G

DP C

HAN

GE IN

200

9 CO

NST

ANT D

OLL

ARS

20-Year Average = 2.5%

Source: Bureau of Economic Analysis, Delta Associates; May 2015. Note: Annualized.

ANNUAL CHANGE IN EXISTING HOME SALE PRICESUnited States

(25%)

(20%)

(15%)

(10%)

(5%)

0%

5%

10%

15%

20%

2008 2009 2010 2011 2012 2013 2014 2015

PERC

ENT C

HAN

GE F

OR

MED

IAN

PRIC

EO

F SI

NGL

E-FA

MIL

Y H

OM

ES

Note: Data reflect 20-city composite index.Source: S&P/Case-Shiller, Delta Associates; May 2015.

Source: Federal Reserve Economic Data (FRED),Delta Associates; May 2015.

BASELINE BUDGET PROJECTIONSUnited States

FEDE

RAL D

EFIC

IT ($

BIL

LION

S)

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

(1,200)

(1,000)

(800)

(600)

(400)

(200)

0 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Deficit % of GDP

DEFICIT AS A % OF REAL GDP

Baseline budget projections as of March 2015.Source: Congressional Budget Office, Delta Associates; May 2015.

SELECTED U.S. GOVERNMENT INTEREST RATES

0%

1%

2%

3%

4%

5%

6%

7%

2000 2003 2006 2009 2012 2015

INTE

REST

RAT

ES

Federal Funds Rate10-Year Treasury30-Year Treasury

Note: Federal Funds Rate unchanged since December 16, 2008. 30-Year Treasury not issued between Q2 2002-2005.

U.S. INFLATION AND PERSONAL CONSUMPTION EXPENDITURE INDEX

(2%)

0%

2%

4%

6%

8%

10%

12%

14%

16%

PERC

ENTA

GE C

HANG

E

CPI-UPCEPI

Source: Federal Reserve Economic Database, Delta Associates; May 2015.

Note: CPI-U through March 2015 and PCEPI through February 2015.12-month seasonally-adjusted percentage change.

1980 1985 1990 1995 2000 2005 2010 2015

Recessions

OUTLOOK

Overall, we expect economic conditions to be slightly stronger in 2015 than in 2014. While March year-over-year job growth was not as strong as expected, the unemployment rate remains low and an increasing share of new jobs are full-time positions. Jobs for the unemployed, full-time positions for the under employed and higher wages are areas where the national economy has room for improvement. We expect progress in these areas to be slow and steady over the next few years.

David WeiselDavid.Weisel@DeltaAssociates.com 202.778.3119

This article is based on economic data available as of May 1, 2015

INTEREST RATES AND INFLATION

Interest rates remain low by historical standards and are likely to remain low this year. (Inflation is well below the Federal Open Market Committee’s (FOMC) objective of 2 percent, there are still too many people looking for work or underemployed and wages remain stagnant.) The pace of improvement in these metrics will be an important factor in the FOMC’s decision about increasing the federal funds rate, which may happen later this year or in early 2016.

Prices were flat during the 12 months ending March 2015. The personal consumption expenditure price index (PCEPI) rose only 0.3 percent during the 12 months ending February 2015. Food and beverages, housing and medical care all increased by 1.9 percent or more, but those inflation components were offset by an 8.5 percent decrease in transportation costs, which included a 29.2 percent decrease in motor fuel costs.

Because price pressure tends to lag behind economic growth by a year or more, and in light of modest wage growth and lower gas prices, we expect inflation to be constrained in the near term – likely in the 0.5 percent to 1.0 percent range on an annualized basis in 2015.

transwestern.com Q2 2015 INSIGHTS + TRENDS + OPPORTUNITIES

12-MONTH PAYROLL EMPLOYMENT CHANGE THROUGH MARCH 2015JOB CHANGE JOB CHANGE

METRO AREA # % METRO AREA # %

LA Basin Minneapolis-St. Paul 39,600 2.1%

Los Angeles/Long Beach/Glendale 113,300 2.7% Boston (Metropolitan NECTA) 39,100 1.5%

Orange County (Santa Ana/Anaheim/Irvine) 55,200 3.7% Detroit/Warren/Livonia 38,200 2.0%

Riverside/San Bernardino/Ontario 53,400 4.2% Charlotte 36,700 3.5%

Total LA Basin 221,900 3.2% Philadelphia 35,300 1.3%

New York 151,600 1.7% Tampa/St.Petersburg 34,500 2.9%

San Francisco Bay Area San Antonio 32,000 3.4%

San Jose/Sunnyvale/Santa Clara 54,700 5.5% Portland, Oregon 30,800 2.9%

San Francisco/San Mateo/Redwood City 43,800 4.4% Sacramento 27,500 3.1%

Oakland/Fremont/Hayward 26,000 2.5% Kansas City 26,800 2.7%

Total Bay Area 124,500 4.1% Indianapolis 26,000 2.7%

Dallas/Fort Worth 115,800 3.6% Raleigh/Durham 25,300 3.0%

South Florida Las Vegas 25,100 2.9%

West Palm Beach/Boca Raton 20,600 3.7% Salt Lake City 23,200 3.6%

Fort Lauderdale 28,900 3.8% Austin 22,800 2.5%

Miami/Miami Beach/Kendall 42,300 3.9% Nashville 22,600 2.6%

Total South Florida 91,800 3.8% Columbus, Ohio 21,500 2.2%

Houston 82,500 2.9% Jacksonville 16,700 2.7%

Atlanta 80,500 3.3% Baltimore 15,100 1.1%

Seattle 63,300 3.5% St. Louis 14,600 1.1%

Chicago 62,600 1.4% Cincinnati 14,400 1.4%

Phoenix 55,500 3.0% Cleveland 14,300 1.4%

Washington, D.C. 50,700 1.6% Oklahoma City 12,200 2.0%

Orlando 50,200 4.6% Memphis 7,200 1.2%

Denver/Boulder 49,700 3.3% Pittsburgh 4,800 0.4%

San Diego 40,900 3.1% New Orleans (800) (0.1%)

Source: Bureau of Economic Analysis, Delta Associates; May 2015. Note: Data are not seasonally adjusted.

HOW TO RENEGOTIATE LEASES ON YOUR TIMETABLE By Bradley Fulkerson Managing Director, Tenant Advisory Services Transwestern

Tenants often want to renegotiate an office lease before its expiration date – either to alter the amount of space, number of years or price per square foot. While most tenants resign themselves to waiting until two years out to attempt a change, there is no reason to be constrained by that timeline. Tenants can put themselves in the driver’s seat on any lease transaction by proactively negotiating a solution that benefits both sides of the table. It may seem counterintuitive, but favorable tenant and owner outcomes can almost always be achieved simultaneously; all that’s required is analysis, awareness of each party’s objectives and a creative negotiation strategy.

Every time a company’s real estate requirements change, it is advised to attempt a corresponding lease change. Need more space for expansion? Need less space because existing square footage is being utilized more efficiently? Need specific concessions to achieve certain objectives? All items are on the table if the proposed deal is also advantageous to the owner.

Last year, our Transaction Sciences team negotiated a favorable lease restructure for a 50,000-square-foot tenant in a St. Louis suburban office property while its building was being acquired. Before the building was sold, Transwestern took the company to market with a smaller 36,000-square-foot requirement two years prior to its current lease expiration. When the prospective buyer put the existing building under contract, we negotiated a new lease with the buyer that reduced the square footage, lowered the total occupancy costs and extended the lease term. The buyer got more favorable underwriting on the deal with the longer lease in hand, and our tenant was able to downsize several years prior to the natural lease expiration date.

transwestern.com Q2 2015 INSIGHTS + TRENDS + OPPORTUNITIES

Another of the many renegotiating strategies involves securing expansion space in a building that’s 100 percent occupied. When a fully leased asset comes to market, the advisor can uncover which investors are submitting proposals. If the business model of one of those investors is more compatible with the tenant, the advisor could pre-structure a lease with the preferred party that would benefit the tenant and give the bidder a more favorable position from which to value the property and make an offer. The multi-pronged concession arrangement could involve the new buyer agreeing to get another tenant to forgo an expansion right so it could be offered to the original client in exchange for a long-term lease. The long-term lease improves underwriting for the prospective buyer, increasing the likelihood that it will be selected as the winning bidder.

A myriad of solutions can be implemented on behalf of a tenant, no matter how many years remain on a lease. It’s important to keep in mind that a pending contractual event is not required. The best advisors are those willing to invest time to explore creative solutions in situations where it looks like there is no alternative – solutions that drive measurable value for both parties. In this way, the tenant can achieve a favorable outcome, on its own timetable.

Bradley Fulkerson Bradley.Fulkerson@transwestern.com 404.842.6610

"TENANTS CAN PUT THEMSELVES IN THE DRIVER’S SEAT ON ANY LEASE TRANSACTION BY PROACTIVELY NEGOTIATING A SOLUTION THAT BENEFITS BOTH SIDES OF THE TABLE."

PREPARE FOR PARADIGM SHIFT IN OFFICE LEASING By Steve Purpura Executive Managing Partner, Northeast Market Leader Transwestern

Working preferences of millennials have led many tenants to reconfigure office space to include more trendy collaborative areas that appeal to the next generation. Building on that movement, co-working space has become wildly popular over the last few years with young entrepreneurs who want to work in close proximity to like-minded professionals in hip office space offering social-based amenities.

Owners of commercial buildings may assume this trend will not affect them; that startup companies will outgrow the small environment and eventually lease traditional office space. However, we do not believe this to be the case. The co-working phenomenon represents a real estate paradigm shift that owners should recognize and prepare for. In anticipating the transformation, Transwestern has developed strategies that will allow forward-thinking owners to capitalize on the shift.

Adapting a new approach begins with an examination of the millennial mindset and growth of the co-working industry. The unique perspective millennials bring to every aspect of their lives impacts their use of real estate – both personally and professionally. They look for a lot of the same qualities in work space that they do at home, where they gravitate to large multifamily complexes with plenty of people, amenities and social opportunities. That mentality is the impetus behind the co-working industry.

The co-working industry, not to be confused with executive suites, grew from one location in 2005 to 781 sites in 2013, according to a report by NAIOP. In particular, the success of WeWork Companies Inc. introduced the concept into the mainstream consciousness. Launched in New York in 2010, WeWork leases large, multi-floor blocks of space from building owners, then parcels out small portions of it to entrepreneurs. The company offers a fully socialized office community that seems a lot like a trendy hotel lobby, with comfortable furniture and hip music playing in the background. Professionals, typically ranging in age from 25 to 35, rent desks and/or small offices by the day or month. They work alongside like-minded professionals, who share copy machines, Wi-Fi and a calendar of social activities designed to link them to each other. As of March 2015, the $5 billion WeWork had plans to double its 29 locations by year-end and had been featured in the Wall Street Journal, Forbes, Fortune and Wired.

Owners that embrace this concept by offering plug-and-play spaces can gain market share among millennials. Those willing to execute a one- to three-year lease with one of these fast-growing companies could earn loyalty that translates into large, long-term tenants. Once young professionals have settled in an office building, they will be less likely to leave as their companies expand, thereby creating leasing momentum at the property. This creative office space needs to look the part – concrete floors, exposed ceilings, glass offices and comfortable collaboration areas. And it needs to be ready within 30 days of lease signing. In addition to offering fresh food and a coffee bar nearby, owners might consider establishing common areas where several of these tenants could connect. Creating happy hours and other social activities would also drive demand.

There’s no doubt co-working has impacted the next generation of real estate decision-makers. Innovative owners that are willing to try something new may find that they have earned valuable occupancy – both now and in the future.

Steve Purpura Steve.Purpura@transwestern.com 617.439.9315

WeWork has locations in tech-heavy markets such as New York, Boston, San Francisco, Chicago and Austin, as well as many other urban cities in the U.S. and internationally. WeWork caters to individuals or companies with one to five employees. These users want to set up shop in an urban environment close to public transportation and lease space on a month-to-month basis. Unlike the past when young professionals took the time to tour multiple sites in search of a 5,000-square-foot space, millennials are not necessarily interested in looking for office space or building it out. They want to rent space that comes with all of the furniture, technology and amenities they need to do business, without signing a long-term contract. The most typical user is a tech startup that needs the flexibility to grow as fast as possible when the need arises.

Building owners can incorporate the successful WeWork philosophy that appeals to the millennials’ desire for short-term commitment and instant gratification. By creating a flexible leasing model, the opportunity would exist to attract companies that have outgrown a co-working environment. Small firms that are accustomed to concierge real estate will need a place to go as they grow. Instead of renting from WeWork-type providers, they will need to lease directly from building owners. Often without the help of a broker, they will be looking for ready-to-use space that’s up to 15,000 square feet, and they will pay premium rates to lease it without a long-term contract.

"INNOVATIVE OWNERS THAT ARE WILLING TO TRY SOMETHING NEW MAY FIND THAT THEY HAVE EARNED VALUABLE OCCUPANCY"

transwestern.com Q2 2015 INSIGHTS + TRENDS + OPPORTUNITIES

CURRENT SERIES OF DEVELOPMENT DIFFERS FROM PREVIOUS CYCLESBy Carleton Riser PresidentTranswestern Development Co.

In previous office development cycles, developers were accustomed to garnering construction loan commitments on a non-recourse basis and breaking ground on speculative projects without any preleasing commitments. However, the financial crisis and Great Recession gave rise to more stringent regulatory requirements that forced lenders to hold high reserves against speculative office loans, effectively making them unprofitable. This issue was greatest for developers in Sunbelt cities that wanted to borrow more than 50 percent of the total cost on a spec building and where preleasing was not a historical standard. The changed environment required most developers to pursue preleasing strategies or devise creative financing solutions to participate in the new cycle.

When the current office development cycle began three years ago, lenders were requiring 60 percent preleasing on non-recourse construction loans. And they would only loan up to 65 percent of the project value versus the traditional cap of 75 percent. Those requirements slowed the market’s reaction to increasing demand and ultimately curtailed the total volume of office development. This is true even in Houston, where the oil and gas industry boom contributed a projected 24 million square feet of new office space, scheduled for delivery between 2012 and 2016.

While loan-to-value ratios have held constant, lenders are becoming more flexible on preleasing levels and more accepting of creative collateral and guarantee solutions. Developers, lenders and institutional equity providers are structuring deals that mitigate the latest regulatory hurdles through the creation of “good news money” covenants and obligations to fund additional equity post-completion if certain leasing targets are unmet. These structured loan agreements are allowing developers to break ground with only 25 to 40 percent preleasing, on the expectation that additional leasing or credit enhancements from the equity venture will still allow leverage in the 60 to 65 percent range.

The capital markets are still much tighter for office development in this cycle as some lenders remain wary and many large investors take a conservative approach to total leverage and contingent obligations. The improving national economy has brought more players into the arena, and if a project is compelling, it is getting financed. The situation ultimately will contribute to the overall health of most office markets by keeping a lid on development volume and preventing marginal projects from ever getting out of the ground.

OTHER DEMAND DRIVERS

There have been some changes to tenant needs and perspectives during this cycle that have had an impact on the type, location and volume of new construction. The trend toward more efficient space configurations and higher densities has been a much discussed phenomenon that has been underway for several years. With more efficient floorplates in modern buildings, many tenants find they can optimize their space plan and resulting density with a move to new construction. And while new product typically commands rent premiums over existing buildings, tenants may actually lower their overall occupancy cost by relocating. A tenant that reduces its overall footprint by 20 percent, which is a realistic expectation based on current activity, can pay 20 to 25 percent more per gross square foot and still be at the previous level of total occupancy cost.

The competition for talent in knowledge-based businesses also has had an increasing influence on location decisions. This impacts both the type of building to be considered as well as the type of environment in which the property is situated. The employer can more easily “sell” the image of first-

"THE IMPROVING NATIONAL ECONOMY HAS BROUGHT MORE PLAYERS INTO THE ARENA, AND IF A PROJECT IS COMPELLING, IT IS GETTING FINANCED"

class space to retain and attract employees, especially millennials. Appealing to millennial employees has led to a greater emphasis on locations rich in amenities and walkability that are typically in downtowns and other dense urban areas. However, this has contributed to an increase in high-density, suburban nodes. A perfect example is CityLine, a 186-acre, mixed-use project under development in Richardson, Texas, a suburb of Dallas. Transwestern is handling property and management services for the project, which includes 2 million square feet of office for State Farm Insurance, 1,700 multifamily units, a boutique hotel, medical office facility and Dallas Area Rapid Transit stop. Spurred by this project, Transwestern Development Co. is planning an office development on an adjacent tract that will comprise 300,000 to 450,000 square feet.

Innovative developers are exploring ways to adapt to the new lending environment with preleasing and creative capital structures. And they are adept at selling the efficiencies and locational attributes that resonate most with current office prospects.

Carleton Riser Carleton.Riser@transwestern.com 713.272.1291

transwestern.com Q2 2015 INSIGHTS + TRENDS + OPPORTUNITIES

transwestern.com

JOIN THE CONVERSATION