Avison commercial office leasing market report toronto 2014 by Chris Fyvie

2013 Annual Review

Avison Young 2014 Forecast Commercial Real Estate - Canada & U.S. Partnership. Performance.

Contents Message from the CEO

Message from the President, U.S. Operations

Message from the Managing Directors

Property Management, Mortgage Services

Canada Overview & Forecast

U.S. Overview & Forecast

Canada Calgary Edmonton Lethbridge Montreal Ottawa Quebec City Regina Toronto Toronto West / Mississauga Vancouver Winnipeg

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United States Atlanta Boston Charleston Chicago Columbus Dallas Denver Detroit Houston Las Vegas Long Island Los Angeles New Jersey New York Orange County Philadelphia Pittsburgh Raleigh-Durham Reno San Diego County San Francisco San Mateo South Florida Tampa Washington, DC

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About Avison Young

Our Contacts

Avison Young Research

Message from the CEO North American real estate in 2014: Higher interest rates, Canadian stability and the U.S. recovery moves forward

ver the past few years, Avison Young has been advising its clients to invest in Canada for stability, seek higher return opportunities in the U.S., and plan for higher interest rates as the North American financial markets pick up steam and fiscal stimulus is removed. The last point was the most important, as too many investors were fixated on quantitative easing as a paradigm shift and a free-money right versus an opportunity. The 15-year decline in interest rates and related cap-rate compression that was the driver of returns had to come to an end at some point. Once global financial markets start to recover, employment will tick up and capital investment will be around the corner. The great news is this: Although delayed by a year due to political gridlock, the return to normal operating conditions and the reduction of monetary easing due to tapering are the catalysts necessary to unlock the capital that has been building up on the balance sheets of the investor and the occupier. Therefore, conditions look solid for a return to the “real economy” in 2014. For the past five years, real estate velocity has fallen from a peak to a very low trough, and made its way back up in markets and segments where investors believe there is liquidity. Canada recovered and reached peak volumes and pricing in the last two years. The U.S. is still behind on velocity, but has returned to pre-crash pricing in certain markets. Zerointerest-rate and mortgage-buying policies emanating from central banks generated meaningful liquidity that resulted in higher returns to our industry and created a powerful alternative investment bias towards real estate. There are many positives and negatives associated with these policies. Real estate again became a favoured asset class and was somehow, if not shockingly, rediscovered as a core holding. Real estate has always been an essential investment and has provided diversification and yield for owners and investors. On the negative side, “free money” has been the driving force and fundamental investment management has been overshadowed. This situation has led to speculation that a pricing bubble is present, particularly for trophy assets in gateway markets where pricing has reached unprecedented levels. While it is true that interest-rate policies have boosted returns significantly, pricing is stable as the voracious

appetites of the REITs are being replaced by pension funds and institutions, which have significant discretionary capital and use lower levels of debt when making acquisitions. What is strategically different today is the borrowed time our industry is living on as we continue to trade in a historically low interest-rate environment. As we often say at Avison Young, “most people know what they know, but they don’t know what they don’t know.” Strategy does matter, and Avison Young has taken the opportunity to communicate as frequently as possible with our clients to prepare them for an inevitable change, even if it is unpopular to do so, or it appears too distant for the decision-maker. Despite an industry populated with very experienced investors, we have turned a blind eye to the fact that this cycle is supported by government monetary policy. It will taper and then end in the near-to-mid term, and investment strategies will return to fundamental real estate investing. Although not anticipated, any cap-rate expansion or re-pricing would create an opportunity for motivated investors (who have been on the sidelines) to step in and acquire at more attractive values. It does appear that we will have a far better financial environment and marketplace to work in throughout 2014. At the outset of 2013, most economists and pundits called for significant improvements in the U.S. economy and real estate markets. However, they missed the fact that payroll taxes had just increased and the unknowns created by the Affordable Healthcare Act, sequestration and debt-ceiling fights would create enough uncertainty for decision-makers to keep their fingers firmly on the pause button. As previously stated, all of those factors were aggravated by a 15-year decline in interest rates that was fuelled by excess liquidity and then interrupted in May 2013 by the heightened risk of tapering. Now looking back, it is no surprise that promising prognostications of significantly improved market conditions in 2013 did not become a reality. Although some improvements occurred in 2013, they were unspectacular at best. Avison Young 2014 Forecast

Message from the CEO Message from the CEO continued... For 2014, we believe the negatives now become positives. Tapering will occur during the first quarter of 2014, interest rates will rise further and real estate debt will become more expensive. It is important to note that this is now expected and should not shock the system. For Canada, solid leadership at the national level has positioned the country for a potential budget surplus in 2015/2016, which in and of itself could be inflationary. Yes, pricing is challenging and feels a little “toppy,” but quality assets with great covenants are in demand, and there is ample capital willing to acquire long-term holdings. The U.S. has not achieved the same stability and premium pricing, but has continued to attract core and opportunistic capital. Canada alone, as the No. 1 foreign investor in United States real estate, put more than $9 billion to work in 2013. Despite the continuation of political disruptions that undermine significant progress, Washington DC appears to be finding some common ground; and with the Democrats and Republicans agreeing to a compromise budget, many of the unknowns will be eliminated and the markets will have a chance to grow. Investment and spending demand, coupled with less angst from Obamacare and government infighting, will create a positive environment for investing – and, more importantly, growth and investment by occupiers. If we give users and occupiers of real estate a clearer, stronger economy in which to grow, and investors a stable underwriting environment that limits surprises and allows for well-defined investment strategies founded in fundamental real estate investing, we could be celebrating a very happy new year in 2014. From a global perspective, despite concerns over bubble pricing for trophy assets in gateway markets, troubled assets remain out of favour, and much of the debt overhang from the last cycle has yet to be resolved, particularly in Europe. Attractive opportunities will abound for investors willing to move off prime assets toward secondary cities and strategies, or out of the risk curve to address assets still in need of capital and intelligent repositioning. 4

Avison Young 2014 Forecast

Finally, as is the case throughout this forecast, change is inevitable and should be considered in near-term planning as global investment flows change our investment theses and best practices change our behaviour. For example, user reconfiguration and technology-driven requirements will continue to drive demand into new and updated facilities. Expect to see retailers leasing more industrial space to handle omni-channel distribution, and office users paying up to access contemporary layouts, systems and energy efficiency. Medical office and data centres may be specialty sectors most directly benefiting from this trend. At Avison Young, we would like to thank our clients, our people and our collaborative partners who have made our growth possible. Five years ago, Avison Young comprised 290 people in 11 Canadian offices, and now our Canadian-based company operates out of 53 North American and two European offices and boasts more than 1,500 professionals. Our strategy is clear: Align ourselves with the goals of our clients and our people, and use a different, Principal-led client service structure to exceed expectations. When we surround our clients with collaborative experts and focus on long-term solutions, we meet our clients’ objectives and make our leaders accountable operationally, reputationally and financially to our clients’ success. Sincerely,

Mark E. Rose Chairman and CEO Avison Young

Message from the President, U. S. Operations Executing our growth strategy and adding strategic service capabilities in 2014

ur growth in the U.S. continued at a rapid pace in 2013. We opened in new markets including Philadelphia, Charlotte, Tampa, Long Island, San Diego, Silicon Valley and Sacramento. Additionally, we added significantly to existing operations in such markets as New York, Washington DC, Los Angeles, Dallas, Boston and Atlanta. We began 2013 with approximately 550 employees in the U.S., located in 21 U.S. markets, and ended 2013 with more than 1,000 people in 28 U.S. markets. The depth of our resources continues to expand and, while we have a way to go to have our business matrix residing in all of our markets, we are rapidly building best-in-class operations throughout the U.S. As in the past, our growth has been accomplished through a combination of strategic hiring as well as through mergers and acquisitions. In 2013, we completed M&A transactions in Dallas, Los Angeles, Washington DC, Florida, Houston and South Carolina. We hired high-quality professionals in virtually every Avison Young office. We have been very fortunate to continue to find individuals and companies that are completely collaborative and collegial, and driven to provide excellent solutions for our clients. Additionally, our growth continues to be executed within the boundaries of very conservative financial guidelines, maintaining our strong balance sheet and partnership structure. I commented a year ago that we were moving into 2013 with a continued wariness of the market conditions, yet with a belief that our markets were generally in a slow recovery mode. Even with the vacillations in market conditions caused by the sequester and national budget uncertainties, coupled with state and local financial stresses, the real estate markets continue to provide investors with a reasonable risk/return investment alternative and, thus, continue to see significant capital seeking investment in most major regions and across all property types. Labor market growth is still far from robust, yet there are monthly gains in employment that, to a small degree, are driving incremental absorption. Sequestration, in particular, has had a dampening effect in Washington, DC where leasing has become short-term focused and government-related occupants are reluctant to commit to expansion.

However, in my 30-plus years in real estate, Washington, DC has weathered many political and economic storms, and Iâ&#x20AC;&#x2122;m quite convinced that this cloudiness, too, shall pass. New York, the other market where activity levels are typically high and values increasing, also took a slight pause as the financial services sector reacted to the fiscal uncertainties by restraining growth. Generally, corporations are still sitting on significant liquidity which, we feel, will be released for investment once the government puts some firm rules in place on taxes, spending, entitlements and healthcare. Letâ&#x20AC;&#x2122;s not kid ourselves though. The U.S. commercial real estate market is still dependent, to some degree, on the continued historically low cost of borrowing. Both investors and occupiers are benefitting from this debt market and should see these conditions persist at least into the first half of 2014. The single biggest risk to a short-term value correction in real estate would be a 100- to 200-basis-point increase in borrowing rates. However, there are a number of less debt-reliant investors who will fill part of any void created by this inevitable upward movement in borrowing costs. We are advising our investor clients to borrow over longer terms and lock in favorable rates if possible, assuming the corresponding investments will support such matching of cash flows. We continue to see opportunities in high-quality assets in second-tier markets, as the returns are still 100 to 200 basis points above those for similar properties in the top six or seven (largely coastal) markets. I hope that everyone has a very profitable and successful 2014. Sincerely,

Earl Webb President, U.S. Operations Avison Young

Avison Young 2014 Forecast

Message from the Managing Directors Experience shows growth plan works

s Managing Directors in 2013, we once again focused on our clients’ needs and delivered another strong period of growth in Avison Young’s history as our firm successfully executed the latest phase of its aggressive North American expansion program. As 2014 begins, we are excited about our continued systematic growth plan as it will build on an already robust Avison Young platform from which to serve our rapidly growing client base. We look forward to the completion of several more strategic acquisitions and opportunistic recruiting efforts that have been set in motion for 2014. In all of the markets that we serve, our differentiated, client-service model and innovative best practices further strengthen Avison Young’s unique, Principalled collaborative culture. In both Canada and the U.S., our motivation to serve clients has never been stronger and we are planning for an American economic recovery in 2014. The financial setbacks of 2013 caused by the impacts of the Affordable Care Act and the federal government’s sequestration efforts will be replaced with more certainty and normal operating conditions. This stability will impact interest rates and real estate debt negatively in the short term, but ultimately lead to growth. There is just too much capital available and owners and occupiers are motivated to put it to work. Despite a long year of federal indecision and a lurching U.S. economy that raised questions about the stability of the post-recession recovery, we welcomed eight new Managing Directors in the U.S. in 2013. As we made more inroads in the U.S., our well-established Canadian offices continued to grow through Canada’s strong market fundamentals. Overall, we recruited senior real estate professionals in most Avison Young markets while producing numerous big wins in the form of large leases, management assignments and sales transactions for our clients. In 2014, we will further expand our business service lines, including project and property management, tax assessment, mortgage brokerage and appraisal, offering more to our growing client roster – and thus making us even more accountable to our clients’ overall success. Staff training remains a centre of focus with initiatives such as Avison Young University and our “Young Guns” training programs across the company. We continue to alter the industry norm by differentiating our service structure through internal Affinity Groups (which comprise Avison Young professionals specializing in specific service disciplines) as communication

Avison Young 2014 Forecast

mechanisms to the company as a whole. Affinity Groups breed collaborative environments at Avison Young, and eliminate the unnatural tensions inherent in antiquated silo structures. We also embrace sustainability as part of our daily operations. In 2013, we engaged our professionals to come together across all business lines and from across North America to form our Sustainability Affinity Group. We will remain committed to environmental, social and economic sustainability while continuing to expand in the U.S., Europe, Latin America and Asia markets in the short and long terms. Avison Young also increased its commitment to corporate social responsibility in the past year. Each of our offices is involved in a variety of events throughout the year and, in 2013, we created a philanthropy committee comprising volunteer Principals and employees from across Canada and the U.S. We believe we can share our efforts with our clients and learn from them the optimum way to support the causes that can have a material impact on a global stage. We believe that the most satisfying part of success, and one of the reasons we all work so hard together to grow Avison Young, is the ability to give back with conviction. On behalf of the Managing Directors, we offer a collective thank-you to our clients, who recognize that the Avison Young culture is different, that the open-source and best-inclass platform places the client first while encouraging a team approach on every level. We wish you a prosperous new year and look forward to generating more growth opportunities for your business in 2014 and beyond. Sincerely, The Managing Directors Avison Young James Becker | Reggie Bell | Laurent Benarrous | Dan Carlo Michael Church | Christopher Cooper | Steve Dils | Martin Dockrill Mark Evanoff | David Fahey | Mark Fieder | Chris Fraser Jeffrey Heller | Richard Jankowski | Michael Keenan | Randy Keller Richard Kimball | George Kingsley | Joseph Kupiec | Ken Lane Greg Langston | John Linderman | Keith Lipton | Kenzie MacDonald Michael McKiernan | Tim McShea | Doug Mereska | Arthur Mirante Len Mongeon | Bruce Neel | Scott Pickett | John Pinjuv | Ray Robinson John Ross | Pike Rowley | Jonathan Satter | Wes Schollenberg Ted Simpson | Nick Slonek | Rand Stephens | Ted Stratigos Todd Throndson | Jeremy Willits | Clay Witherspoon | Alec Wynne

Property Management

he “Green Initiatives” management team broadened its focus in 2013 from office buildings to encompassing all real estate asset classes. For a property manager today, sustainability is an important part of his/her buildingoperations strategy. Not only does the strategy require the ongoing training of staff in new building system technologies, energy consumption, and waste and cleaning management, the strategy needs to involve engaging tenants in resource conservation. Many landlords are turning to social media to engage with tenants and to gain feedback on their properties, while utilizing the connection to educate tenants about their shared responsibilities. Green initiatives will continue to increase a property’s leaseability, create long-term operational cost reductions, and portray the owner as a good corporate citizen.

competitiveness with tangible improvements to common areas, HVAC systems, lighting, signage and exterior landscaping. Increased consideration will be given to such green initiatives as bicycle storage and shower areas, Wi-Fi systems, and even electric vehicle-charging stations. Office-building lobbies will gradually transform from their historically staid appearance to interactive spaces with media walls and functional furniture. Value for money will remain the economic driver in 2014 as managers seek creative and cost-effective approaches to tenant retention, operational efficiencies and fiscal restraint.

Peter Leroux

Property owners will look to continue to capitalize on the improving real estate market in 2014. Those with longer-term hold horizons will improve their buildings’

Executive VP, Managing Director Real Estate Management Services

Mortgage Services

n the first half of 2013, economic growth appeared, to some, to be gaining momentum in the U.S. By midyear, what should have been a predictable message was delivered, preparing the markets for a return to the “new normal”: removal of federal aid was to start. This situation caused hysteria and U.S. Treasury and Government of Canada bonds nearly doubled in yield. Almost immediately, the Federal Reserve backpedaled, and bond prices settled back slightly. There was little reaction on the North American lending front, however. Using history to determine what 2014 may look like will not help, as we are in completely uncharted territory. Although the Fed can influence certain interest rates, there are many that remain at the will of the free market. Perceived or real, a moderate rise in U.S. interest rates should not affect the supply of debt capital. In Canada, the story may be a little different. We could see a more shallow supply of longerterm funds of 10 years and beyond. These have been limited in Canada in the past, and rising interest rates may

cause lenders to be more strategic with deployment and withhold these funds for expected higher returns in the near term. The status quo in the debt capital markets will likely be maintained for much of 2014 – directly tied to the slow recovery of the North American economies.

Norman Arychuk

Mortgage Broker Debt Capital Markets Group

Avison Young 2014 Forecast

Canada Overview & Forecast Guarded optimism as market carries mixed outlook into 2014 Canada’s commercial real estate markets saw some changes in 2013 that could pose challenges in the year ahead. However, ongoing development is an encouraging sign that the markets remain strong, offering opportunities for occupiers, owners and investors. The single-digit vacancy rates, robust demand and stable-to-rising rental rates seen in many office markets may soon come under pressure. In 2013, national average vacancy rose to slightly above 8%. Leasing velocity tapered following a strong start and a burgeoning sublet market emerged, especially in Toronto and Calgary. Tepid demand, along with nearly 27 million square feet (msf) scheduled for completion by 2017, will prompt modestly rising vacancy in 2014. Corporate rightsizing and space-planning efficiency, both in existing stock and new developments, are transforming office market dynamics. As construction and consolidations continue, sublet space will remain prominent. Buildings with impending vacancy will experience downward pressure on rental rates. However, top-tier, lessexposed assets can expect rental rates to hold firm in 2014. Tenants will continue to weigh new developments’ efficiencies against renewing or expanding existing premises, with competition adding emphasis to the landlord-tenant relationship. Meanwhile, LEED buildings have narrowed the downtown/suburban cost gap, enticing suburban tenants to consider downtown options. Bricks-and-mortar retailers are focusing on staying relevant and competitive against online options. Customers increasingly examine products in stores but buy them online, and retailers are adapting with new omni-channel strategies. Meanwhile, big-box retailers are experimenting with small-format urban concepts. Major retailers, including Staples, Best Buy and Sears, slashed jobs and reduced footprints. Sears’ move provided domestic and foreign retailers (including Nordstrom and Simon’s) opportunities for coveted premier mall space. Landlords are investing in regional malls to accommodate incoming tenants and attract new entrants to the Canadian landscape. U.S. retailers should note the lessons being learned by Target: Canadians are less likely than Americans to buy goods in different categories in one store, and consumers expect the same low U.S. prices. Loblaw Companies and Canadian Tire monetized real estate holdings, forming Choice Properties and CT REIT, respectively. Hudson’s Bay Co. acquired Saks, and it will be interesting to see whether the department-store chain will follow suit, given current REIT valuations. Canada’s industrial market remained active in 2013 as vacancy rose modestly in some markets and declined in others. The nation’s

Avison Young 2014 Forecast

1.8-billion-square-foot (bsf) industrial inventory posted 4.6% vacancy – 200 basis points (bps) below 2009’s recession peak. Supply shortages have encouraged build-to-suit and speculative development, with more than 8 msf under construction, which will increase vacancy to just below 5% in 2014. Demand is coming from domestic and U.S. occupiers, especially major retailers expanding distribution networks. The need for high-clear height, large-bay facilities will push rents higher, resulting in challenges for less desirable existing product. While the manufacturing sector re-tools, anticipating demand from recovering U.S. consumers, other trends are emerging. Threedimensional printing, though not applicable to all industries, allows mass customization of finished products. Implications for real estate include smaller production footprints, perhaps bringing business, production and distribution under one roof. The new omni-channel strategy, increasingly being deployed by retailers, is blending retail, warehouse/distribution and logistics. While e-commerce may result in the closure or downsizing of more retail stores as bricks-and-mortar and online retail converge, additional industrial space will be needed for order fulfillment and merchandise-return points. Interest rates began rising in spring 2013 and the impact became more evident as the year progressed, with lower investment volumes and a change in pricing trajectory. Slightly more than $20 billion worth of assets traded through the first three quarters of 2013, and when the final tally is made, 2012’s record $28 billion may be out of reach. REITs, the most active buyers during the past four years, driving overall investment volumes and pricing to record levels, are now faced with flat or falling unit prices. Acquisition fundamentals have changed as all investors (particularly REITs) confront a more challenging capital environment and buying becomes more discriminating. With capital more costly, investors will become more active asset managers to enhance returns. As some REITs scale back acquisitions, others may cull assets. Competition among pension funds/advisors, life companies and emerging private equity players will intensify, while high pricing leads more buyers towards development. Top-tier, well-leased assets will hold their pricing and remain highly contested, while secondary and/or challenged assets see upward cap rate adjustment. Despite the prospect of higher interest rates, capital flows into commercial real estate will remain stable in the year ahead.

Bill Argeropoulos

Vice-President & Director of Research, Canada

Canada Overview & Forecast

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Canada - Overall Office Vacancy Rate Comparison

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Avison Young 2014 Forecast

U.S. Overview & Forecast U.S. commercial sectors demonstrate improved conditions in 2013 The U.S. commercial real estate markets had a mixed performance in 2013, though most moved further towards recovery and there were a handful of standout markets. Vacancy rates for the office, industrial and retail sectors declined year-over-year, and unemployment continued its slow downward trajectory. In late 2013, monthly job growth figures were encouraging; however, businesses continued to be cautious about capital expenditures in the face of ongoing political and budget distractions. With construction levels suppressed, an aging U.S. inventory saw a further emphasis on upgrades, retrofits and modernization. That trend will persist in 2014. As well, forecasted GDP growth bodes well for positive absorption of real estate this year. Office markets covered by Avison Young tightened in 2013 and concluded the year with an average vacancy rate of 13.9%. All markets, except for Houston, New York, San Mateo and Washington, DC, recorded a drop in vacancy, and three (Columbus, Pittsburgh and San Francisco) reported vacancy in the single digits. That trend is forecast to continue with two more cities (Denver and San Mateo, CA) also projecting singledigit vacancy by the end of 2014. Many markets reported that tenant tours accelerated in 2013, though business conditions spurred some short-term renewals. Going forward, long-term renewals may be less likely as occupiers reconfigure and rethink space use to obtain greater efficiencies and accommodate evolving business practices. Overall, construction and deliveries remained lower than the historical average; however, the volume of construction increased by nearly 50% compared with 2012. Three markets have more than 5 msf apiece under construction: Houston (11.8 msf), Washington, DC (7.5 msf) and New York (6.3 msf). The U.S. retail market saw vacancy tighten in all segments during 2013. Importantly, absorption outpaced new deliveries for five consecutive quarters, starting mid-year 2012, and nearly all retail segments were posting vacancy rates in the mid-single digits last year. An exception was shopping centers, but this asset class may get a boost in 2014 from the growth of walk-in clinics and on-demand healthcare centers. The combination of lower vacancy and strong absorption should result in upward pressure on rental rates this year. One example of improved retail conditions is The Shops at Summerlin project in Las Vegas. Development of the 1.6-msf mixed-use mall stalled in 2008, but is now underway for delivery in 2014. Urban concept stores, small inner-city versions of big-box retail outlets, will remain an important trend in 2014 as consumers and businesses continue to shift from suburban locations to core live/work/play communities that are served by public transit.

Industrial markets in cities Avison Young services totaled 6.5 bsf and recorded a decrease in the vacancy rate to 9% from 9.9% in 2013. As in the case of the office sector, improved fundamentals and increased demand have spurred more development in the industrial market. As well, occupiers are increasingly seeking buildings with the new technologies needed for inventory management and logistics and that is also a contributing factor. U.S. industrial projects under construction at year-end 2013 totaled 43.2 msf and increased by a staggering 97% compared with year-end 2012. Avison Young industrial markets that demonstrated the most improvement during 2013 included Charleston, Denver, Detroit and Reno; however, the lowest vacancy rates at year-end were in San Francisco, Long Island, NY, Houston and San Mateo. Even with mixed market conditions, purchasers sought assets of all product types and are becoming more comfortable with what is described as the “new normal” in the post-recession era, referring to improved conditions that, in some cases, are satisfactory but not on par with pre-recession levels. Investors looked beyond the major coastal markets in 2013 and expanded their focus to include quality assets in secondary markets. The threat of rising interest rates has not had an impact on the sales market thus far. Through November 2013, transaction volume in the U.S. had reached $305 billion – 26% ahead of the same period in 2012. Washington, DC, a perennial top market targeted by investors, has lost some favor (as demonstrated by several quarters of declining sales volume), but sales rebounded in the third quarter of 2013. Its position as the U.S. capital, coupled with its low unemployment rate, will support Washington, DC’s ongoing desirability to investors. Other top markets such as Manhattan, San Francisco and Texas continue to garner investor interest that will be sustained through 2014. Canada led all other countries, by a significant margin, in capital investment in the U.S. in 2013. Canadian purchases totaled $9.9 billion in 2013, surpassing the total of $9.2 billion in 2012. Manhattan, Los Angeles, Dallas and Chicago were the top destination markets. Political uncertainty early in the year could lead to a slow start for the U.S. real estate market in 2014; however, improvement will accelerate in the second half. Look for strengthening fundamentals in select markets to spur office, retail and industrial development activity.

Margaret Donkerbrook Vice-President, U.S. Research

Avison Young 2014 Forecast

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Avison Young 2014 Forecast

Calgary The City of Calgary Water Centre

Strong economic performance bolsters retail and investment markets

he economic aftermath of the June floods in Alberta was expected to be grim, but recent outlooks suggest the opposite. RBC Economics reported in September 2013 that the province’s resilience and post-flood spending are expected to more than make up for the short-term challenges induced by the disaster. With the announcement of the proposed new Energy East pipeline, waning concerns about the “bitumen bubble,” real GDP growth for the province projected at 4.1% in 2014, and pricing for Western Canada Select crude oil averaging above $75 per barrel in 2013, the optimistic outlook within Alberta’s energy sector should translate into continued demand for quality space by major oil firms. Building booms in the Downtown, Beltline and Suburban South areas of Calgary will see 21 new buildings erected, adding more than 7 msf to the city’s office inventory.

Office Overall vacancy within Calgary’s office leasing market rose in 2013, reaching 6.6% in the third quarter. Downtown vacancy surpassed 5% after seven consecutive quarters of sub-5% levels. Class AA space, however, remains extremely limited as appetite for the top-quality product in the Downtown remains high, spurring a surge in new office development. Eight projects in total are either confirmed or under construction and represent 5.2 msf of leasable office space, of which 61% is preleased.

Retail A strong local economy, high consumer spending power, and aggressive U.S. retailer expansions by Target and Nordstrom drove retail market performance upward in 2013. TD Economics has forecasted that Alberta will lead the country with annual average retail sales growth of 6.5%. Issues related to Calgary’s urban sprawl, new municipal guidelines and a growing demand for complete communities - where people can live, work, shop and play - are changing the face of urban and suburban retail. Developers are now giving consideration to high-density, mixed-use projects that include street-level retail with underground parking and office and residential units above.

Industrial Overall industrial vacancy climbed to 5.5% at the end of the third quarter of 2013, up from 4.9% at the conclusion of 2012. Developer confidence has been high in Calgary’s industrial market. The Northeast market, in particular, has seen the highest amount of construction activity, with approximately 3.5 msf of

Avison Young 2014 Forecast

Calgary Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2012

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new construction in 2013. Vacancy is expected to rise slightly in 2014 with a number of new buildings either being proposed or awaiting construction. As a result, tenants will have several new options to consider.

Investment The Calgary market witnessed a robust year on the investment sales front, with land showing a significant increase as a percentage of overall investment activity, and the sale of the Jacobs Engineering building in Quarry Park setting a new historic low in terms of suburban office capitalization rates in Alberta at 5.2%. Several major institutional players made large investments in development plays to generate yield in the absence of sufficient existing commercial asset transactions. Several new masterplanned rental communities have been proposed for the edge of Calgary’s downtown core after a decades-long trend of multiresidential condominium conversion and development. REITs are likely to become active again in 2014 following the decline in unit values and the rising cost of equity that led to the investment vehicle’s exit from the buying scene for much of 2013. That absence created a unique window of opportunity for private investors, pension funds and other institutional players, many of which are aggressively seeking yield-generating real estate opportunities with exposure to Alberta’s thriving economy.

Edmonton Kelly Ramsey Building

Shifts expected in all sectors

he Edmonton market performed as expected during 2013, in lockstep with predictions of moderate, but not extraordinary, growth and stable economic indicators. As with the rest of the province, Edmonton saw GDP growth of 3.5%, falling vacancy in all sectors of the commercial real estate market, and an impressive level of new construction. As the majority of the Edmonton market is intrinsically tied to the health of the energy sector, the region is expected to fare better than the national average in 2014 as oil-price indicators remain strong. High immigration and growth rates that significantly outstrip the rest of the country indicate another robust year for Edmontonâ&#x20AC;&#x2122;s commercial real estate market. As vacancy rates reach critical lows, the region is primed for respectable expansion in all sectors.

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Edmontonâ&#x20AC;&#x2122;s office market had a strong year of consistent positive absorption in 2013. By the close of the third quarter, overall vacancy was down to 7.6%, compared with 8.8% one year previous. Lease rates remained relatively stable during the same period; however, free rent as a tenant inducement has become scarce.

Industrial vacancy in the Capital Region continues to inch downwards, reaching 3.3% overall with a total inventory in excess of 117 msf. Although rental rates held steady in 2013, the amount of available land within the city has steadily dropped and has made the outlying areas significantly more attractive for development. New construction totalled approximately 1.7 msf, the majority of which is expected to be easily absorbed.

The possibility of up to four new office towers in the downtown core has raised speculation on the state of the market in 2014. It remains to be seen what impact each of the four possible towers will have, although the consensus is that class A and AA rental rates will drop while vacancy rises. The extent to which this will happen, however, remains uncertain.

Retail Albertans continue to enjoy disposable income rates in excess of 150% of the national average, and 2013 saw this exceptional spending power brought to bear in the retail market. Overall vacancy dipped below 2% during the year, indicating an excess of demand and lack of space. There are currently 42 significant new retail developments either under construction or planned for the next two years. The majority of these are on the outskirts of the city in new neighbourhoods that have yet to be serviced by a local power centre. As these developments start coming online, the market is expected to reach a much healthier vacancy rate, though a significant shift may yet be two years out.

With the energy sector continuing to lead development and create substantial positive externalities in Edmonton, 2014 is expected to be another strong year for the industrial market. Moreover, the regionâ&#x20AC;&#x2122;s outlying areas can expect to see a more significant share of growth as the outward trend continues.

Investment Much like in 2012, the investment market was bottlenecked not by a lack of willing capital but, rather, by a shortage of available investment opportunities in 2013. Though prices remained high across the market, deal velocity was stagnant, particularly in multiresidential properties, where near-record-low vacancy pushed rental rates and profitability up significantly. While interest rates remain low, investment properties in Edmonton offer enticing opportunities. This trend is expected to continue as the Bank of Canada eyes the possibility of keeping rates low for the foreseeable future.

Avison Young 2014 Forecast

Lethbridge Galt Museum

Market outlook remains promising for 2014

he Lethbridge commercial real estate market finished the year strongly once again in 2013. With the city awarding a major retail and residential development (The Crossings) to Royop, consumers remaining optimistic about the prospect of purchasing a home, and investors confident in the Lethbridge market, growth in all sectors is anticipated in 2014.

Office Vacancy in office product is expected to be higher than for regional retail and industrial assets in 2014. This situation is largely attributed to 30,000 sf of new office space on a large infill site in downtown Lethbridge, as well as 16,000 sf of additional new construction slated for 2014. Abundant availability downtown is giving tenants more options. Demand is shifting to high-quality professional space. Medical office users are looking for more opportunities to purchase â&#x20AC;&#x201C; both strata units and freestanding buildings. By the end of 2014, this trend will translate into a significant increase in office vacancy to approximately 18%.

Retail Earlier projections for commercial development in West Lethbridge were realized with the preleasing and construction of two new developments, WestGate Centre and SunRidge Corner. WestGate is approximately 90% leased and construction will be complete with tenant occupancy in early 2014. SunRidge Corner will see tenants open for business in 2014 with 70% of the project leased. In late 2013, the City of Lethbridge completed a transaction with Royop Developments for a 65-acre mixed-use project with approximately 45 acres earmarked for retail development during the next several years. Construction is set to begin in 2014. Overall, retail vacancy is sitting around 2% at the start of 2014.

Industrial Demand in the industrial market was very strong in 2013 with the manufacturing sector leading the growth in new space and jobs. Vacancy rose slightly to 2.6% in 2013 with multiple new developments becoming available. Vacancy is anticipated to rise further with additional construction planned for 2014. Lease rates are now steady at $8.50 per square foot (psf ), up from $7.50 psf in 2012, with niche or premium locations as high as $10 psf. Growth inside the city has been matched by growth in the surrounding county, as businesses were attracted by improved large-vehicle

Avison Young 2014 Forecast

Lethbridge Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2012

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accessibility and lower land costs and taxes. Overall, the market is well balanced in terms of sales and leasing, and this trend will likely continue in 2014.

Investment The uptick in interest rates in early 2013 led to a pause in acquisition activity by some buyers. However, confidence returned, as interest rates are expected to remain relatively stable through 2014. Industrial investment continues to be the most active. Small investors are able to participate, as most sales are valued at less than $1 million. However, a $6-million transaction is scheduled to close in early 2014. As in past years, many transactions involve owner/users. This trend will continue as interest rates remain low and local industrial users want to own their space. There is limited retail investment product currently available, but the sector remains strong with two new developments in West Lethbridge and one in South Lethbridge. All new developments are expected to be open for business early in 2014. Most of the investment activity targeting office product will be in the strata office market. Current market office lease rates do not necessarily work for new construction, but low interest rates are pushing demand from owner/users seeking strata units. Construction of several small strata office developments is planned for 2014. In 2014, Lethbridge assets will continue to offer 8% to 9% capitalization rates, but properties will be harder to find.

Montreal Place Ville-Marie

New public administration seen as an encouraging sign

conomic activity in the Greater Montreal Area (GMA) experienced moderate growth in 2013; however, in 2014, growth prospects look promising with the improvement of global economic conditions. The ongoing commission of inquiry on the awarding and management of public contracts in the construction industry and the recent elections in both Montreal and Laval suggest an improvement in municipal government transparency. These recent changes could result in the end of the gloominess surrounding the management of public funds and provide an economic boost for Montreal.

Montreal Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2012

Office Nearly 3 msf of office space is currently under construction in the GMA, 1 msf of which is located in the downtown core. The most important project in the area is Cadillac Fairview’s new Deloitte Tower, 70% preleased to Deloitte and the Rio Tinto Group. Meanwhile, the overall vacancy rate increased to 10.9% in the third quarter of 2013 from 9.8% in 2012. The number of leasing transactions decreased slightly in 2013, but there has been a significant increase in sublease activity in the market, mainly due to rationalization of space. In this context, the vacancy rate is expected to increase slightly to 11.9% in 2014.

Retail Retail activity has increased slightly during the past few years. Business types have diversified and, consequently, transformed the retail real estate sector. Conventional shopping centres are slowly making way for larger regional shopping centres, power centres and lifestyle shopping centres. The rest of Canada has seen the arrival of major American bigbox stores and e-commerce, and Montreal is no exception. This increase in competition has increased retail vacancy and exerted downward pressure on rental rates. In Mirabel, a suburb north of Montreal, a 350,000-sf Premium Outlets centre is currently under construction. Expected to be delivered in 2014, this $150-million investment will comprise more than 80 stores.

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other well-located industrial buildings have been turned into retail or wholesale stores. The re-industrialization occurring in the United States could have a favourable impact on the Montreal market in the years to come, given the city’s proximity to major U.S. markets.

Investment In 2013, investment property transaction volumes were equivalent to reported 2012 levels. The most significant transaction was the acquisition of a 50% interest in Place Ville-Marie by Ivanhoé Cambridge. Several other noteworthy buildings and real estate portfolios came to market in 2013 and are expected to find a buyer in 2014. The Quebec government has also announced the construction of a new institutional building at l’Îlot Voyageur, a $246-million investment comprising 625,000 sf of office space. The building is expected to be delivered in 2019. Despite some concerns about an increase in interest rates, transaction volume in 2014 should be similar to that recorded in the previous two years because of capital available to pension funds and the number of REITs that have become prominent players in the market, though acquisition activity amongst REITs may be slightly muted.

Industrial Vacancy in the GMA increased to 6.6% in the third quarter of 2013 from 5.4% at the end of 2012. This activity reflected part of a larger trend which has seen a 1.7-msf decrease in the amount of occupied industrial inventory since 2010. Once vacant, some of these former warehouses have been converted into loft-style office space, while Avison Young 2014 Forecast

Ottawa Bayshore Shopping Centre

Office market softens as retail market surges

iven Ottawa’s position as the Canadian capital, the commercial real estate market continues to be heavily influenced by federal government tenancies in the core. Suburban relocation initiatives and a flight to higher quality and/or energy-efficient buildings are trends in the continued shift in the Ottawa office market. The long-awaited construction of the light rail transit (LRT) system has begun, while development surrounding transit stations was at the forefront of many conversations throughout 2013 – and is sure to remain a focus of new development initiatives going forward.

Office Some uncertainty prevails in the downtown Ottawa office market. In late 2013, continued downsizing by Public Works and Government Services Canada (PWGSC), combined with another anticipated large non-renewal, further added to local market concerns. In 2014, core vacancy rates will likely escalate and approach double digits for the first time in many years, creating a market with significant tenant leverage coming at the expense of any mid-tier landlords that are slow to react to a changing marketplace. Going into the final quarter of 2013, overall office vacancy stood at 5.8% - with expectations that it will crest to 6% in 2014 - while availability rose to 8.2%. Much of this increase could be attributed to the continued rise of core vacancy rates as new construction projects came to market and absorption levels remained negative throughout 2013. The late expansion by Internet marketing company Shopify in 2013, taking 100,000 sf in the core, was the one bright absorption in 2013. Meanwhile, on the other side of town, the suburban west market is holding its collective breath as a major restructuring of BlackBerry would negatively impact the Kanata North market, while stories of further job cuts at Alcatel will have implications for the Kanata market as a whole.

Retail Ottawa’s retail market remained very active in 2013 with many new developments coming on stream throughout the year. With Ottawa remaining a focal point for national retailers, a battle for positioning has emerged among the city’s major retail centres with expansion and redevelopment plans underway in order to attract the likes of leading national and international retailers as they eye expansion into the market.

Avison Young 2014 Forecast

Ottawa Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2012

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In the west end of the city (adjacent to Canadian Tire Centre), a multitude of new developments have been announced, including the much-anticipated Tanger Outlet Mall and Bass Pro Shops, which are sure to increase competition among existing retail centres. Ottawa has also experienced major growth in the culinary industry, which is evident by the elevated activity by both local and national restaurant owners seeking to expand in the area. Looking forward, historically low vacancy rates and ongoing development are expected to continue as Ottawa remains one of the top choices for national retailer expansion programs.

Industrial Industrial demand remained strong in 2013, leading to a significant decline in the overall vacancy rate to 1.9% at the end of 2013 from 2.8% in 2012. Low vacancy rates, coupled with strong net rental rates, continued to attract the attention of national real estate investors looking for stable returns. Despite strong appetite, limited product availability and a shortage of quality development land have led to cap-rate compression across the city. As a result, renovating and repurposing older stock will remain a focus of Ottawa’s industrial market going forward.

Investment Ottawa capital markets continued to perform well in 2013. The local investment market saw an increase in owner/user offerings late in the year, suggesting that those who held real estate as an investment strategy in recent years decided to take advantage of the continuing low interest rate environment, a trend that is expected to continue in 2014.

Quebec City Place de la Cité, Laurier Boulevard

Business as usual The Quebec City area assured its potential for economic growth with the re-election of Mayor Régis Labeaume in the fall of 2013. The private sector has diversified during the past decade with an emphasis on innovation and research, creating many high-skilled jobs. Furthermore, the high concentration of public services (education, health and government employment) will help maintain the area’s stable economy and low unemployment rate. The unemployment rate stood at 5% in the fourth quarter of 2013, below the Canadian average of 7%.

Office After adding 1 msf of new office space to inventory in 2011 and 2012, more than 480,000 sf is currently under construction in the Quebec City region, with 50% preleased. With the construction of these new office projects, there is a shift in activity from the downtown core towards the suburban areas of Lebourgneuf and Laurier Boulevard. This wave of construction will, undoubtedly, place upward pressure on vacancy rates. At the end of 2013, the city’s overall vacancy rate was 6.5%; however, in the present context, a slight increase to 7.2% is expected in 2014.

Retail Growth in the retail market has been weak during the past few years. The retail landscape has been transformed with the arrival of power centres, resulting in a diversification of retail product. Construction in the retail market was non-existent in 2013 with no new projects announced. The only activity was the renovation of three former Zellers stores located in shopping centres that are now occupied by Target. Consumers continue to be well-served with more than 1,000 retail outlets dispersed among five regional shopping centres and four power centres. Faced with increasing competition from American big-box stores and e-commerce, it is expected that retailers will attempt to reduce operating costs by decreasing their square footage and rents.

Quebec City Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2012

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At the western extremity of the city, the industrial park in the suburb of St. Augustin de Desmaures is growing, with the availability of land expected to generate new construction in 2014.

Investment Several major investment real estate transactions took place in the Quebec City region in 2013. The main transactions were the sale of two power centres (Méga Centre Lebourgneuf and RioCan SainteFoy) totalling 983,000 sf for $238 million; the sale of two multiresidential properties (Les Méandres and l’Aristocrate) comprising 417 units for $83.5 million; and the Bois-Fontaine office buildings with an area of 350,000 sf, which sold for $50 million. Construction of Quebec City’s new arena, an investment of $400 million, is underway. And Almerys recently announced plans to construct a 400,000-sf data centre for $34.5 million.

Industrial The area’s industrial parks are witnessing an abundance of activity. Land parcels in industrial zones are 95% occupied. The market is characterized mostly by owner/user properties with a limited number of leased industrial or storage facilities. Furthermore, there are few buildings in the market for sale. This situation is putting upward pressure on rental rates and asset pricing, which is now equivalent to the construction costs associated with a new building.

Avison Young 2014 Forecast

Regina Viterra Building

Saskatchewan’s economy continues to grow

askatchewan will continue to be among the top provinces in growth, and the Conference Board of Canada has predicted the province has entered a period of prolonged economic prosperity. This is translating into growth in both major and secondary centres. The City of Regina had average real GDP growth of 3.7% per year in the 10-year period from 2003 to 2012, and is expected to surpass 5% in 2013, second in the country behind Saskatoon. This trend is expected to peak in 2014 before levelling off into 2017, closer to the predicted national average of 2.5%. These predictions align with population growth (a five-year annualized average of 2.5%) and unemployment (a five-year annualized average of 4%) statistics in Regina and Saskatoon. Collectively, the perfect economic storm is working to the benefit of the office, industrial and retail markets in both cities.

Office Regina’s office market continues to be active, with inventory close to 7 msf and an overall vacancy rate of 5.2%. An additional 132,600 sf is expected to be added to the market in 2014, indicating that developers see high demand in both the downtown and suburban markets. Construction of an 80,000-sf office building at 1827 Albert Street and a second 40,000-sf suburban office building at Harbour Landing Business Park were completed in 2013. A three-storey, 20,000-sf medical office building is being constructed adjacent to the Regina General Hospital, while Harbour Landing Business Park is underway with its third of four planned buildings. There are a few sublet options in the downtown fringe area that are well-suited for a variety of specialty and professional users. A good variety of downtown, fringe and suburban space is either coming on stream or being constructed which, along with moderate absorption, suggests the office market will remain healthy in 2014, albeit with a slight increase in the overall vacancy rate.

Retail There was little development activity on the retail front in 2013 due to a lack of available land. The majority of new development continued to occur in Grasslands on Regina’s west side. As a result of the limited supply and strong demand, land prices have increased, and coupled with the lift in construction costs, rental rates have increased to highs of $25 psf to $30 psf in certain areas of the city.

Avison Young 2014 Forecast

Regina Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2012

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Renovations at Southland Mall are complete with new tenants entering the market. Target opened its doors in July 2013, replacing Zellers. Cabela’s opened a new 50,000-sf building at Grasslands Shopping Centre, where construction continues as national retailers prepare to move in. Future tenants will include Bouclair Home, PetSmart, Party City, GNC, Rogers and Dollarama.

Industrial Regina’s existing industrial inventory exceeds 17 msf with a vacancy rate of 3.6%. Morguard Investments Ltd. began construction in the Global Transportation Hub on its development, the TransLink Logistics Centre. Coupled with building costs, supply and demand will always decide the rates, and although vacancy has risen yearover-year in recent times, 2014 will continue to see a shortage in overall options to meet a variety of tenant demands. Look for rates to hold steady in the short term and no increase in land prices that now hover in the $425,000-per-acre range.

Investment The Regina investment market was fairly dormant in 2013 with limited transactions occurring, mainly due to a shortage of product and solid income for current owners. This trend is expected to continue in 2014.

Toronto The Globe and Mail Centre

Market pause in 2013 sets up challenges for some sectors in 2014

obust during and since the recession, the commercial real estate markets across the Greater Toronto Area (GTA) showed mixed results in 2013. Corporate downsizing, consolidations and relocations into more efficient footprints fuelled a burgeoning sublet market in the wake of new supply, while interest-rate worries curtailed the formerly bullish investment market. These factors will challenge the market in 2014; however, market fundamentals will remain relatively sound.

Office Following a strong performance through the downturn, the office market had less-than-stellar results in 2013. Leasing activity slowed, demand waned, sublet space spiked, and vacancy increased across most districts. While rental rates softened at the bottom end of the space spectrum, they remain firm at the top end with historic highs achieved in some top-tier towers in the core. Similar conditions will likely prevail in 2014, as the market braces for another wave of development (7.8 msf), delivering this year through 2017. With a landlord-favourable 5.6% vacancy rate, Downtown Toronto will see the bulk (5.8 msf) of new inventory. Notable construction announcements in 2013 included Oxford Properties’ Ernst & Young Tower, Menkes Developments’ 1 York Street and First Gulf’s Globe and Mail Centre. A steady stream of new supply, especially in Toronto West, countered any notable absorption, keeping suburban vacancy in double-digit territory (11.9%). Developers are pursuing and developing sites near existing or future transportation arteries, hoping to combat downtown’s appeal by urbanizing the suburbs.

Retail Sears Canada captured headlines late in 2013 with the announcement that the leases for five major store locations will be sold back to the landlord, Cadillac Fairview – with three (Eaton Centre, Sherway Gardens and Markville Shopping Centre) in the GTA. Meanwhile, Nordstrom added Yorkdale Shopping Centre to its Canadian expansion plans. Target’s much-anticipated openings in former Zellers locations met with mixed results, encountering stumbling blocks, including consumers’ expectations regarding cross-border pricing parity. Moving into 2014, Toronto’s retail landscape continues to evolve. Exclusive Bloor/Yorkville is holding steady on rental rates, while trendy Liberty Village west of downtown draws interest from retailers, with several major new lease announcements pending. The overhaul of Union Station, slated for 2015 completion ahead of the Pan Am Games, promises approximately 165,000 sf of retail space for the downtown core and opportunities to capitalize on station passenger

Toronto Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2012

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traffic and the extensive highrise residential and office development that has reshaped the south core district in recent years.

Industrial With vacancy below 5%, demand for modern distribution facilities has led to a surge in development in response to the ongoing needs of large domestic (Canadian Tire) and multinational (Amazon) retailers. Despite high development charges, new industrial projects are especially apparent in Toronto West, where distribution facilities in the 1- to 1.5-msf range are either underway or imminent. Orlando Corporation will soon deliver 7825 Winston Churchill Boulevard (377,000 sf) – the first speculative building offering a 36-foot-clear ceiling height. Vacancy will rise modestly in 2014 as users focus on new projects, diminishing absorption for existing buildings.

Investment The frenzied investment sales activity of recent years appears to be winding down, largely because of volatile interest rates beginning in early 2013 that curtailed the purchasing power of the biggest buyers – the interest-rate-sensitive REITs. 2013 also signalled the end of caprate compression for secondary and/or challenged assets. With the final tally to come, the $8.2 billion transacted through the first three quarters of 2013 could leave the market short of the record-setting $11 billion traded in 2012. Notable transactions in 2013 included a sizeable portfolio of office and industrial buildings by GE Canada Real Estate Equity. As REITs become more discriminating in their acquisitions, competition will intensify among pension funds/advisors, life companies and emerging privateequity players, keeping buyers and sellers active in 2014.

Avison Young 2014 Forecast

Toronto West (Mississauga) Mississauga Gateway Centre - Building A

Moderate growth expected in 2014

oronto Westâ&#x20AC;&#x2122;s commercial real estate market sent mixed signals in 2013. While the office market raised concerns with rising vacancy rates and an expanding sublease market, robust deal velocity led to upward price movements in the industrial market. Moderate growth is expected in the leasing and investment markets in 2014. Average asking rates in premium class A assets will remain at current levels as the market witnesses continued demand for quality.

Toronto West Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6%

Office

The office market experienced a shift in market dynamics in 2013. The market saw a continual rise in the availability rate, a substantial third-quarter expansion in the sublease market, flat class A average asking rental rates, and the delivery of approximately 560,000 sf.

For 2014, a slight decrease in class A vacancy is expected, driven by a continued flight to quality with users seeking high-quality spaces in prime locations. This increased high-end activity will come at the expense of second-generation class B spaces encumbered with higher operating costs, larger vacancies and deferred maintenance. The market will also see higher employee density as users seek improved space efficiency.

Retail Supported by the continued growth of home sales in the GTA housing market, the Toronto West retail market had a modest showing in 2013. Retail growth was reflective of the general strength in demographics and steady demand for home ownership. Following a rise in greenfield development in the Halton Hills Planning Area, the 350,000-sf first phase of Toronto Premium Outlets in Halton Hills, a major retail development, was completed in the third quarter of 2013. The growth of e-commerce continues to influence big-box retailersâ&#x20AC;&#x2122; commercial real estate decisions. In April 2013, office supplies giant Staples Canada issued its plan to shrink its brick-and-mortar footprint by 39 retail stores. This trend will provide smaller and less prominent retailers with leasing opportunities in a healthy market that posts 1% to 3% vacancy.

Industrial In 2013, rental and vacancy rates in the industrial market returned to pre-recession levels. Robust deal velocity drove up rental rates across all asset classes, encouraging a rise in speculative construction. Upward pressure on rental rates for space larger than 100,000 sf was also a result of the lack of product in the market.

Avison Young 2014 Forecast

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In early 2014, a rise in tenant consolidations is expected, as new industrial product comes to market. This will cause a slight uptick in vacancy rates for existing buildings, while rental rates for these buildings are expected to remain flat, just above $5.60 psf, with newer product priced between $6 psf and $6.50 psf. With deal velocity weakening during the course of the year, as multinational retailers embrace the challenges of the U.S. economy, the market will likely see a reduction in net absorption rates.

Investment Entering 2014, investors will encounter difficulty in acquiring class A industrial assets as the market continues a shift towards lower-risk, high-quality assets with limited capital expenditure requirements. Following this trend, pension funds are expected to take a more aggressive approach to industrial acquisitions; however, they will have limited interest in suburban office with concern over leasing fundamentals. REITs will continue to take a back seat, at least in early 2014, as they remain sensitive to interest rates, the debt markets and unit pricing. Overall, premium industrial assets will remain the most attractive target for investors in 2014, due to strong leasing fundamentals.

Vancouver 980 Howe Street

Strong demand driving market as premium assets remain scarce

emand for BC commercial real estate attained near-record levels in the first half of 2013 despite diminished dollar volume due to a lack of trophy-asset transactions. Overall deal activity in 2013, however, remained elevated compared with previous years as several significant transactions closed in the second half of the year. This uptick in second-half sales and dollar volume is attributed in part to the unexpected outcome of the provincial election in May 2013, which served to reinforce business confidence and provided additional momentum to an already active commercial real estate market.

Office In 2013, the office market remained calm in advance of a flurry of activity in 2014. Limited new-build product was available in Metro Vancouver in 2013, but numerous office buildings that were under construction are set to start delivering new inventory in 2014 and beyond. With more than 2.1 msf of new office space in downtown Vancouver alone under construction by year-end 2013, and more than 3.5 msf regionally, there is likely to be a significant shift in the downtown office market in terms of how assets are classified. In addition, increases in sublease space and overall vacancy, and a flight to quality, may result in downward pressure on lease rates, particularly in older class A and B premises.

Retail Demand for retail assets remained strong in 2013; but with few premium assets available in primary markets, retail real estate sales activity has diminished compared with previous years. Deal volume is anticipated to remain steady going forward as vendors seek to dispose of non-core assets and benefit from the strong demand for real estate persisting in the market. Purchasers are likely to buy more on fundamentals in 2014 and will no longer be strictly focused on income and yield. A distinction between primary markets and secondary/tertiary markets will be drawn more sharply by purchasers, and sellers may find an adjustment in pricing expectation necessary to clinch a deal.

Industrial Confidence in Metro Vancouverâ&#x20AC;&#x2122;s industrial market surged, particularly after May 2013. Despite millions of square feet of new product added to inventory in 2013, overall vacancy was virtually unchanged and remained below 4% region-wide. Vacancy in largefloorplate modern distribution buildings remained exceptionally

Vancouver Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2012

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tight in all markets. The supply of industrial land remains a concern moving forward. New construction will remain a priority in 2014, particularly next-generation logistics/distribution facilities that cater to the needs of large users seeking to leverage investment in port and transportation infrastructure in the region. This year will also mark the opening of the South Fraser Perimeter Road, a new $1.3-billion trucking route that connects an existing container terminal, a second such terminal under development, a coal export facility and various industrial nodes to existing highway infrastructure.

Investment In 2013, the transition to a post-recovery financial environment likely commenced. This controlled market normalization was slowed somewhat by lacklustre economic and employment indicators that manifested in mid-to-late 2013. The Metro Vancouver commercial real estate market was impacted by the retreat of Canadian REITs in 2013, which generally led to reduced competition for top-tier assets. However, well-capitalized local purchasers and institutional buyers stepped into the breach for those quality premium assets that did come to market, and that trend is expected to continue in 2014. Metro Vancouver remains a key market for most investor types, and the persistent lack of supply in all asset classes is expected to support both elevated market demand and asset pricing.

Avison Young 2014 Forecast

Winnipeg 2445 Pembina Highway

Open for business

innipeg and Manitoba are indeed open for business. Office towers are going up, condo projects are multiplying, and the city has its fair share of wind turbines supplementing the power grid. Condominium sales were up a record 14% in 2013; building permits increased 3.5% to $810 million; tens of thousands of square feet of new retail and office space are under construction; and the city’s new $200-million police headquarters is nearing completion. The city has had a new energy to it since the return of the NHL’s Winnipeg Jets hockey franchise. Winnipeg’s Downtown Business Improvement Zone started a pilot program with a weekly downtown farmers’ market – a roaring success jammed with customers that has been extended into the winter.

Office The downtown market finally found some traction in the second half of 2013 after a lacklustre first half, but finished the year slightly off 2012 transaction totals. Vacancy remained steady, rising slightly to 8.5%, with just under 162,000 sf of positive absorption. Although class A buildings experienced slight negative absorption of 8,300 sf in early 2013, this class remained the tightest in the city, ending 2013 with the lowest vacancy. Class B properties ended the year with the highest vacancy (9.4% at the end of the third quarter of 2013). To mid-2013, class C properties enjoyed positive absorption of more than 148,000 sf, causing the vacancy rate to drop 90 bps to 8.9%. Although construction costs remain high, office vacancy rates in all classes are expected to remain static through early 2014.

Retail Retail sales increased 2.1% through early 2013, earning Manitoba a ranking of fifth in the country. This increase can be attributed to the sale of new vehicles, which grew by 9.6%. Despite this growth in sales, retail vacancy rose by 450 bps as the arrival of a U.S. retailer – Target – offset the departure of a Canadian retailer – Zellers – to a large extent. On the flip side, big-box power centres continue to have the lowest vacancy in the city at 0.3%. The pace at which retailers absorb vacant space will be a good indicator of the overall strength of the retail market in 2014.

Industrial The market saw 140,000 sf of new supply and experienced negative absorption of slightly more than 247,000 sf during the first three quarters of 2013. Even though the market has

Avison Young 2014 Forecast

Winnipeg Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2012

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experienced back-to-back reporting periods with negative absorption and increased vacancy, the market has a strong foundation exhibited by an overall vacancy rate of 2.6%. Quality space in the city continues to be absorbed quickly when it hits the open market. Part of the reason for the spike in vacancy was the closure of a 200,000-sf property leased by a U.S.-based tenant. However, this vacancy created an opportunity for tenants to take advantage of a quality industrial building. In such a tight market, this vacancy accounts for a significant portion of the product available for lease. A recurring theme in the Winnipeg industrial market is the amount of functionally challenged space that continues to remain vacant.

Investment Fortress Developments and Mady Development Corp. have announced the construction of the tallest skyscraper in Winnipeg at approximately 42 storeys – a retail, office and residential condo project in the heart of downtown. This project, combined with Centrepoint - a $75-million mixed-use complex being developed jointly by Longboat Development Corp. and Artis REIT - along with plans to double the size of the RBC Convention Centre Winnipeg, are generating a lot of positive momentum.

Atlanta Hammond Exchange

Business climate driving commercial real estate rebound

ueled by a steadily improving economy, Metro Atlanta’s office, industrial and retail markets are gaining traction, and the multiresidential sector continues to shine. The city’s strategic location within Georgia (which was voted the No. 1 business climate in the U.S. by Site Selection magazine), enviable logistics assets, low cost of energy and diversified economy are credited for attracting new business. Eighty per cent of the U.S. can be reached within a twoday truck drive or two-hour flight from Atlanta Hartsfield-Jackson International Airport. Businesses are also considering Atlanta as a potential relocation destination thanks to new statutory incentives, including energy sales and use tax exemptions. As 2014 begins, one can finally be optimistic about the future of the Atlanta commercial real estate market in the post-recession era.

Atlanta Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2012

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The Atlanta office market has turned a corner after being hit hard by the Great Recession. While the sector has not fully recovered, it is exhibiting significant signs of improvement. The overall office vacancy rate continues to dip after spending much of the past five years higher than 20%. At the end of the third quarter of 2013, office vacancy stood at 18.6%, a decline of 150 bps compared with year-end 2012. The average asking rent for Metro Atlanta office space at the end of the third quarter of 2013 was $20.46 psf, the highest since 2011.

Metro Atlanta’s industrial market continued to experience positive absorption numbers in 2013. At the end of the third quarter, yearto-date net absorption totaled more than 8.6 msf. During the same period, vacancy fell 50 bps to 11.5%. Rental rates remain stable. The average quoted rental rate was $3.88 psf at the end of the third quarter, up from $3.80 psf at year-end 2012. Atlanta’s industrial sector should continue to rebound in 2014 as the city’s housing market steadily improves, suppliers require more warehouse space and retailers seek more distribution space to meet the needs of their growing e-commerce business.

The Atlanta market showed positive net absorption throughout 2013. By the end of the third quarter, total net absorption reached 1.8 msf, outperforming all of 2012, and marking the eighth consecutive quarter with positive absorption. This pace should continue throughout 2014 as businesses hire more people and require more space.

Retail The Atlanta retail market also made gains in 2013. The vacancy rate at the end of the third quarter of 2013 was 9.6% – a 60-bps decrease from the same period in 2012 and the lowest vacancy since 2008. Total positive net absorption for the third quarter was 889,486 sf, bringing the year-to-date 2013 total to 2 msf. Deliveries expected in 2014 include Avalon in Alpharetta and Ponce City Market in Midtown. Tenants will continue to show interest in leasing space in these types of mixed-use properties that include office and residential space.

Investment Atlanta’s commercial real estate investment market experienced a 67% increase in sales volume during the first three quarters of 2013 compared with the same period in 2012. Bolstered by the $373-million sale of a partial interest in Terminus I & II and the $82.5-million sale of Camden Vantage Apartments, investment sales in all sectors topped $6.8 billion by the end of the third quarter in 2013, the largest three-quarter total since 2007. Improved job growth – 51,600 new jobs in the previous 12 months – due to local business expansion and increased relocations are driving the strong rebound in the Atlanta market.

Avison Young 2014 Forecast

Boston 6 Tide Street

Boston strong in the midst of sluggish U.S. recovery

etropolitan Boston continues to enjoy economic expansion and improving real estate fundamentals. Upticks in local housing prices, wages and consumer confidence during 2013, coupled with low inflation and increases in consumer spending, will enable the economy’s growth to continue. With an unemployment rate among the strongest in the U.S. (7.2% in August), Massachusetts continues to thrive due to the presence of world-class educational, medical and research institutions.

Boston Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6%

State GDP grew an estimated 3.5% in the third quarter of 2013, according to MassBenchmarks, following a revised 1.7% increase in the second quarter of the year. The publication forecasts 3.4% growth in state GDP from October 2013 to March 2014. Commercial real estate saw falling vacancies, rising rents and new construction across most property types. In 2013, a total of 5.5 msf of new inventory was delivered, including 3.1 msf of multi-residential and 1.9 msf of office. More than 16 msf is under construction – three times greater than the previous five-year average in Metro Boston, including 7 msf of multi-residential, 6.9 msf of office and 2.2 msf of new retail developments.

projects at both North and South Station, Landmark and Fenway Centers bordering the Back Bay will add another 500,000 sf of retail. Five new supermarkets are coming to Boston to feed the demand created by 8,260 approved new housing units, including 1,346 already delivered in 2013.

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Industrial

Overall office vacancy fell 260 bps year-over-year to 11.9% while rents increased 5.5% to $24.23 psf in the market as a whole, and 7.7% to $44.70 psf in the central business district (CBD). Expect rents to continue increasing until new construction delivers during 2014 and excess space, already being marketed, officially vacates. Of the office space under construction, 78% is preleased to notable-credit tenants, including Vertex Pharmaceuticals, PricewaterhouseCoopers and State Street Corp.

The industrial sector absorbed 3.8 msf of space, including R&D and flex space, in the 12 months ending in September 2013, lowering vacancy to less than 14% for the first time since 2008. Major leases to Preferred Freezer, Waste Management, NyPro, O’Reilly Automotive, Double E, Williams-Sonoma, Jiffy Mix and Artisan Industries were welcome relief along the battered Route 495 corridor. New construction is virtually non-existent, and it will take several more quarterly gains like these to push rents or jumpstart development.

Limited suburban construction and strong leasing activity brought suburban vacancy below 14% for the first time since 2008. Suburban rents grew 1.6% year-over-year to $19.82 psf overall on the 11th consecutive quarter of occupancy growth. Still, tenants can lease class A space in suburban markets for $30 psf versus $60 psf in the CBD’s financial district. Demand for live/ work/play centers continues to drive urban and suburban mixeduse developments.

Retail New amenities are coming via new suburban lifestyle centers underway in Burlington, Lynnfield, Westwood and Littleton. Urban mixed-use projects at Seaport Square, the Ink Block, New Balance’s Boston Landing and Assembly Row in Somerville all have retail components underway. Major development and redevelopment

Avison Young 2014 Forecast

4% 2% 0% 2012

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Investment At $5.4 billion through the first three quarters of 2013, sales volume through October showed a slight increase compared with the first half of the year. While core product remains the most in favor, investors are now buying vacancy hoping to capture increasing rents. Look for more owner/user deals, as a hedge against that rent growth, like athenahealth’s purchase of its Watertown campus. With the Federal Reserve’s stimulus policy of buying $85 billion per month in bonds expected to continue through at least the first quarter of 2014, low interest rates will continue to support capital flowing into U.S. commercial real estate in general, and specifically into gateway cities like Boston, which remains a top target for investors worldwide.

Charleston 360 Concord Street

Region poised for explosive growth

he Charleston region is recognized internationally as a top destination, recently garnering its third consecutive Condé Nast Readers Choice Award as the No. 1 place to visit in the U.S. Amplified visibility has spurred increased tourism and a boom in hotel construction and investment. Major growth in key industries, including port-related businesses, manufacturing (led by Boeing and its suppliers), and both IT and medical research, has made the Charleston region one of the fastestgrowing metro areas in North America during the last five years, and the region is expected to outpace the nation in the coming decade. With the top manufacturing job growth in the nation between the first quarter of 2010 and the fourth quarter of 2011 according to Brookings, as well as a top IT growth spot in the country, the region will see new construction in all product types increasing in the coming months and years. Moreover, the Charleston region’s population will exceed 1 million people in the coming decade, driving construction of apartment, housing, retail and other product types, and requiring significant investments in infrastructure.

Office Demand for office space and the value of office properties are linked closely to job growth. In 2014, office demand will continue to outpace supply, which has been playing catch-up since the recession, resulting in steadily declining vacancy and rising values. Absorption will increase as developers create more class A space to meet the burgeoning demand. Rental rates are expected to continue their climb, further driving up values. The forthcoming year is shaping up to be one of optimism and progress for Charleston as it caters to the needs of a fast-growing population.

Retail The Charleston retail market continues to flourish and is expected to expand in 2014 and beyond. Fueled by accolades for Charleston’s history, charm and fine food, the booming local tourist industry has spurred a rush to build hotels, restaurants and retail outlets in historic downtown. Charleston’s population and job growth have outpaced the nation, which has prompted substantial single-family and multi-residential construction, driving retail growth in the suburban markets. The majority of the anticipated growth will occur in the northern part of the Charleston Metropolitan Statistical Area in the small, but growing, towns of Goose Creek, Summerville and others.

Charleston Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2012

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Industrial The Charleston industrial market is poised for robust growth in 2014. Expansions have been announced by Boeing and others in the aerospace and auto-related sectors. Expansion by BMW in the upstate, and the inland port opening in October, will result in higher export volumes and greater business for port-related industries. The Port of Charleston terminal expansion, its dual-rail access intermodal facility, and the harbor deepening will further enhance Charleston as a destination for exporters and distribution centers. The fundamentals are at a tipping point. Vacancy is below where it was at the top of the market, and speculative development is underway. Rent growth is expected to return in 2014 to justify broader speculative growth.

Investment Charleston is on the radar screen for institutional investors as well as private investors seeking a growth market. Led primarily by the multi-residential and hospitality sectors, new construction and sales of existing properties are driving market capitalization rates down and creating a shortage of opportunity. Investors who purchased in the early stages of the recession and have re-tenanted their properties will find buyers eager to provide them handsome returns while still allowing ample upside as rents continue to rise back to pre-recessionary levels. As rents continue to rise, and vacancy trends improve, land sales and new construction will dot the horizon in the region as the continued strong population and job growth propel Charleston forward.

Avison Young 2014 Forecast

Chicago 225 W. Wacker Drive

Improving economy, increased demand prompt further growth in 2014

he Chicago economy saw modest growth during the course of 2013: employment jumped 120 bps (53,700 jobs) in the 12 months ending in October 2013; unemployment remained slightly above the national average; and job growth was led by both the professional and business services sectors, adding 28,700 positions through October. The software and technology sector also witnessed strong growth, which is projected to continue through 2014. Both the office and industrial sectors remained consistently active throughout the year, prompting several significant developments to commence construction – confirming that the market has stabilized. Throughout 2014, the Chicago market will likely see considerable growth as the local economy continues to improve.

Office The office market recorded a third-quarter 2013 vacancy rate of 13.9%, a minor uptick compared with year-end 2012. Both the central business district (CBD) and suburban markets witnessed strong leasing activity, resulting in positive absorption in the last several quarters. Notable 2013 transactions included McDermott Will & Emery’s 232,000-sf lease at River Point, Google’s 223,000-sf lease at 1K Fulton, and Denton’s 217,000-sf lease at Willis Tower. Capital One continued expanding its suburban footprint, which now totals 150,000 sf. Rental rates are tightening and forecasted to rise throughout 2014, especially in limited class A product. Luckily, construction has returned after a hiatus of several years. Currently, there are two projects under development within the CBD, representing 1.7 msf.

Retail Chicago’s retail market remained fairly active throughout 2013. Vacancy fell 30 bps through the first three quarters of the year. Retail activity shifted from the suburban markets into the CBD and surrounding submarkets, following both businesses and consumers. Big-box retailers continued modest expansion in key suburbs while also reducing their footprint to expand into areas surrounding the CBD. The regional grocery chain Dominick’s will close all stores by mid2014, likely causing vacancy to rise slightly in the next several quarters and then fall, as both national and local specialty grocery chains have been showing interest in acquiring many locations.

Avison Young 2014 Forecast

Chicago Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2012

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Industrial With an inventory of more than 1 bsf, Chicago’s industrial market experienced steady growth during 2013. Vacancy fell to 8.5% at the end of the third quarter from 9.2% at year-end 2012. There was a total of 2.8 msf under construction as of the third quarter of 2013, with an additional 1.9 msf expected throughout 2014. The number of speculative projects has risen since the recession; build-to-suits remain the predominant choice for landlords. E-commerce continues to be a market driver – many retailers are expanding their distribution capabilities to accommodate growth. Amazon has confirmed plans for a 1-msf build-to-suit within the Southern Wisconsin submarket, bringing 1,000 new jobs. Looking ahead, positive net absorption and lower vacancy are expected, especially in key submarkets.

Investment As market conditions stabilized, the Chicago office market recorded an uptick in investment sale transactions in 2013. Owners that successfully repositioned their properties began selling for premiums. Foreign investors continued to acquire office product. Notably, 225 W. Wacker Drive was purchased by South Koreanbased Mirae Asset Global Investments, and Canada’s Ivanhoé Cambridge purchased 10 and 120 S. Riverside. Several large assets under contract in late 2013 were expected to close by year-end 2013 or in early 2014. Demand for industrial assets remains strong as vacancy falls to pre-recession levels. Investors with sufficient capital continued to acquire fully leased big-box assets while also considering value-add opportunities, a trend which should carry on through 2014.

Columbus Columbia Gas Building

Slow and steady wins the recovery race

he Columbus, Ohio Metropolitan Statistical Area (MSA) is currently experiencing a slow and steady recovery that should continue through the first half of 2014. The unemployment rate dropped to 6% in the third quarter of 2013, which was attributed to hiring in the public sector and in opposition to the State of Ohio’s unemployment rate, which increased to 7.5%. The Columbus MSA comprises approximately 1.7 million residents and is expected to break 2 million by 2015. Columbus is the 15th-largest city in the nation with a diverse economy driven by education, insurance, banking, fashion, defense, aviation, logistics, healthcare and technology. The city’s growth has been focused primarily in five submarkets: Downtown, Easton, New Albany, Dublin and Polaris.

Columbus Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2012

Office The Columbus office market is made up of almost 64 msf of space. The sector’s recovery is being led by Nationwide Insurance’s 426,000-sf development of a class A office building in the Arena district downtown. Columbia Gas has preleased 246,400 sf in the project. Additional planned projects include 250 S. High Street (160,000-sf mixed-use building in the Columbus Commons), Westar V (a 103,000-sf class A office building in Polaris), and The Joseph (a 55,000-sf mixed-use project in the Short North). There was approximately 800,000 sf of positive absorption in 2013, causing the vacancy rate to drop to 9.3% at the end of the third quarter of 2013. The average quoted rate for class A office space was $18.04 psf.

Retail The retail market comprises approximately 88 msf and experienced approximately 1 msf of positive absorption during the first three quarters of 2013. Total vacancy dropped to 7.5% and average rental rates rose to $11.36 psf. The retail recovery is being led by the Easton Gateway, a new 54-acre development that is expected to open in 2014. Costco opened a 150,000-sf store on a 17-acre site purchased by the warehouse retailer. REI, Saks Off 5th and Dick’s Sporting Goods are set to open in mid-2014, while Whole Foods will open in May 2015. The City of Dublin has announced plans for a new $300-million, mixed-use development to break ground in 2014 on the northeast corner of Riverside Drive and Dublin Road along the Scioto River. The project will include retail, multiresidential and office components.

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Industrial The Columbus industrial market contains 243 msf in 5,034 buildings. The industrial market recorded 4.4 msf of absorption and 2.2 msf of new construction during the first three quarters of 2013. The vacancy rate declined to 8.2% with an average rental rate of $3.21 psf net. The largest new deals included Speed FC LLC, which signed a 767,000-sf lease; and Exel Global Logistics, which signed two leases for 338,000 sf and 313,000 sf, respectively.

Investment Through the first three quarters of 2013 there were approximately $81 million in office sales and a total of 50 transactions with cap rates up slightly, averaging 9.5% compared with 9.3% in 2012. A total of 295 retail assets with a combined value of $125 million changed hands in the first three quarters of 2013. Cap rates for retail product averaged just below 10%, compared with slightly more than 13% one year prior. In the industrial investment sector, 3.2 msf sold during the first half of 2013, according to CoStar. The total space was traded in 22 transactions totaling $70 million at an average price of $21.72 psf. Average cap rates increased to 7.8% at the end of the third quarter from 7% in late 2012.

Avison Young 2014 Forecast

Dallas Encana Plano Office

Corporate expansions fuel the Dallas economy

he Dallas-Fort Worth region recorded some of the highest employment gains in the United States in 2013 as large corporations expanded in the area. The favorable business climate led to further population growth, and Dallas-Fort Worth is currently the fourth-largest metro in the U.S. The increased activity from large corporate users (who were either expanding or relocating) created a ripple effect, pushing the unemployment rate down to 6% and increasing the need for space across all product types. Housing is one of the foundations of a healthy market, and according to the S&P/Case-Shiller Home Price Index, home prices have surpassed those seen before the recession. The Dallas market will likely continue its expansion in 2014 along with the positive market fundamentals.

Office The Dallas office market recorded healthy absorption in 2013, causing vacancy to stabilize and asking rates to appreciate. Many large corporate users expanded in the area, with State Farmâ&#x20AC;&#x2122;s 900,000-sf lease in the Richardson submarket among the more notable transactions. The company is also constructing a 1.5-msf campus in Richardson, which will deliver in 2015. Sustained low natural-gas prices are beginning to have an effect on the Dallas office market. Encana, the Canadian natural-gas giant, announced plans to close its Plano office, a new building totaling 320,000 sf. The large block of space hitting the market could dampen the viability of new projects in the area. However, space in Plano is in high demand and the office market should adapt quickly. Decreasing vacancy has caused speculative construction to return to the market, but until new space delivers in 2014, the strong demand will cause upward pressure on asking rates.

Retail Retail growth has begun to echo the population growth in the metro, and the significant employment gains have boosted consumer spending. Mixed-use developments in urban growth areas have attracted additional retail tenants, particularly in Uptown where consumers live, work and play. Demand for retail space will continue to grow in 2014, resulting in declining vacancy.

Industrial Dallasâ&#x20AC;&#x2122; centralized location and busy airport have turned the city into a continually growing major inland port. The City of Dallas has a $33-million project in the works to improve infrastructure near the inland port. Warehouse and distribution users have expanded

Avison Young 2014 Forecast

Dallas Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2012

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in the Dallas market due to the favorable logistics and trade routes. The demand for space has caused the vacancy rate to fall to its lowest point since 2002. Construction was conservative in 2012, but increased in momentum throughout 2013. Even when this space delivers in 2014, it will not likely offset the ongoing strong demand in the industrial market. Vacancy is projected to remain near historically low levels throughout 2014.

Investment Considered by economists to be one of the nationâ&#x20AC;&#x2122;s most dynamic markets, Dallas continues to capture the interest of both foreign and domestic investors. Core assets in prime locations have typically been a favorite among investors. However, value-add properties are gaining traction, particularly among market-entry buyers who want to place capital in an economy that continues to demonstrate strong fundamentals. Thanksgiving Tower in Downtown Dallas was sold to Woods Capital Management in July 2013, and the company plans to invest a significant amount of capital towards improving the building. Rising interest rates remain a concern in the Dallas investment market, but as long as interest rates remain relatively low, investment activity will remain elevated.

Denver Denver Place

Upcoming opportunities mean Denver is poised for success

enver is on course to become one of the top commercial real estate markets in the country with numerous upcoming opportunities in all asset types anticipated throughout 2014. With unemployment rates still among the strongest in the country, Denver is situated for a year of progress in 2014. The city’s unemployment rate peaked at 9.7% in March 2010 and has subsequently improved by more than 300 bps. The consumer price index increased approximately 3% during 2013 due to rising housing, food and oil costs. This rise, coupled with stagnant salary growth, is contributing to slower-than-desired economic gains.

Denver Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2012

Office Denver’s office vacancy rate steadily declined to 10.9% in 2013 from a high of 14.7% in 2009. Positive absorption of 1.2 msf during the first three quarters of 2013 was in line with the 1.3 msf absorbed during the same period in 2012. Office construction was active, with 826,000 sf completed and more than 2 msf under construction as of December 2013. The downtown office sector will continue to be the hottest market in Denver in 2014. Rental rates have increased $4 psf since 2011 to an average of $29.24 psf at the end of 2013. Additionally, speculative properties under construction show the true optimism of the downtown office market, as this type of development was a rarity in recent years. These properties include 1601 Wewatta and 16M, whose combined availabilities equal almost 400,000 sf. Along with increased confidence in the market comes the return of landlord-favored deals with fewer tenant concessions.

Retail Metro Denver’s retail vacancy rate improved slightly to 6.3% in 2013 from 6.7% at year-end 2012. In 2013, rental rates were fairly flat at $14.77 psf, but absorption was at a five-year high of nearly 1.7 msf. The downtown Denver retail market will also see considerable activity in 2014 with mixed-use properties growing in popularity. The convenience of street-level retail, with either multi-residential or office space above, is a draw to those who desire a live/work/play environment. Approximately 400,000 sf of retail space was under construction at year-end 2013.

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continues to trend lower and the rental market is improving, closing 2013 at a five-year high of $5.39 psf. The industrial market is arguably one of the most energetic market sectors in Denver. The warehouse sector has the most potential in the coming year as retailers change their focus to online sales and quick distribution networks. Manufacturing will also see an uptick in activity while more companies look to relocate to Denver due to incentive programs such as the Enterprise Zone Tax Credit.

Investment After a successful year in 2013, the investment market is poised for even more progress in 2014. With the upsurge in investor interest in Denver and likelihood of higher rents, the expected rise in interest rates will not slow the market growth. Multiresidential investments led the Denver investment market in 2013 with an estimated $2.6 billion in sales. This momentum will continue in 2014. The office sector also has very strong investment potential for 2014, especially in the downtown submarkets. A number of highprofile downtown office sales occurred in 2013, including 1001 17th Street for $217 million, 1999 Broadway and 2099 Welton Street ($183 million), 1625 and 1675 Broadway ($176 million), and 1700 Broadway ($98 million).

Industrial The industrial market consists of 239 msf with an additional 2.4 msf that commenced construction before year-end 2013. Vacancy Avison Young 2014 Forecast

Detroit Southfield Town Centre

Fighting through bankruptcy

espite the pending bankruptcy of the City of Detroit, the market, in the third year of a business recovery, is showing signs that its steady turnaround will continue in 2014. The recovery of the Big Three automakers is now having the expected trickledown effect on the automotive supply chain. First-tier suppliers like Delphi, Visteon, Lear, Federal Mogul and others have stabilized their cost structures and are once again creating real estate demand and activity to help manage their capacity in response to record-breaking global auto sales in 2013. Many user-investors are viewing the bankruptcy of Detroit as a reset button for city hall and a definitive sign that the bottom was, in fact, reached. Investor activity has slowed as rents have started to rise and capitalization rates are declining. Nonetheless, buildings and properties in all sectors are being sold at levels well below replacement cost, and cap rates are well above the national average. The downtown Detroit office market, where investor Rock Ventures has acquired more than 22 properties to-date, is viewed as an island surrounded by neighborhoods with 40 years of deferred maintenance â&#x20AC;&#x201C; and, accordingly, there is still a lot of trepidation felt by investors from outside of Michigan. Employment downtown continues to be strong and the cycle of residential conversion of older class B and C office stock continues in response to rising, near-100% occupancy and climbing rents. Asian investors have recently bought two major conversion assets downtown. Retail infrastructure is emerging, and the new Whole Foods is experiencing strong per-square-foot sales, which should give comfort to other retailers evaluating market entry.

Office Six straight quarters of positive absorption has reduced the vacancy rate in the class A and B markets to 19%. Expectations for 2014 are for continued absorption, and no significant speculative construction is anticipated for delivery until 2016. Rental rates will rise modestly in spot markets, but should stay within normal inflationary parameters. Continued recovery of the auto industry, including the supplier base, and the expansion of a cadre of technology companies should contribute to another year of positive absorption.

Retail Retail market vacancy dipped below 10% in 2013, but rents remain suppressed by the slow growth of consumer confidence and spending. Many well-located centers continue to thrive with strong tenancy and performance, but the market of more than 236

Avison Young 2014 Forecast

Detroit Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2012

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msf is still in digestion mode. It is anticipated that this trend will continue through 2014.

Industrial The 514-msf industrial market in Southeast Michigan registered five straight quarters of 2-msf-plus absorption; and older manufacturing stock has been idled, repurposed or redeveloped, driving vacancy to 10.9% from 12.9% at the end of 2012. Rents have basically stayed flat and should see a modest rise in 2014 as high-quality large blocks of space become limited. Activity in the automotive industry will continue to drive the recovery of this sector.

Investment After years of plunging valuations in all asset classes, prices appeared to hit bottom in 2012 and 2013. Owner/users are continuing to take advantage of many properties in troubled financial situations. The pending sale of the 2.2-msf Southfield Town Center by Blackstone will be a true barometer on the health of the investment market in Southeast Michigan. Institutions are still reluctant to step back in, but opportunistic value-add investors are expected to continue to drive investment volumes higher in 2014.

Houston Greenway Plaza

Houston enters period of sustained growth

ouston’s post-recession energy boom attracted the attention of an international audience in 2013. Population and employment expanded rapidly, and construction increased substantially as developers addressed the pent-up demand brought on by the economic downturn. Hiring in Houston’s oil and gas sector slowed throughout 2013, indicating that the energy boom may be coming to an end. With roughly 50% of the economy tied to oil, a stable energy market is vital to Houston. The International Energy Agency (IEA) predicts that shale-oil, along with the Canadian oil sands, will reduce reliance on OPEC for the next decade. Although the economy has slowed relative to the boom years, Houston is likely beyond the cycles of boom and bust – and headed towards a period of sustainable growth.

Houston Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2012

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Office In an effort to compete for top talent, obtaining the most desirable office space in Houston became a trend in the oil and gas industry following the recession. Class A space, particularly in the most sought-after areas, quickly disappeared from the market, leaving limited options for tenants to expand. The resulting building boom delivered its first major wave of construction in 2013, totaling 4.5 msf, 80% of which was preleased. Houston’s healthy absorption primarily came from the delivered product. Another 7.5 msf, 79% of which is preleased, will deliver in 2014. Most notably, ExxonMobil’s 3-msf campus is set to be completed in mid-2014. Absorption will likely be substantial this year as tenants take occupancy of the new space, although vacancy is projected to increase slightly. New-construction starts will likely slow as supply catches up with demand.

Retail Houston’s growing population is fueling the retail market, resulting in new development that is largely located in West Houston. The Grand Parkway Loop will be completed in 2015 and will result in additional retail opportunities along the toll way. Vacancy in the retail market is expected to decrease in 2014 as tenants capitalize on sustained consumer confidence.

in the North submarket, which will have a significant impact in that area. Asking rates rose substantially in 2013 due to demand, although an uptick in development will aid in alleviating the tight market.

Investment While Houston’s economy continues to receive recognition both nationally and internationally, investors demonstrated their confidence in the market with record-breaking transactions in 2013. In one of the largest transactions, Cousins Properties purchased Greenway Plaza for $950 million in September. Other large-scale transactions in 2013 included BG Group Place ($480 million), Williams Tower ($412 million), and the recently completed 3009 Post Oak ($112 million). Houston is poised to become the next gateway city. According to Forbes Magazine, by 2023 Houston will be widely acknowledged as America’s next great global city, and in a 2012 year-end survey by the Association of Foreign Investment Real Estate, Houston was named the fifth-most attractive investment market in the world. Rising interest rates remain a threat to the investment market. However, unless interest rates rise substantially, sales in the Houston market will remain strong.

Industrial The industrial market continued its expansion in 2013. The Northwest area is Houston’s most established industrial market, although a lack of land has pushed development further north and west. The area around Houston’s IAH airport, in particular, is witnessing significant development. Hines broke ground on Pinto Business Park, a 971-acre master-planned industrial park Avison Young 2014 Forecast

Las Vegas The LINQ

The face of Las Vegas is changing

romising developments in the Las Vegas Valley have brought about renewed confidence in the local economy. Largescale projects such as the SLS Hotel/Casino, The Linq, Shops at Summerlin and the proposed Resorts World and MGM Arena will bring thousands of much-needed jobs and increased tourism to Las Vegas.

Office Throughout 2013, lease rates were very enticing for professional office product. A majority of landlords offered existing tenants the option to renegotiate their existing lease terms at a lower rate under blend-and-extend terms. Some tenants took advantage of the historically low lease rates and found more favorable locations and terms. Overall, average asking lease rates remained relatively flat throughout the year and are expected to push slightly upward in 2014 as demand continues to grow. Market-wide vacancy is expected to continue its slow downward trend during the next year with little-to-no office construction breaking ground. The medical office market has shown an increase in overall vacancy, largely due to smaller practices joining larger medical companies. Medical office buildings that can meet larger space requirements will continue to see decreased vacancy throughout 2014.

Retail Activity in the retail market in 2013 mirrored that of 2012. Lenders continue to favor high-credit tenants with strict requirements for those not meeting their higher standards. The velocity of lease transactions going into 2014 pushes forward, with a majority of deals being relocations or renewals. New business owners remain cautious and are pushing for short-term leases. Existing businesses are still taking advantage of the vulnerable market and pushing for long-term leases. The Shops at Summerlin project, a 1.6-msf mixed-use mall with several anchors and 125 stores, is currently underway. The project stalled in 2008 and has been sitting dormant for five years. While under construction, this project will provide approximately 1,700 jobs and, when finished in late 2014, will employ approximately 2,000 people.

Industrial Industrial vacancy across the Las Vegas Valley has continued to drop in recent years. It is very likely that vacancy will dip below 10% in 2014. Lease rates for all product types remained flat throughout 2013 and are expected to tick upward in 2014 as market occupancy

Avison Young 2014 Forecast

Las Vegas Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2012

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increases. Distressed assets are, to some extent, a thing of the past. A majority of bank-owned properties have been sold to investors and put back into the market. Those projects are expected to lease up quickly due to the lower-than-normal asking lease rates marketed by the new owners. With a lack of available contiguous space greater than 100,000 sf, and with many large retail and entertainment projects coming in 2014 and 2015, demand for large warehouse/distribution space is expected to be significant. The question going forward will be where to build it.

Investment The anticipated economic stabilization in 2014 will follow a year in which asset prices, transactions and capital availability all saw continued recovery. In the first half of 2013, Las Vegas asset prices moved significantly higher, yet nowhere near the peaks of 2007 and 2008. While multi-residential was the most popular focus for investors in recent years, two significant office projects sold in 2012 and 2013, respectively. These projects were General Growthâ&#x20AC;&#x2122;s 32-office-building portfolio in Summerlin of 1.1 msf and the 10-building Crescent Hughes Center totaling more than 1.5 msf. The acquisitions had a combined value of just under $500 million.

Long Island 68 South Service Road

Resilience and strong demographics keep Long Island strong

ong Island’s proximity to one of the largest urban centers in the world, New York City, has helped the area transform during the past 30 years from a manufacturing-based economy to a wellrounded, service-oriented economy. Leading industries include financial services, professional and business services, healthcare, leisure and hospitality, construction, and transportation and utilities. A robust retail sector and strong demographics have fueled Long Island’s expansion and growth in recent years. The effects of Superstorm Sandy in October 2012 had a significant impact on businesses, residents and even the unemployment rate, which rose 30 bps during the following quarter. One year later, there are signs of improvement, but the rate has lagged behind the robust recent activity in Manhattan. The Long Island market’s limited supply of new construction deliveries, coupled with the region’s diminishing supply of existing inventory, offers a positive outlook for 2014 and beyond.

Office The office market, which consists of just under 40 msf of class A and B office space, still remains sluggish, but is improving. The office market ended the third quarter of 2013 with a vacancy rate of 16.2%, down from the previous quarter and only a slight decrease from a year earlier. The growing success of the financial, healthcare and energy sectors has resulted in positive absorption in all submarkets. Healthy incentives such as free rent and above-standard work letters are still being offered to credit tenants leasing space. Asking and effective rents are continuing their slow-but-steady upward trend and, with continued activity forthcoming, positive absorption and lower vacancy rates should prevail in 2014.

Retail The retail market is making a strong comeback with expansion for both big-box users and small national chains on the rise. Target just completed a new superstore in Huntington, and the Walt Whitman Mall, also in Huntington, has just finished a major expansion with new stores such as Urban Outfitters, Anthropologie, Carhartt and Brooks Brothers joining the tenant roster. Both small neighborhood centers and regional shopping centers continue to lease up the vacancies of several years ago. This positive growth trend is expected to continue in 2014 with tested retailers continuing their expansion and new players entering the market.

Long Island Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2012

2013

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Industrial Long Island has a unique industrial real estate market comprising more than 126 msf of warehousing and distribution space, with some regional manufacturing still remaining. The industrial market was the first sector to show signs of improvement with the most significant improvements coming in 2013, bringing the vacancy rate down to a healthy 5.2%. There is a lack of highbay, large product on the market, and both lease rates and sale prices continue to rise significantly. These trends are expected to continue in 2014 as smaller, lower-ceiling buildings attempt to catch up to their competitors.

Investment Investment transactions slowed throughout the Long Island marketplace in 2013, more from a lack of available product than any decrease in demand. Retail, office and industrial portfolios continue to be the preferred product types, and any properties which come on the market are selling at strong pricing levels. The lack of quality product in the multi-residential sector has resulted in continued new speculative construction. Activity has expanded to the fringe areas, and a number of secondary office buildings were sold. Quality retail and office product will continue to attract buyers in 2014 as occupancy numbers continue to strengthen.

Avison Young 2014 Forecast

Los Angeles 1777-1779 Vine Street

Slow, steady economic growth to continue in 2014

n Los Angeles County, the economic recovery has been steadily gaining momentum through employment gains and heightened investment activity. In the aftermath of the 2012 presidential election and fiscal-cliff situation, 2013 commenced with an aura of economic uncertainty. As confidence in the economy resumed through the year, overall performances across the commercial sectors trended upward. In 2014, the unemployment rate is expected to drop to 9.1%. Industries that will experience solid growth through job gains and increases in revenue include entertainment, media, healthcare, technology and aerospace. Additionally, as investment increases, the construction sector will also see noticeable growth this year.

Los Angeles Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2012

2013

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Office The rise of the creative sector has transformed the region and its market fundamentals. Heavy job gains in the technology, creative, media and entertainment industries have generated high demand for creative office product. The Silicon Beach corridor of the West Los Angeles submarket has been the preferred destination for high-tech companies migrating from other regional submarkets. Developers in other submarkets are taking note, retrofitting and constructing products to meet the demand. Regionally, the vacancy rate has stabilized, with stronger submarkets such as West Los Angeles offsetting such weakerperforming ones as Downtown Los Angeles. By year-end 2014, regional vacancy will dip below 14%, a benchmark reached during the strongest years. Additionally, leasing activity will strengthen, as more investment dollars are being funnelled into the commercial sector.

Retail Although much of the retail market remained in neutral during 2013, some areas are showing signs of strength. Stronger job growth in 2014 should encourage retailers to move into weakerperforming submarkets, thereby assisting in the recovery of the entire market. On the supply side, a few small, mostly preleased, projects are coming out of the ground. One major development, the Boulevards at South Bay, accounts for most of the construction underway, and leasing activity is anticipated to be brisk by the time the project comes online in 2015. By year-end 2014, the vacancy rate will fall below 6% and rental rates will reach north of $27 psf, a 2% year-over-year increase.

Industrial 34

Avison Young 2014 Forecast

In 2013, the industrial real estate market was largely defined by the static level of cargo volumes at the San Pedro Bay ports. Although the county has one of the largest concentrations of industrial buildings in the U.S., the availability of large warehouse space is tight. The challenge for the county’s industrial market is supply. Transportation and logistics firms must compete with the large manufacturers for space. In addition, lease renewal rates are high, making it hard for companies seeking a presence in the region to gain entry. In 2013, the direct industrial vacancy rate in Los Angeles County dipped into the 2% range, down from nearly 3% in 2012. Additionally, average asking rents edged up 4% on a yearover-year basis. Recovery is well underway and lease activity is increasing. In 2014, industrial lease rates should rise appreciably.

Investment The investment market was solid in 2013. A number of highprofile trophy assets traded, causing a ripple effect on market fundamentals. Notable deals included Brookfield’s acquisition of several MPG properties, Overseas Enterprise Union’s purchase of the iconic U.S. Bank Tower, and Commonwealth Properties’ acquisition of the City National Towers. In light of significant trades, asking rents will rise as the demand for space increases. Additionally, prominent West Los Angeles assets are now on the market. Landlords and developers who have held on to trophy assets are now finding the opportune moment to sell.

New Jersey MetLife Stadium

Opportunity knocks for market growth

wo major questions were answered in New Jersey towards the end of 2013: Would pro-business Governor Chris Christie gain re-election? Would the highly anticipated Economic Opportunity Act of 2013 (EO13) finally be signed into law? Governor Christie won a landslide election victory in November and EO13 was enacted in September. The act, lauded as a â&#x20AC;&#x153;game-changerâ&#x20AC;? by government officials, consolidates five incentive programs into two and, with its focus on job creation, will attract companies and industries to the state. Governor Christie and his administration have been very active within the business community, and 143,000 new private-sector jobs were created during his first four years in office. Furthermore, speculation that the governor could be a potential candidate for a 2016 presidential run keeps the spotlight on New Jersey, which is perceived as good exposure for the state.

Office Vacancy improved slightly during 2013, declining to 20.8% from 21.2% at year-end 2012. Visionary developers began to assess whether to upgrade or re-purpose older properties left unoccupied for several years due to corporate consolidations. The state benefited from growth in healthcare and life sciences, the technology sector, and increasing activity among firms in the technology/telecommunications sector. Suburban transit submarkets gained attention from tenants in search of live/work/play vibrancy and accessibility, positioning them to attract the next-generation workforce. Future office market success may rely on local players gaining a better understanding of EO13, as well as the approval and execution of adaptive re-use of some antiquated facilities.

Retail After leveling off during 2012, retail vacancy rates tightened somewhat during 2013. All major property types experienced lower vacancies year-over-year, while shopping centers had the most improved occupancy levels. Slightly more than 200,000 sf of new inventory was delivered during 2013, with an additional 500,000 sf anticipated for 2014. Construction has progressed at the American Dream Meadowlands project. Plans for the 2.8-msf shopping and entertainment center have been in the works for more than 10 years and the development is expected to create thousands of jobs. American Dream Meadowlands will likely garner worldwide attention as

New Jersey Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2012

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the region is set to host Super Bowl XLVIII, which will be played adjacent to the project, at MetLife Stadium, in February 2014.

Industrial Availability rates in the industrial market are at five-year lows. Efforts to strengthen demand for bulk warehousing and distribution along the New Jersey Turnpike in the central part of the region continue to be at the forefront. Port New York and New Jersey is preparing for the widening of the Panama Canal in 2015, and an increase of 2,500 jobs is expected. E-commerce is expected to remain a major business driver. Amazon.com is spearheading the activity, committing to two warehouses totaling 1.5 msf. Despite increased construction levels, robust demand for warehouse space is projected to result in positive absorption throughout 2014.

Investment Through the first three quarters of 2013, office sales volume was 73% higher on a year-over-year basis, though more than half of the 2012 total occurred during the fourth quarter. Cap-rate compression continues for industrial product, which experienced the highest level of demand as sales volume reached nearly $1.4 billion by the end of the third quarter of 2013, compared with $762 million in 2012. Sales of quality, leased retail assets were accompanied by reduced cap rates, while overall volume was lower than in 2012 and 2011. Institutional investors are expected to remain active for established product, while value-fund operators are willing to invest available capital for the right product at a fair price.

Avison Young 2014 Forecast

New York 4 World Trade Center

Pendulum shifts towards a stronger market

he New York City economy grew at a steady pace in 2013 at 1.7%. According to data from the U.S. Bureau of Labor Statistics (BLS), private sector office-using jobs grew 2.5% through September 2013. Although employment growth in the financial services sector has yet to return to pre-recession levels, the professional and business services sector, which added more than 23,800 jobs through June 2013, is at the forefront of the improved labor market.

Office The Manhattan office market strengthened during 2013 as vacancy rates declined year-over-year. In Midtown, the average class A asking rental rate rose 2.4% from 2012, standing at $72.39 psf. Leasing activity jumped nearly 25% during the first three quarters of 2013, and absorption was expected to be positive to close out 2013. The delivery of 4 World Trade Center (2.8 msf ) Downtown and 51 Astor Place (400,000 sf ) in Midtown South marked the beginning of the strongest construction cycle since the 1980s. The delivery of additional product in the Downtown market will make the World Trade Center site even larger than it was before 9/11, replacing the areaâ&#x20AC;&#x2122;s 13.4 msf that was lost - including a number of damaged, antiquated buildings that were converted to housing. Buildings currently under construction, including the newly built 4 World Trade Center, account for 8.6 msf. And, if the market continues to create demand, the World Trade Center site could add another 5.6 msf (2 and 3 World Trade Center). The Downtown market remains an option for value-driven tenants, due to an abundance of available class A product, coupled with discounted asking rents, when compared with Midtown and Midtown South. Landlord concession packages are tightening and are expected to decrease in the first half of 2014. Three of the top five lease transactions that closed by fall 2013 were renewals. Macyâ&#x20AC;&#x2122;s renewed its 646,000-sf lease at 11 Penn Plaza for 20 years. In the Grand Central submarket, law firm Simpson Thacher & Bartlett LLP renewed at 425 Lexington Avenue (595,000 sf ), and Jefferies Group Inc. renewed at 520 Madison, taking an additional 133,000 sf.

Retail The retail market vacancy rate held steady throughout 2013. The Fifth Avenue corridor between 49th and 59th Streets remains the premier retail destination. Increased tourism has added to demand, and many retailers are seeking to expand their presence

Avison Young 2014 Forecast

New York Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2012

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in the market. Available options include new developments such as Hudson Yards, Brookfield Place and the retail complex at the World Trade Center. Average asking rental rates increased nearly 4% year-over-year, even with the amount of available retail sublease space trending upward during the last four quarters. Looking ahead, an uptick in tourism should result in increased retails sales during the period leading up to Super Bowl XLVIII, which will be played at MetLife Stadium in nearby New Jersey in February 2014.

Investment The Manhattan investment sales market continued to display unbridled strength even as financing questions loomed amidst a 100-plus basis point surge in yields on the 10-year Treasury. Sites that only a year ago were selling for $350 to $450 per buildable square foot are suddenly trading in excess of $600, and even $700, per buildable square foot. Capitalization rates remain steady and are expected to sustain their current levels throughout the balance in 2014. Numerous factors that contributed to the success included a continued low-interest-rate environment (favorable from both a leverage perspective and below-average yield opportunities from competing asset classes) and the perceived strength and stability of Manhattan real estate.

Orange County 2030 Main Street, Irvine

Economic growth outpacing the nation

n the past few decades, Orange County (OC) has transformed into a prosperous hub for high-tech and aerospace manufacturing, financial activities and tourism. Since the end of the Great Recession, OC generally tracked the national recovery. Facilitating the countyâ&#x20AC;&#x2122;s growth is a highly educated workforce. Quality of life is another attribute in which the county ranks highly, and this factor plays an integral role in attracting skilled and creative workers. In 2013, the OC economy continued to expand at a faster rate than both the nation and California. In 2014, the unemployment rate is expected to fall to 5.2%, down from the peak of 9.5%. Going forward, banks, tourism and hospitality, technology, life sciences and medical instrumentation and health services will likely experience growth and measurable job gains. The region is now seeing renewed commercial development activity, with several long-delayed construction projects set to move forward.

Office Since the end of the Great Recession, the office market has maintained a strong pace of positive overall net absorption and decreasing vacancy rates. Availability in the most desirable areas (Newport Center, Irvine Spectrum) is tight, and rents are starting to reflect demand for space in these prime locations. Demand is strong among technology and medical services companies, law firms, mortgage companies, and even small entrepreneurial firms. By year-end 2014, a delivery of new space will add 780,000 sf to the office inventory, most of which will be occupied by two large-scale tenants: Hyundai and Pacific Investment Management Company (PIMCO). Vacancy rates will continue to decrease as rental rates rise and availability tightens. Interest remains high regionally for OC office product.

Retail The median household income for OC residents is one of the highest in the U.S., encouraging retailers to search for space and expand their footprints here. Retail operators are filling dark, inline space throughout the metropolitan area, bringing some relief to smaller retailers who depend on large anchors for traffic. As junior and big-box retailers continue to fill large blocks of space at existing centers, many smaller tenants will be encouraged to extend their leases rather than relocate in 2014.

Orange County Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2012

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many are buying older properties in high-demand areas and redeveloping or repositioning older assets.

Industrial OC will be among the tightest industrial markets in the country in 2014. Consistently throughout the Great Recession, net absorption levels were healthy. Construction, aerospace and distribution firms are driving demand, especially for buildings that are 100,000 sf and larger. Many buildings are leased before they even hit the market. More than 200,000 sf of industrial product will deliver in 2014. The average direct vacancy rate remained below 5% through 2013 and will continue to decrease in 2014. Average asking rents have increased anywhere from 5% to 8% quarter-by-quarter, reflecting a strong and high-demand industrial market. Higher land costs may deter some users of large warehouses, but with interest rates and sale prices remaining low, investor activity should post significant gains in 2014.

Investment Interest from investors has intensified, as demonstrated by several substantial asset trades during 2013. Also, the decreasing number of distressed transactions point to an improving sales market. Investments in the multi-residential market have increased as more people (i.e. tenants) continue to move into the area. As the recovery continues at an impressive pace, look for investment volume to rise and trophy assets to trade.

Additionally, the limited availability of quality space left on the market, and rising rents at well-located and newer centers, are encouraging developers to become more active. As a result,

Avison Young 2014 Forecast

Philadelphia Comcast Center

Outlook strong for continued growth in the region

he Philadelphia area has the fifth-largest labor force among the nation’s largest metro areas, with 40.6% of the employed workforce in knowledge occupations. Many industries make up the employment potential in the region; and with a strong concentration in education and health services (approximately 21%), the region was less affected by the recession than some other major U.S. markets. In 2014, the region will continue to gain momentum as educational and medical organizations continue to expand.

Office Philadelphia’s universities, hospitals, tourism and professional services have experienced growth and increased demand for office space. The overall office vacancy rate was stable at 11.1% in the third quarter of 2013. Some markets, such as the central business district (CBD), have large blocks of contiguous space for major tenants, leaving fewer options for smaller tenants to rent. The larger tenants, such as Comcast and Independence Blue Cross, are driving the demand for space in the CBD. Independence Blue Cross extended its full-building lease of 800,695 sf at 1901 Market Street in the CBD for another 10 years. This is the largest transaction for the region since the Internal Revenue Service (IRS) leased 862,000 sf of space in 2011. The office market in Philadelphia has almost recovered from the recession, and this progress is expected to continue at a steady and consistent pace in 2014.

Retail The retail market did not experience much change during the first three quarters of 2013, with its vacancy rate holding steady. The largest lease signings during 2013 included ShopRite, Thriftway Supermarket, LLC and Lehigh Hospital – totaling more than 178,000 sf. Specialty Centers experienced nearly 26,000 sf of positive net absorption in 2013 with vacancy at 1.5% at the end of the third quarter. The Philadelphia International Airport opened new shops and restaurants in 2013, and there are plans to add several other concessions there by early 2014. Specialty Centers’ expansion has helped level off the tenancy losses seen in malls. The Coventry Mall in Pottstown, PA and the Granite Run Mall in Media, PA were sold. Both of these malls have high vacancy rates and are not able to match the standards of the dominant class A malls that have luxury retailers as tenants. Retail center sales activity was up in 2013 from 2012, and the same pattern is expected to continue in 2014.

Avison Young 2014 Forecast

Philadelphia Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2012

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Industrial The industrial sector is composed of both traditional and nontraditional manufacturing, regional and national distribution, warehousing, logistics and transportation services. The city’s central location is within a five-hour drive of 25% of the U.S. population and supports a variety of industries, including food, chemicals, transportation equipment, medical devices, textiles and pharmaceuticals. Since manufacturing is such an important part of Philadelphia’s economy, Mayor Michael A. Nutter created the Mayor’s Task Force on Manufacturing in 2013 to examine ways that the sector can grow. In 2014, this sector will continue to grow as the city is partnering with the Philadelphia Industrial Development Corporation (PIDC) to guide the next phase of industrial growth in the region.

Investment In 2013, there were a number of notable investment transactions in the CBD and suburban areas. These included Commerce Square (1.9 msf ) and numerous buildings in suburban locations totaling approximately 1.66 msf. The investments bring great expectations for 2014, as the economy is expected to stabilize and the demand for class A office buildings in prime business corridors is expected to increase.

Pittsburgh 400 Bertha Lamme Drive

Strong industry sectors spell ongoing prosperity

he Pittsburgh market remains extremely vibrant and the pace should continue throughout 2014. Notable sectors of the market, including energy, financial services and healthcare, remain strong. Pending forthcoming regulations, the healthcare and energy segments may see an enormous boom in job growth and real estate demand. Pittsburgh has proven in the last several years to be a stable market with low volatility. With existing and newly established large corporations maintaining and setting up regional headquarters and continued growth in employment, the region continues to prosper heading into 2014.

Office Office tenants continue to upgrade their premises with the majority moving from class B to class A spaces. As the upper level of the office market continues to tighten, many mid-tier opportunities and corporations’ substantially sized subleases (e.g. Heinz, Exco and EDMC) are becoming available. Limited highrise spaces in the central business district (CBD), coupled with limited upper-tier options in the suburbs, provide only a handful of choices for tenants looking in their respective markets. The blocks of space coming online and limited speculative development will balance the already tight market and keep rental rate growth flat as vacancy increases slightly.

Retail Shopping center construction is still sparse in the retail sector, but there are numerous projects in the early stages. Retail leasing is starting to expand with recent announcements by Dick’s Sporting Goods, Bonefish and Cinemark of plans to expand their locations throughout the region. The hospitality sector is reaping the benefits of strong consumer spending as customers prefer dining out compared with other forms of retail activity. New and proposed restaurants are turning up throughout the CBD, fringe downtown markets, urban neighborhoods like Lawrenceville, Mt. Washington, East Liberty, Shadyside, and in almost every submarket. Overall retail occupancy is still very strong, in the mid-90% range, and new well-located retail is commanding triple-net rents in the $25-to-$30-psf range, with numerous deals exceeding the $30 psf threshold. Bank development is noticeably slower, and big-box expansion is limited; but overall, the retail sector experienced a good 2013 and can expect demand and rent requirements to force new construction in 2014.

Pittsburgh Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2012

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Industrial The industrial market tightened further to 8.8% vacancy going into the final quarter of 2013. Class A facilities with available opportunities in the 100,000-sf range are very limited. The increase in occupancy levels is a result of growing companies with an existing local presence. Industrial growth is anticipated in 2014 due to steady activity in oil and gas and related manufacturing and technology sectors. Much like market conditions in preceding years, industrial building sales activity through the third quarter of 2013 remained flat. Limited availability of quality buildings increased opportunities for build-to-suit and owner/user development. Gordon Food Service’s planned 420,000-sf distribution center highlights market growth through user development. Pittsburgh will continue to be challenged by industry demand and quality of supply.

Investment Investment activity remains strong throughout the region, as investors look to Pittsburgh’s very stable market as a place to invest their money. With considerable investor interest in the market and low vacancy rates, owners continue to evaluate their options to sell. Interest rates have had limited impact on sales as cap rates remain below 8% on all property types. The investment market continues to see purchases at prices in excess of $100 psf and, at this pace, the current economic dynamics favor sellers and appear unlikely to change in 2014.

Avison Young 2014 Forecast

Raleigh-Durham Perimeter Two

Fundamentals improve across all sectors

he Raleigh-Durham region witnessed improvement across all sectors in 2013. Strengthening leasing fundamentals drove new construction and increased investment activity in the office, retail and industrial sectors - a trend that is expected to accelerate in 2014.

Raleigh-Durham Vacancy Rates 24% 22% 20% 18%

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A lack of new office construction in recent years has driven class A vacancy down rapidly. As a result, more tenants were forced to turn to preleasing options, which will not appear in the numbers until the product is delivered. Preleasing of more than 700,000 sf in 2013 helped drive a wave of new construction. Highwoods Properties broke ground on two buildings totaling 427,000 sf at Weston Lakefront in Cary, both preleased to MetLife. Duke Realty began construction on more than 450,000 sf at Perimeter Two and Three in the I-40/RTP submarket, with both buildings substantially preleased to multiple tenants.

12%

Average asking rental rates rose slightly in late 2013. Rates are likely to rise more notably in 2014 as tenants compete for a dwindling pool of quality options and newer buildings begin to be delivered at a higher price point. More projects are expected to break ground in 2014.

Retail Retail vacancy continued its downward trend in 2013, ending the year at pre-recessionary levels. The region’s reasonably healthy economy and robust population growth have made it a target for new retailers. New-to-market brands in 2013 included Bass Pro Shops, Cabela’s, Field & Stream, CineBistro, and Dave and Buster’s. Other recent market entrants announced plans for additional locations, including Anthropologie and Gander Mountain. Big changes took place in the region’s grocery market, with Kroger acquiring Charlotte-based Harris Teeter and Florida-based Publix announcing plans for its first RaleighDurham store. Construction activity continued at a moderate pace during 2013, but developers have been selective with regard to location. As a result, preleasing levels have been strong for most projects, and deliveries should not significantly impact vacancy rates in 2014. The new product will benefit tenants who are anxious to enter the RaleighDurham market but are having difficulty finding locations that meet their criteria.

Industrial The industrial market saw solid improvement in 2013 with demand increasing for both warehouse/distribution space and R&D/flex space. Activity was driven by a broad base of businesses, including

Avison Young 2014 Forecast

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logistics, technology-related entities and companies connected to the region’s improving construction and housing industries. The I-40/ RTP submarket saw vacancy approach the 10% mark by late 2013, while vacancy dipped to near 12% in Eastern Wake County and finally dropped below 20% in the U.S. 1/Capital Boulevard corridor, which was particularly hard-hit when the housing market collapsed. Speculative development remains limited, with just one building underway at year-end 2013. With prime locations in short supply, more developers may launch projects in 2014. Asking rental rates edged up slightly late in 2013, a trend that needs to accelerate before substantial new construction takes place.

Investment Investment volume increased by more than 20% in 2013. While multiresidential transactions continued to dominate activity, demand increased notably for all other sectors. Multi-residential sales declined slightly, due in part to the large number of properties that have already traded, combined with a wave of new construction that will place upward pressure on vacancy rates. The sale of the 300,000-sf Captrust office tower at North Hills set a new pricing record for the region at $327 psf. Retail sales volume increased noticeably, while industrial volume rose slightly. Multi-residential sales will likely become less dominant in 2014, while improving leasing fundamentals are expected to spur stronger investor demand in the commercial sectors.

Reno 200 S Rock

Steady recovery in 2013 sets the stage for growth in 2014

ulti-residential and industrial properties are leading the way in Reno’s recovery. As the backlog of vacant space shrinks, development of new commercial product continues to stall. Large employers committed to the area during 2013, and local and national home-builders constructed new homes for the first time in more than six years. Unemployment figures continue to fall, and property values are increasing as Northern Nevada climbs beyond recessionary levels. Lease rates will continue to rise slowly, and the lack of new commercial development will force end users to fill the remaining vacant space. Based on the velocity of 2013’s final quarters, commercial lease and sales transactions will see a healthy increase. Nevada’s pro-business, favorable tax structure, expanding labor pool, and lower cost of living will attract numerous companies from a diverse range of industries. Continued recovery in all aspects of the commercial market is expected in 2014.

Office Youthful companies attracted to Reno’s live/work/play atmosphere, call centers, and retail mortgage brokerage houses pushed the office markets’ vacancy toward 16.8% at the end of 2013, down from 18.1% one year previous. The central Meadowood submarket remained strong throughout the downturn while Downtown revived at the start of 2013. In 2014, South Meadows will drive absorption as downturn pricing continues to attract tenants to the remaining class A and B product. Class C product will continue to struggle until class A and B lease rates increase. Office vacancy steadily declined for three years with a full 200-bps drop in 2013. This trend will likely continue across the region’s submarkets in 2014.

Retail After years of stagnation, recent market growth created a sense of urgency for local retailers. Many relocated their businesses to locations with superior exposure at comparable rental rates, renegotiated their current leases, or found centers with reduced rental rates. National retailers returned to Northern Nevada in 2013 and plan additional openings for 2014. The most robust growth occurred in the Meadowood, South Reno, Northeast Sparks and North Valley submarkets – pushing vacancy rates down to 17%. The retail market has an optimistic outlook for 2014 and follows the overall trend toward lower vacancy and higher rental rates.

Reno Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2012

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Industrial Manufacturers, delivery services, third-party logistics, pharmaceuticals, gaming, energy, Internet retailers, and technology tenants have made Reno home. The Northern Nevada industrial market is expected to reach single-digit vacancy by the first quarter of 2014, down from almost 16% in 2008. Approximately 1.1 msf will be available in the first and second quarters of 2014, including high-bay construction and speculative buildings. Distributors access 80% of the West Coast’s population within one day’s drayage via Interstate 80 and Interstate 580. Nevada’s pro-business environment will attract additional businesses as other states implement more restrictive tax and regulatory legislation at local and state levels.

Investment Overall investment activity for 2013 exceeded that of 2012 with retail, industrial and office showing the most growth. Out-ofstate investors increased year-over-year and created a shortage of available opportunities as distressed office and retail properties were purchased at low prices. In the office and retail sectors, prospects include vacant buildings with pricing that is not reflective of the risk or office buildings with reasonable occupancy, but shortterm leases. The multi-residential sector is faring better, with several medium-sized properties available, but few of significant size – while the industrial market notably included a 9.5-msf portfolio sale. A tight investment market will be maintained in 2014 as the recovering economy occupies the remaining vacant spaces.

Avison Young 2014 Forecast

San Diego County Rio San Diego Plaza

Strong indications of improving market fundamentals

wo of San Diego Countyâ&#x20AC;&#x2122;s most important assets are its diverse economy and reputation for innovation. The region is a thriving hub for the biotechnology and telecommunications industries. The county also has a significant high-tech manufacturing sector and remains a popular travel destination. By year-end 2014, job growth will likely return employment to pre-downturn levels. Growth has been broad-based with nearly every private-sector industry adding jobs in 2013. Atop the list are leisure and hospitality, wholesale trade, transportation and utilities, professional, scientific and technical services, retail trade, and finance and insurance. The unemployment rate is expected to dip to 6.2% countywide in 2014.

San Diego County Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2012

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Office Office vacancy, which has trended downward since 2009, is expected to continue to decrease incrementally before settling at a healthy low by year-end 2014. Lease rates have tightened and stabilized, and the county has experienced consecutive quarters of positive absorption. Additionally, recently announced projects will more than double the amount of construction. Several new mid-rise office buildings, as well as the first speculative projects since the recession, will start in 2014. Overall county-wide average rent, supported by healthy leasing activity, is expected to increase between 2% and 3% in 2014.

Retail The retail market is expected to show signs of a more vibrant recovery in the next year, despite a temporary setback in 2013. The county remains an attractive destination for retail companies with its high median income and positive population growth. Tenant types that will be active in 2014 include food, apparel, health and service. Several economic indicators directly affecting demand for retail space have recorded sustained improvements. In 2014, all employment sectors combined in San Diego County are forecasted to grow 1.8% (+22,800 jobs). As national and local economies continue to improve, the countyâ&#x20AC;&#x2122;s retail market is bound to follow while building on improvements recorded during the last two years. Retailers in the county will continue to compete for the most visible locations, especially with a lack of new construction projects on the horizon. Landlords with less desirable locations will attempt to attract and retain quality

Avison Young 2014 Forecast

tenants by investing in the revitalization of their properties or offering concessions.

Industrial The industrial sector began to see strong recovery in 2013. There has been a noticeable increase in property tours and a reduction in available space for sublet. Nonetheless, although the county has a strong port, a focus on military, recreation and cruise-ship uses has inadvertently helped to divert import and export traffic to the twin ports of Los Angeles and Long Beach. Consequently, with such a relatively small industrial base, the recovery of the industrial market in San Diego County will take some time compared with larger, more developed markets elsewhere. Industrial vacancy rates, which rose to nearly 10% in 2010, are on a gradual decline and expected to fall to 8.6% by year-end 2014. Going forward, the health of the industrial market will depend in large part on the recovery of the local economy.

Investment In 2014, the San Diego County investment market is expected to continue to parallel the U.S. economy by showing growth, but at a moderate pace. The flow of institutional and wealthyprivate-investor capital into the secondary markets, along with the low-interest-rate environment and a subtle climb in prices and rents, will fuel the market throughout 2014. The determining factor will be the availability of preferred product and its ability to propagate to match investor demand.

San Francisco 333 Bush Street

Tech continues to drive successful market

an Francisco led the nation in job growth for the fifth year in a row, expanding by 4% in 2013. The technology and information sector continue to be a driving force for the strong local economy; the unemployment rate decreased by nearly one percentage point from 2012, down to 5.4% with the addition of more than 45,000 technology jobs alone. Demand remains strong as both start-ups and established technology companies are looking to relocate and expand in the San Francisco market. With an expected delivery of more than 1 msf in 2014 and a number of large tenants in the market for greater than 100,000 sf, San Francisco will remain a competitive market.

San Francisco Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2012

Office The technology sector continues to be a driving force for the San Francisco office market as companies, including Pinterest and Square, have opened headquarters in the city. Companies are expanding into San Francisco to stay competitive and attract top talent. In 2013, roughly 800,000 sf was occupied by tech companies either migrating (or expanding) from Silicon Valley to San Francisco. Mid-Market has seen an increase in activity: Twitter leads the charge with its headquarter move in early 2013 and is looking to expand into 1 Tenth (337,909 sf ) come 2014. As the technology sector continues to grow, look for Mid-Market to become the new tech hot spot. As demand stays high, vacancy continues to steadily decrease, dropping to 8.2% in the third quarter of 2013. Big moves by Salesforce, Illumina and Uber contributed to positive absorption with more companies like Visa, LinkedIn and Google expecting to take space in 2014. With big tech tenants eyeing the large blocks of space coming on the market like 505 Howard and 181 Fremont, rental rates are expected to steadily rise throughout 2014.

Retail While demand remains strong in the San Francisco retail market, limited geographic availabilities continued to inhibit new retail construction. Vacancy has remained close to 3% in the hotspots of the San Francisco market, including Downtown San Francisco and Union Square where rents remain high. Discount retailers are steadily growing and capitalizing on under-served areas with Target and Grocery Outlet opening stores in western San Francisco. The delivery of 20,000 multi-residential units in the next 36 months will present new street level retail opportunities in neighborhoods like Mid-Market that have been neglected for years.

2013

Office

2014F

Industrial

Industrial Tech demand has overflowed into the industrial sector with growing tech firms looking towards unused industrial space to convert into open, creative space. Pinterest was successful with the transformation of 808 Brannan to serve as its head office, but companies are running into rezoning issues for many industrial buildings.

Investment The San Francisco office market saw a slowing of investment activity in 2013 as the city came off one of the strongest market years since 2007. However, activity remained strong in 2013, with 28 office buildings changing hands â&#x20AC;&#x201C; notably 333 Bush Street, which sold twice in 2013: it was purchased by Brookfield Asset Management for $275 million in the third quarter, then sold to DivcoWest for $268 million in the fourth quarter. The Transbay transit center redevelopment projects and a dominant tech industry have put the central business district and South of Market (SOMA) neighborhoods in the center of investment activity. Look for investment activity to slow in 2014 as availabilities for top-tier buildings are decreasing.

Avison Young 2014 Forecast

San Mateo Crossing/900

Technology companies fuel employment growth

an Mateo County witnessed one of the highest job-growth rates in the country year-over-year since the third quarter of 2012, gaining 13,000 jobs and contributing to a 1% drop in the unemployment rate, down to 5.4% from 6.4% in 2012. With just under 3 msf of office-tenant requirements being tracked within San Mateo County, this market is showing no signs of slowing down. Tech companies continue to dominate the market, so look for the unemployment rate to continue to drop throughout 2014, barring any unforeseen economic or political events. The office market is returning to its pre-recession vacancy days of 2007, experiencing just under 1.9 msf of positive absorption between the first quarter of 2011 and the third quarter of 2013. The industrial market in San Mateo County witnessed occupancy growth of slightly more than 800,000 sf during the same period. San Mateo County’s retail market continues to report low vacancy, especially in well-located shopping centres.

Office The San Mateo County office market will experience major office construction during 2014 for the first time since the construction of Centennial Towers in South San Francisco in 2007. Kilroy Realty and Hunter Properties are developing a twobuilding, 300,000-sf speculative office project in Downtown Redwood City, dubbed Crossing/900, with an expected delivery in the first quarter of 2015. Owner/users are also getting in on the action. Facebook will commence construction on its 434,000-sf Menlo Park campus expansion in early 2014, which is expected to finish in late 2016. After the campus expansion, the company will occupy just over 1.5 msf in Menlo Park. Developers are now responding to increased demand from large users and the limited supply of quality large blocks of space near public transportation, especially in Southern San Mateo County. As of the third quarter of 2013, Avison Young is tracking 14 companies in and around San Mateo County looking for more than 50,000 sf within the next 24 months.

Retail The retail market remained strong in 2013. Mom-and-pop retailers have been active in the market for the first time since the recession. Vacancy in well-located shopping centers is under 2%, creating ideal conditions for new development; however, with strict development policies prevalent in most

Avison Young 2014 Forecast

San Mateo Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2012

2013

Office

2014F

Industrial

cities in the county, developers have been reluctant to enter the market. Demand is expected to remain strong in 2014, with rental rates expected to climb throughout the year.

Industrial San Mateo County’s industrial market experienced a turnaround in 2013. Headlined by the record-breaking 450,000-sf FedEx Ground transaction at 1070 San Mateo Avenue in South San Francisco, the industrial market is back to pre-recession vacancy rates, ending the third quarter of 2013 at 5.3%. Moving into 2014, demand is strong; however, users are having difficulty finding quality space within the county due to the limited supply and obsolete product. Asking rates have hovered around $0.75 psf NNN during the past couple of years; but with vacancy low and demand strong, asking rates are expected to rise throughout 2014.

Investment The county’s investment market witnessed a significant increase in activity during the first nine months of 2013. Industrial investors are expected to become more active in the next 12 months as rental rates rise and vacancy decreases. The big question is whether or not there will be any sellers. Office and industrial investors with access to necessary tenant improvement funding will be ones to watch in 2014, as the majority of vacant office and industrial properties in San Mateo County are in need of rehabilitation.

South Florida Beacon Square

Office market continues to rebound from recession

he South Florida commercial real estate market continues its resurgence on the back of a strengthening recovery and a continued low-interest-rate environment. The key indicators of a healthy market â&#x20AC;&#x201C; vacancy, absorption and planned development â&#x20AC;&#x201C; are all progressing in a positive direction, enabling the region to end 2013, and sail into 2014, on a high note.

Office The office sector continues to rebound from the recession as unemployment figures show significant decreases. Office leasing is on the rise, especially in the already-tight Miami and Fort Lauderdale central business district (CBD) as well as in suburban class A buildings. The overall office vacancy rate ended the third quarter of 2013 at 14.9%, down 90 bps from year-end 2012. Office sales volume through the first three quarters of 2013 saw a year-over-year decrease to slightly more than $1 billion from $1.3 billion, but that does not tell the entire story. During the same period, sales pricing on a per-squarefoot basis jumped more than 27%, to $181 psf from $141 psf. Year-end 2014 projections are bright for the office market, as vacancy rates are projected to continue their downward trend. Vacancy is expected to fall a full percentage point to 13.9% by end-of-year 2014, illustrating the resurgence of this asset class.

Retail Retail product demand is holding steady as the overall market begins to heat up. Desire for retail space remained high in 2013, with a vacancy rate of 5.7% at the end of the third quarter, and this trend is expected to continue. In 2013, prices jumped tremendously on a per-square-foot basis, increasing to $285 psf, an $88-psf escalation since the end of 2012.

Industrial Demand for industrial space within the tri-county area also continues to strengthen. This charge is led by companies looking for space in the Doral submarket of Miami, which is seeing increased activity due to the major expansion plans at PortMiami. Industrial vacancy decreased by 60 bps to 7.2% in the third quarter of 2013. Year-over-year sales volume took a hit, decreasing almost 31% to roughly $900 million by the third quarter of 2013. However, even though volume was down, pricing on a per-square-foot basis increased a solid 14% yearover-year, or $10 psf, to $81 psf in the first three quarters of 2013.

South Florida Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2012

2013

Office

2014F

Industrial

The outlook for the future of the South Florida industrial market continues to be bullish. Estimates for year-end 2014 show increased demand for industrial space. This outlook is based on a projected lowering of the vacancy rate to 6.7%, a decrease of 50 bps, by year-end 2014.

Investment Overall investment activity remained strong in 2013 and continues to be dominated by multi-residential and retail transactions. Demand for office and industrial product will likely continue to improve in 2014 based on compressing vacancy rates coupled with a lack of construction activity. Office properties should begin to heat up in 2014, as institutions and private clients alike have begun to be limited by the amount of multi-residential product available for purchase and shrinking yields. Investors seeking higher yields on the back of a perceived decreased risk in office product - based on a recovering economy and improving demographics - should begin to repopulate the buyer front. Projections for 2014 are positive for all asset classes, but could see a regression if the economy begins to show signs of weakening, lowering consumer confidence and, in turn, investment activity.

Avison Young 2014 Forecast

Tampa 100 North Tampa

Employment on the rise as companies look to relocate

he Tampa Bay region continued to witness improvement across all sectors in 2013. Between June 2012 and June 2013, a total of 33,300 new jobs were created, dropping the unemployment rate to 7%, which is below the national average and in line with Florida’s state average. This positive trend is expected to continue in 2014 with the construction sector, followed by professional and business services and health service sectors, all adding jobs. Tampa Bay is back in the spotlight for corporations looking to relocate back-office operations based upon the affordability of housing and availability of a solid labor pool.

Tampa Vacancy Rates 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2012

Office The office market ended the third quarter of 2013 with a vacancy rate of 14.3%, marginally down from 14.7% at the end of 2012. Year-to-date, the office market has witnessed nearly 1.4 msf of positive net absorption. Health Plan Services (95,000 sf ), Stream Global Services (98,000 sf ), Bristol-Myers Squibb (73,000 sf ) and Quest Diagnostics (48,000 sf ) were some of the larger deals signed during the first three quarters of 2013. The United States Automobile Association (USAA) announced plans late in 2013 to expand its Tampa operations by 450,000 sf. With the lack of large blocks of existing office space, lower absorption is anticipated in 2014, but the trend of decreasing vacancy should continue. Speculative development is unlikely to deliver space to the market until 2015.

Retail Tampa Bay’s overall retail market, at 120 msf, remains stable, with occupancy rates of 92.7% and absorption virtually flat through the first three quarters of 2013. During the past two years, a flurry of new retailers, including Chase, PNC Bank, Wawa and Thortons, have entered the market. In 2014, Trader Joe’s is entering the market with new stores coming online. A notable transaction announced in 2013 was Dick’s Sporting Goods’ lease of 100,000 sf, formerly occupied by Saks, at the Westshore Mall. Publix Supermarkets continues to dominate the grocerystore market, even with a limited number of new stores in the Tampa Bay area. Bi-Lo announced the purchase of 72 Sweetbay supermarkets in 2013, which will be converted to the Winn-Dixie brand in early 2014.

Avison Young 2014 Forecast

2013

Office

2014F

Industrial

Industrial The industrial market continued to see steady improvements with net positive absorption of almost 1.5 msf through the first three quarters of 2013. The vacancy rate at the end of the third quarter was 8.7%, down from 9.4% at the end of 2012. With available class A warehouse space greater than 100,000 sf limited to only three existing options and one sublease, new construction will commence in 2014. Three projects will break ground in the first quarter of 2014: Taurus’ 150,000-sf Tampa Commerce Center; Cabot Commerce Center, a 150,000-sf project by Cabot Properties; and East Group’s 120,000 sf in two buildings. Amazon, with USAA providing equity, has announced it will build two 1-msf warehouses in Tampa Bay.

Investment Investment activity remained strong in 2013 and continued to be dominated by multi-residential transactions. Demand for office, industrial and retail properties is expected to improve in 2014 as leasing fundamentals continue to strengthen and construction activity remains limited. Industrial product is in high demand from institutional investors, but very little product will change hands because of the large presence of REITs. Office sales made a comeback in 2012 and 2013 and more opportunities will be coming to market in 2014. More institutional investors are starting to put Tampa Bay back on their radar screens as they look to the secondary markets for higher-yielding investments.

Washington, DC Edens’ Mosaic District

Approaching recovery in 2014, market characterized by uncertainty

ncertainty in Washington’s real estate markets has been fueled by seemingly endless federal gridlock, sequestration and the government shutdown of 2013. The area has recovered its prerecession employment levels and the recently passed federal budget may spell an increase in federal contracting opportunities in 2014. Many submarkets and sectors will move toward recovery in 2014, stimulated by the expansion of the Metrorail and HOT lanes in Northern Virginia, health/medical and biotech growth in Suburban Maryland and a younger workforce gravitating toward one of the many successful live/ work/play communities.

Office The metropolitan area’s 370-msf office market ended 2013 with modest positive net absorption and, after delivering 5.4 msf, with vacancy levels mirroring 2012. What was different for this market was a notable lack of leasing by the federal government and its contractors, and the fact that growth has been concentrated in outside-the-beltway locations rather than the close-in submarkets. Nevertheless, the private sector has returned and the number of tenants touring is up, although transactions are protracted and feature a high level of concessions in this tenant-favorable environment. The market has had an ongoing influx of tenants, including Amazon’s growth in the region and the spin-off of Leidos from Science Applications International Corporation (SAIC).

Washington, DC Vacancy Rates Washington 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% 2012

2013

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Industrial The 181-msf industrial market continues to perform well in select submarkets. Chantilly and Dulles North, for example, have solid warehouse occupancy with an entrenched tenant base and infrastructure and road improvements near Washington Dulles International Airport. Nevertheless, the inventory is aging and occupiers are looking for buildings with modern features, state-of-the-art design and ample parking – a problem in many of the region’s submarkets due to increasing land costs and zoning.

Further recovery is predicted in the office market in 2014. There is no real threat of oversupply for the market as a whole, with the 3.3 msf set to deliver this year having a high level of preleasing. And, while some submarkets will be standouts, others are still suffering the effects of government cutbacks and sequestration with persistent high vacancy rates, and those conditions will be in play again in 2014.

In 2014, data centers will face increased competition and downward pressure on pricing, though the market will remain one of the country’s best performers due to its abundance of connectivity, cheap utility rates, state incentives and strong demographics.

Retail

Washington remains a very dynamic gateway city and continues to outperform other U.S. markets. Core and core-plus sales were very active in 2013, particularly in the central business district (CBD) and Metrorail-served locations. Lower cost of capital and motivated sellers, and lenders, kept interest high for all product types. Much of the institutional investment activity was characterized by largeportfolio transactions, such as First Potomac’s industrial portfolio sale to Blackstone, Archstone’s multi-residential portfolio sale to AvalonBay Communities and Equity Residential, and WRIT’s medical office portfolio sale to Harrison Street.

There were several noteworthy retail expansions in 2013. Walmart opened an urban concept store in Tysons Corner, VA, and has several more stores slated to open in the District of Columbia in the coming months. Elsewhere, grocery-anchored retail is thriving, and amenity-based developments have supported a proliferation of new restaurants, especially healthy food, and fitness centers in the region. Walk-in clinics and urgent-care centers are also on the rise as medical providers anticipate an increased number of patients. Look for further retail growth in 2014.

Investment

Although other U.S. markets are gaining in investor favor, sales are anticipated to accelerate in 2014, and Washington is expected to remain a top investment market.

Avison Young 2014 Forecast

About Avison Young

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Avison Young 2014 Forecast

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Avison Young is the world’s fastest-growing commercial real estate services firm. Headquartered in Toronto, Canada, Avison Young is a collaborative, global firm owned and operated by its principals. Founded in 1978, the company comprises 1,500 real estate professionals in 54 offices, providing value-added, client-centric investment sales, leasing, advisory, management, financing and mortgage placement services to owners and occupiers of office, retail, industrial and multifamily properties.

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Avison Young 2014 Forecast

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vison Young’s multi-disciplinary group of dedicated research professionals works collectively to deliver market analysis and insights that drive value in real estate decisions. We translate data into market intelligence to help our clients strategically solve their real estate concerns and concentrate on what their business does best. Avison Young regularly produces an array of local, regional and North American market research, including quarterly and special reports, and annual forecasts. Our research is quoted extensively in local, national, business and global media outlets. Through Avison Young’s professionals, our research team engages with a wide variety of corporate, investor and institutional clients to conduct customized research, due diligence and market assessments, as well as demographic and location analysis. Leveraging in-depth knowledge from our broad services platform with information from internal proprietary and independent third-party data-tracking systems, our clients’ real estate decisions are fully supported by best-in-class, interpreted data – true market intelligence.

Orange County Oakwood Long Beach Marina

nquenchable demand has sparked a transformation in the Orange County Investment Volume Orange County commercial real estate landscape, from lowOffice Industrial Retail Multi-Residential density suburbia to pockets of high-density urbanization. The $ in billions investment market has been a driving force in Orange County (USD) based on the global outpouring of capital from traditional equity 12 markets into real estate. These factors will ultimately affect not 10 only the commercial real estate industry but, on a broader scale, how and where people live, work and find recreation. 8 6 Orange County is ripe with commercial real estate investment opportunities. Beyond the dot-com crash, low interest rates 4 have driven capital traditionally earmarked for the stock market 2 into the realm of commercial real estate. Private and institutional 0 investors such as individual entrepreneurs, pension funds and 2007 2008 2009 2010 2011 2012 Mid-Year REITs continue to blanket Orange County’s five commercial 2013 real estate submarkets in search of all product types, whether Orange County Investment Activity industrial, retail, office or multi-residential. 1 Queen St. E. & 20 Richmond St. E. (By Property Type) The challenge in today’s market is finding available product. ealthy commercial real estate market fundamentals continue to Toronto Investment Volumeimbalance in The shortage of inventory is creating an extreme Mid-Year Mid-Year drive investment activity in the Greater Toronto Area (GTA). Sales and demand, driving property values to unprecedented 2013 2012 supply Industrial Retail Multi-Residential Land of office, industrial, retail, multi-residential and land propertieshighs. in the Cap rates areOffice lower than normal considering today’s soft Multi-Residential 48% 27% billions first half of 2013 reached $6.5 billion, up 15% over the same lease periodrates$ inand economic uncertainty. These unusual market (CAD) in 2012 – capturing 45% of the Canadian tally. Portfolio transactions dynamics 12 have led to multiple offers behind almost every 32% 17% Office boosted sales, and though cap rates remain low, compression building for sale. Additionally, more investors are liquidating 10 13% 20% Industrial appears to have moderated for some property types. their assets now while the market remains primed for sellers. 8 Industrial sales outpaced the office sector at $1.9 billion (29% Of share), 7% 35% Retail the $4.8 billion in investments in the first half of 2013, multirecording the greatest year-over-year increase of 112%. GE Capital 6 the bright spot with $2.3 billion in investments, residential was Real Estate (GE) and CanFirst Capital were active sellers, collectively up from $779 4 million one year earlier. Orange County was one disposing portfolios worth $492 million to PIRET and Dundee of the first metros in Southern California where the construction 2 Industrial REIT, respectively. First-half office sales totalled $1.8of billion multi-residential units gained notable traction after a virtual Select Average Capitalization Rates 0 Steady job gains in the office and industrial sectors (27% share), down 34% from an impressive $2.7 billion in the first halt. five-year 2007 2008 2009 2010 2011 2012 Mid-Year Mid-Year 2012 Mid-Year 2013 half of 2012. Again, GE was active, selling 22 office buildingshave worthled to strong investments at $1.6 billion and $627 million, 2013 Office 7.4% 6.0% $686 million in two separate transactions to Greystone Managed respectively. Multi-residential development and construction Toronto Investment Activity Investments and Slate Properties. Industrial 6.9% 5.9% will continue to lead in investments, as the market continues (By Property Type) and job growth remains stable. Additionally, the Retail 6.8% 5.6% Retail transactions totalled $1.3 billion (20% share) in the firstto halfimprove of market for all property 2013 – twice that of one year ago and equal to the sales volume for has experienced cap-rate compression Multi-Residential 5.3% 5.9% U.S. Canada Mid-Year Mid-Year overall rateReal tightening to2013 5.9% 2012 at mid-year all of 2012. Pension and REITs threewith theCommercial Estate Investment Volume2013 By Property Type (USD) Commercial Real Estate Investment Volume Byfunds Property Typeswapped (CAD) prize assets withtypes, at mid-year 2012. deals greater than $200 million, the largest being Primarisfrom Retail6.6% $225 29% 15% Industrial REIT’s $259-million sale of Oakville Place to RioCan REIT. Office 27% 47% Favourable mortgage rates, steady income and low vacancy$200 continue to make multi-residential property a desirable investment Retail 20%TOP 12% 5 INVESTMENT SALES BY PRICE $175 with the lowest cap rates. However, this sector failed to crack the Address Property Type PriceMulti-Residential (USD) Vendor Purchaser 15%Total 14% billion-dollar mark, finishing the first half of 2013 with $986 million 1 Oakwood $136,373,560 Lehman Bros. Holdings AvalonBay Communities (15% share) in sales. This was due more to lack of product than lack$150 Long Beach Marina Multi-Residential 9% 12% Land of demand. Nevertheless, the mid-year figure was 25% higher 2 than Laguna Hills Mall Retail $110,000,000 Simon Property Group Merlone Geier Partners $125 in 2012. Maple Leaf Quay was the largest transaction at almost 3 $151 Bixby Office Park Office $84,250,000 American International Group Parallel Cap Partners million. Select Average Capitalization Rates $100 4 3300 S Fairview St. Industrial $63,336,000 PacTrust Alere Property Group Mid-Year 2012 Mid-Year 2013 Land was the least-traded asset class with a first-half tally 5of $617 2601 Campus Dr. Industrial $56,194,000 Guggenheim Partners Campos Verdes LLC million (9% share) – a modest 6% decline compared with the$75 Downtown Class AA Office 5.5% 5.1% same period in 2012. Land remains highly contested, particularly Suburban Class A Office 6.4% 6.3% downtown, where interest is growing in mixed-use projects that$50 Single-Tenant 6.2% 6.0% 26 Fall 2013 Canada,Industrial U.S. Commercial Real Estate Investment Review facilitate urban lifestyles. Multi-Tenant Industrial 6.4% 6.1% Toronto could top $13 billion in sales in 2013. However, the recent$25 Tier I Regional Mall 5.2% 4.8% uptick in interest rates could curtail investment volume and leave $0 Multi-Residential 5.1% 4.7% 2011 some of2010 the most active buyers, 2012 the interest-sensitive REITs, on the 2007 2008 2009 2010 2012 Mid-Year 2013 2007 2008 2009 2011 Mid-Year 2013 sidelines. Multi-Residential Retail Industrial Office Land Multi-Residential Retail Industrial Office

Toronto

Atlanta Office Market

Mid-Year 2013

Canada & U.S. Market Highlights

Office

Industrial

Multi-Residential

$225

$200 $25

$175

Billions

$20

GE Canada Real Estate Greystone/Slate Office Portfolio GE Canada Real Estate - PIRET GTA Industrial Portfolio Oakville Place

Office

$541,813,777

Purchaser Greystone Managed Investments / Slate Properties

Industrial

$340,950,000

GE Canada Real Estate

PIRET

Retail

$258,562,000

Primaris Retail REIT

RioCan REIT

Upper Canada Mall

Retail

$251,500,000

Oxford Properties Group

Canada Pension Plan Investment Board

$150

1 Queen St. E. & 20 Richmond St. E.

Office

$220,000,000

Ontario Pension Board

Canada Pension Plan Investment Board

2010 Retail

2011 Industrial

Office

2012

Mid-Year 2013

Q2 2010

Q2 2011

Downtown

Q2 2012

Q2 2013

Suburban

Boston Office Market

oston’s office market continued to experience strong leasing velocity $20 in prime submarkets during the second quarter of 2013, resulting in vacancy declines across most of the class A and B inventory. Vacancies fell to 17.1%,$10down 190 bps from a year ago, with vacancy in the CBD’s 59-msf market declining to 12.5%. The CBD saw leasing velocity of 2.5 msf, slightly $0 off last year’s annual pace of 5.6 msf. Cambridge and the suburban office markets dropped below 20% vacancy for the first time since 2008. With 5 msf leased in 2013, the suburbs will struggle to keep pace with the 11 msf major leased in 2012.

Washington, DC

Boston Office Vacancy Rates 28% 26% 24%

Rosslyn-Ballston Corridor facing a new reality

22% 20% 18%

ollowing several years of less than 7% vacancy, Northern Virginia’s 22-msf Rosslyn-Ballston (R-B) Corridor saw vacancy begin to climb in 2011 and reach 15% by the first quarter of 2013. 4% 2% Many factors contributed to this 0% dramatic change and will likely test reached $22 psf, an increase of $1 psf versus one year ago, while select Q2 2009 Q2 2010 Q2 2011 Q2 2012 Q2 2013 the market for years to come. Canada Overview U.S. Overview suburban submarket class A asking rents moved back to the low $30s. Downtown Suburban The consolidation related to the anada’s office market, at 491 million square feet (msf ) and growing, he 10.3-billion-sf U.S. office market continued its bumpy When recovery new construction begins to be delivered U.S. in the CBD later this year, U.S.ended the second quarter of 2013 with Base Closure and Realignment closed the first half of 2013 with 7.9% vacancy – up from 7.1% at over the last 12 months and a leveling-off in vacancy rates is expected downtown - with major tenants migrating to the new properties, returning excess square mid-year 2012, but remaining below the recent recessionary peak an overall vacancy rateAofAverage 11.7%. Asking Gross Rents legislation of 2005 (BRAC) – Suburban Class A Average Asking Gross Rents Downtown Class footage to the market, while landlords continue to trade vacancies. Meanwhile, the limited suburban development is almost entirely of 9.9% in mid-2010. Half of the 12 Canadian markets were below Looking at Avison Young markets, U.S. U.S. wherein defense agencies vacate vacancy rates remained in the double build-to-suit and should not Suburban impact greatly. However, as leasing activity is not expected to keep pace with the last several Downtown Class A Average Asking Gross Rents Classvacancies A Average Asking Gross Rents the national average and 10 posted single-digit vacancy. The gap$70 in digits at mid-year leased space in the private-sector 2013, with an overall average vacancy of 14.7%, down$70a leveling-off of vacancy rates may occur until the business community gains more comfort with federal fiscal policy. When this quarters, vacancy between Western and Eastern markets narrowed during the slightly from 14.8% at mid-year 2012. Nevertheless, 16 of the 20 Avison market and move to governmentoccurs, office-using employment should resume its assault on Massachusetts’ overall unemployment rate of 6.6%, which still sits 400 bps last 12 months. Representing two-thirds of the national inventory, the $60 Young markets reported lower vacancy rates when compared to 2012.$60 owned facilities – was to have the historic low of 2.6% in October 2000. In late 2012, 4040 North Fairfax Drive felt the effects Eastern markets closed the first half of 2013 with a collective vacancy Class A rents averaged $48 psf and $27 psf (USD) for central above business been completed in 2011. The building was vacated. $50 $50 rate of 8.4%, or +70 basis points (bps), with Ottawa the lowest at 6%. Multi-residential development leads market of BRAC when the entire district (CBD) and suburban markets, respectively. Lease Renovations are plannedRecent in an effort to Transactions better attract program will now carry on at least The growing Western markets combined for a vacancy rate of 7.1% San Francisco again saw a significant increase in CBD class A rent this $40 Casto Investments Company, LLP (retail) –through 126,400 sf2015 with some 2 msf of tenants to backfill the space. (+100 bps), with Regina reporting a national low vacancy of 5.2%. $40 Mid-Year 2013 Canada, U.S. Office Market Report 15 year, ending the second quarter of 2013 at $52.50 psf, an 11.7% increase additional move-outs planned in he unending wave of multi- LNR Property Corporation (retail) - 28,100 sf Corporations seeking to attract and retain the young and highly $30 from the second quarter of 2012, following a remarkable 18% spike in$30 thissfsubmarket. 4040 North Fairfax residential development InBound Call Experts, LLC (office) – 26,500 educated workforce increasingly living and working in urban areas rents between the second quarter of 2011 and the second quarter of is a prime example.TNHYIF A back-office for thesf Department of Defense vacated the that tookDrive place in South REIV Kilofunction (office) – 16,700 $20 have created competition in most downtowns. Corporate restructuring, 2012. Vacancy fell 140 bps year-over-year to 8.9%. The highest CBD class$20 entire 184,000-sf building at end of 2012 and moved to a sfneighboring submarket. Florida during recent years LFCthe Development, LLC (office) – 12,900 downsizing and consolidations have raised sublease vacancy in some A rents currently are in New York, where the $64-psf rate was a 2.3% $10 Newitdevelopment activityBoca is currently outpacing brought with some concern R & D Project (office) absorption. – 12,600 sf The R-B Corridor’s 10-year average markets, elevating Canada’s downtown vacancy 40 bps over 2012 $10 to increase compared with 2012, and in Washington, DC, a 1.3% change annual is 273,000 sf and by the of–2013, sf of speculative construction 5.6% at mid-year 2013. The tightest markets are Calgary (4%, +80 bps), as to whether theabsorption market could MS Eastchester, LLCend (retail) 12,300538,000 sf at $56 psf. There is currently more than 43 msf under construction, $0 $0 Ottawa (4.4%, -140 bps) and Vancouver (4.6%, +130 bps). Unsurprisingly, 72% of which is in four markets – Houston (10.6 msf ), Metropolitan (nearly two years’ supply) Boca is slated be delivered in –a 10,500 singlesfbuilding at 1812 North Moore handle such robust activity. R & Dto Project 7, LLC (office) these markets have the highest average gross rents for class A space, Washington, DC (7.8 msf ), New York (7.5 msf ) and Boston (5.3 msf ). Street,Florida being developed Monday Properties. As the South Business byRecent Exclusive Lease Listings led by Calgary ($57 per square foot (psf ), a $5.66-psf rise from 2012), Pittsburgh’s metropolitan area recorded an 8.2% vacancy rate at midJournal That reported recently, being said, owners of new can expect to attract sharesfof tenants. A significant 3998 buildings FAU Boulevard, Boca Raton (office)a–fair 283,900 Vancouver ($52 psf, -$2 psf ) and Ottawa ($47.95 psf, -$0.53 psf ). year 2013 – the lowest of the Avison Young U.S. markets and one of only development activityexists has been dichotomy between5900 theN.performance of newer properties and older ones beyond the Andrews Avenue, Ft. Lauderdale (office) – 215,000 sf Class A Average Asking Rent ($psf net) Suburban Class A Average Additional Rent ($psf) Asking Rent ($psf net) Downtown Class A Average Additional Rent ($psf) In contrast, new supply outpaced demand in some markets, pushingDowntown twoClass U.S.A Average markets with a total vacancy rate in the single digits. Although Suburban flight-to-quality also at play. The 22 newest buildings in the R-B Corridor, which strong andgeneral experts believe the trend Class A Average Asking Rent ($psf net) Downtown Class A Average Additional Rent ($psf) Suburban Class A Average Asking Rent ($psf net) Suburban Class A Average Additional Rent ($psf) 100 W. Cypress Creek Road, Ft. Lauderdale (office) – 215,000 sf national suburban vacancy to 10.6% – up 130 bps since mid-2012 – Downtown the Metropolitan Washington, DC office market remains relatively were delivered and 2012, averaged 424,000 sf of absorption annually during that market is ready for it. between 2002 rates are shown in U.S. $ * Rental rates are shown in U.S. $ 8051 Congress Avenue, Boca Raton (office) – 160,000 sf with seven of the 12 markets below average. Except for Lethbridge healthy (posting an* Rental average CBD vacancy of 9.3% at mid-year 2013), the period and boasted an 8.6% vacancy rate at year-end 2012, compared with 14.9% for buildings One of those experts, Alliance 1875 NW Corporate Boulevard, Boca Raton and Vancouver, single-digit vacancy persists in the same markets as region was one of four U.S. markets to see its overall vacancy increase View of Sunny Isles, Florida - home to many of South to 2002. Able landlords are renovating or repositioning older assets to help Residentialcompleted chief prior operating one year ago. Once again, Regina (3.1%, +170 bps) had the lowest (13.8%, +70 bps) over the past year. New Jersey currently has the highest (office) – 123,800 sf Florida’s marquee condominiums. them stand out or converting them to other uses such as multi-residential projects. officer Brad Cribbins, pointed suburban vacancy and Mississauga (Toronto West) (13.7%, +130 bps) vacancy, after experiencing a year-over-year increase in its vacancy rate 900 Broken Sound, Boca Raton (office) – 120,700 sf market challenges Silver Boulevard, Line extension into Tysons Corner which, the highest, while Lethbridge (11.6%) experienced the greatest year- (20.9%, +30 bps), although the market is headed in a positive direction out one Additional trend fueling the 1100,include 2200 & Metrorail’ 2100 Park sCentral Musical chairs for startups and techs when completed, will create more affordable leasing opportunities for occupiers seeking over-year swing, spiking 350 bps. Calgary and Regina have the priciest after posting 21.4% vacancy in the first quarter of 2013. market demand: “Much of what is getting built is midrise downtown/urban buildings. Recent Lease Transactions Pompano Beach (office) – 112,500 sf suburban markets with average gross rent for class A premises of $37 Elsewhere, Chicago’s total office market vacancy rate improved to Metrorail-served There is also a pullback, beyond BRAC, from federal tenants due to a What’s drawing people to thatLife particular building type is mobility. ” He adds thatlocations. “the 1300 Caliper Sciences (office/R&D) – 198,300 sf Sawgrass Corporate Parkway, Sunrise psf, followed closely by Vancouver ($36 psf ). mandate to increase space-use efficiencies and pending further tightening, from government ewly founded tech-focused 25- to 35-year-old group athenahealth, is redefiningInc. how long–they 13.8% at mid-year downU.S. fromOffice 14.1% at mid-year 2012. In New 6 Mid-Year 20132013, Canada, Market Report (office) – 106,600 sf (office) 83,000want sf to be tied down to a home.” contractors as well, as a result of sequestration’s spending cuts. Similarly, space utilization rates Office space under construction has increased by 4.5 msf since mid- York, leasing activity rebounded, but with large blocks of space being companies have specific needs the Emerson Further supporting claim that demand in the –multi-residential market remains 3201 N. University Drive, Coral Springs (office) – 105,900 sf Hospital (office/medical) 80,800 sf 2012 to nearly 22 msf (53% preleased), with a 60/40 downtown/ returned to the market, vacancy rose to 12.1% at mid-year 2013. Los are falling among private-sector tenants as work culture changes brought about by a younger in choosing a healthy location: is CVRpublic Realty’s report South Florida the 100 proposed 150 S. Pine Island Road, Plantation (office) – 102,000 sf PayPalthat (office) – 62,800 sf is on pace to surpass suburban split. Toronto is the biggest development market in the Angeles is experiencing a slow but stable recovery with strong leasing workforce and technology are leading to more densely packed, open-workspace floor plans. transportation, downtown condominiumaccess, developments threshold in Inc. 2013 with as manysf as 15 condominium 2307 W. Broward Boulevard, Ft. Lauderdale country, with 7.1 msf (49% preleased) – one-third of the national total – activity, although the vacancy rate climbed 330 bps year over year to Proto-Pac Engineering (industrial) – 45,900 Despitedevelopments the R-B Corridor’s many desirable qualities, it is expected that these market influences affordable livingprojects accommodations already under construction. Most of these projects are midrise (office) – 66,900 sf and also leads with 5.3 msf (47% preleased/41% of national downtown 16.3% by mid-year 2013. Atlanta’s elevated vacancy rate persisted and A.I.M. Mutual Insurance Companies (office) – 34,500 sfwill lead to a prolonged underlying vacancy, especially in class B buildings. The R-B Corridor is and, of course, access inexpensive near to thriving urban areas. Adding these condo totals to the broad scope of South 604-622 Banyan Trail, Boca Raton (office) – 65,000 sf total) underway downtown. However, Calgary is narrowly outpacing ended the second quarter at 19.7%, albeit down from 21.7% at midZwicker & Associates PC (office) – 34,400 sf to experience intense141 competition for viable tenants for the foreseeable future. real estate – be it office, labmulti-residential or flexible Florida’s development boosts the local market likely to the top of most Toronto on the suburban front with almost 2 msf (78% preleased) under year 2012; and in South Florida, vacancy improved for the third straight NW 20th Street, Boca Raton (office) – 61,800 sf Acacia Communications (office) – 28,200 sf space. Years ago, East nationwide. Cambridge development – accounting for 23% of the national suburban total. metros quarter to 15.4%. Turning to Texas, Dallas recorded a vacancy decrease Recent Properties Sold Technologies, Inc. (office) – 26,600 sf became one of Additionally, the world’s according largest toVecna For the second half of 2013, tight conditions will persist in most of 60 bps year-over-year, falling to 15.6%, while energy-driven Houston Multi-Housing News, at year-end 2012, the South Florida market Stearns Bank (office) – 14,200 sf TeraDiode, Inc. (industrial) – development 24,500 sf launch pads for startups techs.its share downtown office markets as tenants face eroding space options and ended the second quarter of 2013 with an 11.1% total vacancy. had vastlyand outsold of multi-residential sites compared withISOthe N YOU Recent Sale Properties Listed likely higher rents. More options will present themselves later this year After years of uneven recovery led by a handful of standout markets, – 21,900 sf (compared with second-place The area met everyrest demand of the including country, with Sotax moreCorporation than $315(office) million in sales and into 2014 as new supply comes online. In contrast, more favourable many U.S. markets remain oversupplied. Expect vacancy to stay on 604-622 Banyan Trail, Boca Raton (office) – 65,000 sf MIT, one of the Los largest generators Place International (office) – 17,800 sf Angeles at more thanPark $108 million). space and rental-rate alternatives will be commonplace in select its downward trajectory through year-end 2013 and some markets to 6501 & 6531 Park of Commerce Boulevard, of startups in theThe nation. Today, with Vantage Partners, LLC (office) – 16,200 sf infill locations in the primary South Florida sites seeing the most activity seem to be suburban markets across the country. demonstrate landlord-favorable conditions in the coming months. PayPal’s lease of 62,814 sf at 1 International East Cambridge rents Boca Raton (office) – 50,900 sf leading Greater MaidPro Franchise (office) – 13,900 submarkets. Once the new supply hits Corporation the market, it does notsf take long to Young sell. As Commercial Real Estate Newsletter (Canada, U.S.) Avison Place has changed the way companies view the Boston, many startups 32 900 Broken Sound, Boca Raton (land) – 17 acres willclass need Crunchtime! Information Systems, (office) – 13,700to sf beat. Reports show anticipated, A inventory is still expected to beInc.the product downtown market. alternative location options. that brand new product sells very quickly, with(office/medical) the majority of the highly coveted projects Lexington Eye Associates – 12,200 sf The relocation patterns of these young, nimble and technology-driven companies still attracting all-cash buyers asTherapeutics the top bidders. Flexion (office) – 11,800 sf are explained by the decisions of their global corporate counterparts, asregion’s Googleexperts Mostsuch of the believe the market a steady growth rate as Smart Destinations (office) should – 10,900 maintain sf Mid-Year 2013 Canada, U.S. Office Market Report 3 and Microsoft. In an effort to coexist, industry behemoths effect supply and demand loans have Recent becomeExclusive easier to obtain capital from secondary markets Leaseand Listings Spring/Summer 2013firms. Hoping to capitalize on theisconstruction constraints upon smaller, younger human that a factor. Foreign startingcapital to become investment, especially 526 Main Street, Acton, MA (office) – 36,000 sffrom Latin America, also is so critical to their core business, these global companies occupy real estate in locations remains as a strong component of private capital with more overseas interest growing Recent Sold dense with startups. As corporations absorb spaces upwards of 200,000 the market by thesf, quarter. Simply stated, theProperties sustained level of activity across the multi-residential 221 Baker (land) one – 6.3 of acres tightens. The areas become less affordable for the very tenants who created the desire to market seems to indicate that theAvenue, sectorConcord, shouldMA remain the hottest commercial enter the market – early-stage and tech ventures. markets in South Florida.Recent Sale Properties Listed In 1995, office space was renting in the mid $20s psf in East Cambridge. As rents have 354 & 356 Mountain View Drive, Colchester, VT The Trade Centre South building, located doubled – and, in some cases, tripled – there has been a tremendous shift. Startups and (office) – 110,400 sf in Fort Lauderdale, continues to attract techs began taking space in the Seaport District in 2009. Dubbed the Innovation District 393 Fortune Boulevard, Milford, MA high-end office tenants. Generations and technology – transforming the workplace by Boston Mayor Thomas Menino, the Seaport, with its vibrant lifestyle and lower rents, ON YOU IS (office/retail) – 107,600 sf has attracted many smallnot thriving oday’s workforce spans four generations: assigned workplaces – a trend evident only companies. In recent years, however, $25 psf rents CANADA 60 Hartland Street, East Hartford, CT (office) – 40,800 sf Mature/World War II (born pre-1946); Baby in new, but also existing buildings. the iconic have become $38 psfInrents. Availability has dropped with the addition of companies 2 Calgary Boomers (1946-1965), Generation X (1966-1980) 1960s-era TD Centre Toronto’s ranginginfrom Life Isfinancial Good to core, Vertex Pharmaceuticals. Tenants nearing lease expirations 3 Edmonton and Gen Y/Millennials (1981-2000). According to TD Bank is retrofitting 20 storeys of as oldmuch offices face proposals that are as 30% higher than their current lease rates,Young so the cycle Avison Commercial Real Estate Newsletter (Canada, U.S.) 31 4 Guelph Statistics Canada and the U.S. Bureau of Labor with an array of flexible work areas. Elsewhere, continues. 5 Lethbridge Statistics, Gen Y represents approximately 35% Deloitte introduced the “Deloitte Journey”, With tight markets Seaportwork and Cambridge, startups and techs are seeking rent relief. 6 Mississauga and 34% of the Canadian and U.S. labour forces, replacing assigned desks with inshared It is expected that companies will be attracted to the South Station and North Station 7 Montreal respectively. Educated and tech-savvy, they spaces. In contrast, Yahoo! clearly values facesubmarkets, where rents can still be found starting 8 Ottawain the high $20s psf. Many should are transforming the workplace, physically and to-face interaction, recalling work-from-home consider the financial Although 9 previously Quebectoo City expensive, the high vacancy psychologically. employees back to the office in a biddistrict. to rebuild thehad. Great Recession is10providing opportunities for affordable class B the competitivestemming advantagefrom it once Regina For decades, office designs changed little, with such asand PayPal 11 subsidiary) Toronto have taken advantage of the glut traditional private offices, cubicles and meeting The rise in thespace. urbanCompanies supply pipeline the(an eBay of lower-floor the financial classNorth A highrises. As it turns out, earlyrooms. In the 1990s, personal computers, mobile technological advances beingvacancy offeredwithin are making 12 district’s Toronto phones and the Internet brought dreams of a some lease renewals as tenants stage andproblematic technology-driven companies 13 are provided Vancouver with more geographic options paperless office and hotelling. Still, over the past eschew in-place renovations. Traditional office East Cambridge than ever; gone are the days when was the only choice. The real question 14 Winnipeg 20 years, office space looked much the same. configurations is:simply won’t work. Generally, what submarket will hold the crown as Boston’s U.S.innovation hub in five years’ time? tenants are taking less space on a per-person Boston’s Hubway bicycle rental network Enter Gen Y: today, CEOs are in cubicles and there 15 Atlanta basis as they relocate. A 2012 study found that is a valuable amenity to employees and is a new business glossary: “distributed workforce” 16 Boston corporations are looking to reduce office space by residents alike. – hiring regardless of geography; “BYOD” – 17 Charleston ON YOU 17% by 2020 – leaving older, obsolete buildings IS bring your own device to work; and “ROWE” – 18 Chicago ready for renovation and adaptive re-use. results-only work environment. Smart phones 19 Dallas have become virtual desks, offering “unified As office space per employee continues to decline, 20 Detroit communications” across platforms and media. what happens to all of the underutilized space, Houston According to CTIA – The Wireless Association, and, indeed, traditional single-purpose Young Commercial Real21Estate Newsletter (Canada, U.S.) 16 to theAvison 22 Irvine American data usage from July 2011 to June office building? The future of office buildings 2012 increased 104% from the previous year. may end up being the “Hackable Building” – a 23 Las Vegas Work is now mobile and, when it comes to office term coined in global architecture firm Gensler’s 24 Los Angeles premises, less is more. recent work on the evolution of the North 25 New Jersey American building. A Hackable Building is an Gen Y’s work characteristics (more flexibility, flat 26 New York existing structure that has been updated beyond hierarchy, mobile devices and social networking) 27 Pittsburgh recognition to incorporate a diverse mix of uses and businesses’ focus on cost reductions have 28 Raleigh-Durham such as residential, office, retail, educational and changed the office landscape toward open plans 29 Reno public spaces. and a collaborative work environment. Eroding 30 San Francisco work-life boundaries means work is no longer Advancing technology and generational 31 South Florida where you go, it’s what you do. Since Gen Y will shifts continue to shape the evolution of the 32 Washington, DC become the dominant group in the workforce, workplace. When these changes have played 33 About Avison Young businesses are adapting to attract top talent. out, what will the office of the future look like? 34 Avison Young Research Cisco’s “Connected Workplace” is a big draw Only time will tell. 35 Our Offices with new recruits, where many staff don’t have Suburban Class A Average Asking Rent ($psf net) Suburban Class A Average Additional Rent ($psf) Quoted asking rents continued to rise, reaching an estimated $24 psf across Suburban Class A Average Asking Rent ($psf net) Suburban Class A Average Additional Rent ($psf)

Downtown Class A Average Additional Rent ($psf)

16% 14% 12% 10% 8% 6%

South Florida

2007

2008

2009

Multi-Residential Office

2010

IndustrialRetail Retail

2011 Industrial Multi-Residential

2012

Land

Mid-Year 2013 Office

U.S

Fall 2013 Canada, U.S. Commercial Real Estate Investment Review

Avison Young Commercial Real Estate Investment Review Canada & U.S.

U.S

ar ke ts

FALL 2013

Multi-Residential

Q2 2009

$25

2009 Land

Fall 2013 Canada, U.S. Commercial Real Estate Investment Review

2008

$10

Downtown Class A Average Asking Rent ($psf net)

$50

2007

$20

Ongoing improvement in US commercial real estate market, tight market conditions in Canadian downtown office markets Downtown Class A Average Asking Rent ($psf net) Downtown Class A Average Additional Rent ($psf)

$75

$40

$30

Canada’s office markets, resilient during and since the recession, continue to sport relatively healthy market fundamentals; however, some themajor metro – the highest level* Rental sincerates2008. Downtown, full-service rents * Rental rates are shown in CAN $ are shown in CAN $ markets appear to be softening, turning in less-than-stellar performances in the first half of 2013. Many major U.S. markets remain oversupplied, averaged $50 psf for class A space while tighter highrise listings, as well as with tenant-favoured conditions – even while tours and velocity have increased and several metro areas have moved into equilibrium. select listings in the Back Bay, exceeded $70 psf. Average suburban rents

$100 $10

$50

$40

$30

Vendor GE Canada Real Estate

$125

$15

$60

$50

U.S. Address Property Type Total Price (CAD) Commercial Real Estate Investment Volume By Property Type (USD)

Canada Commercial Real Estate Investment Volume By Property Type (CAD)

4% 2% 0%

Canada Suburban Class A Average Asking Gross Rents $70

$60

Canada & U.S. Market Overview

Land

TOP 5 INVESTMENT SALES BY PRICE

$30

Billions

Retail

Canada Downtown Class A Average Asking Gross Rents $70

8% 6%

Canada Suburban Class A Average Asking Gross Rents

$10

Canada Downtown Class A Average Asking Gross Rents

$15

14% 12% 10%

ar ke ts

$20

20% 18% 16%

Atlanta’s CBD has also recorded an uptick in rent over the past year, with average asking rents climbing to $20.78 from $18.08. Overall suburban market rents have remained flat during the same period; however, suburban class A rental rates did increase to $22.51 psf from $22.31 psf. CBD class A market rents are also improving. Currently standing at $19.81 psf, the rate is the highest since year-end 2011. Moderate job growth and limited development are expected to continue throughout 2013, leading to a tightening demand for quality space and, eventually, to rent growth across the Metro Atlanta office market.

Billions

$25

The positive economic improvements and a willingness expressed by firms to expand have led to gains in the Atlanta office market. Atlanta ended the second quarter of 2013 with a total inventory of 143.5 msf and a vacancy rate of 19.7%. The vacancy rate has decreased 200 bps during the last 12 months. Net absorption

24% 22%

for the first half of 2013 totaled 595,445 sf, up slightly from 410,111 sf during the Canada & U.S.same Market Highlights period in 2012.

Mid-Year 2013

Billions

$30

Atlanta Office Vacancy Rates 28% 26%

Boston

Recent Lease Transactions

VA Data, Inc., Ashburn (industrial) – 200,000 sf TNS, Inc., Reston (office) – 120,000 sf Northern Virginia Community College, Fairfax (office) – 84,900 sf Pacific Architects and Engineers, Courthouse (office) – 71,100 sf Level 3 Communications, Tysons Corner (office renewal) – 64,100 sf Arlington Public Schools, Arlington (office) – 62,300 sf Alion Science & Technology, Alexandria (office renewal) – 57,300 sf

Recent Exclusive Lease Listings

Trinity Centre 1-4, Trinity Parkway, Centreville (office) – 488,200 sf 5911 & 5971 Kingstowne Village Parkway, Alexandria (office) – 304,000 sf 3150 Fairview Park Drive, Merrifield (office) – 252,600 sf 10740 Parkridge Boulevard, Reston (office) – 215,700 sf 8609 Westwood Center Drive, Tysons Corner (office) – 159,300 sf 11790 Sunrise Valley Drive, Reston (office) – 139,500 sf

Recent Properties Sold

1900-1902 Campus Commons Drive, Reston (office) – 239,600 sf 10740 Parkridge Boulevard, Reston (office) – 215,700 sf 8609 Westwood Center Drive, Tysons Corner (office) – 159,300 sf 10800-10802 Parkridge Boulevard, Reston (office) – 121,700 sf 9990 Fairfax Boulevard, Fairfax (office) – 93,000 sf 607 Herndon Parkway, Herndon (office) – 78,300 sf

Avison Young Office Market Report Canada, U.S. (Mid-Year 2013)

Avison Young Commerical Real Estate Newsletter Canada, U.S. (Spring/Summer 2013)

Avison Young 2014 Forecast

Partnership. Performance.

(Canada, U.S.)

MID-YEAR 2013

Avison Young Office Market Report Canada & U.S.

Avison Young Commercial Real Estate Investment Review Canada, U.S. (Fall 2013)

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MID-YEAR 2013

Avison Young Office Market Report Canada & U.S. Partnership. Performance.

Avison Young Office Market Report Canada & U.S. Mid-Year 2013 Canada & U.S. Market Overview

Canada & U.S. Market Highlights

Canada Calgary & Edmonton

Halifax & Lethbridge

Mississauga & Montreal

Ottawa & Quebec City

Regina & Toronto

Vancouver & Winnipeg

United States Atlanta & Boston

Charleston & Chicago

Dallas & Denver

Detroit & Houston

Irvine & Las Vegas

Los Angeles & New Jersey

New York & Pittsburgh

Raleigh-Durham & Reno

San Diego & San Francisco

South Florida & Washington, DC

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Canada & U.S. Market Overview Ongoing improvement in US commercial real estate market, tight market conditions in major Canadian downtown office markets Canada’s office markets, resilient during and since the recession, continue to sport relatively healthy market fundamentals; however, some major markets appear to be softening, turning in less-than-stellar performances in the first half of 2013. Many major U.S. markets remain oversupplied, with tenant-favoured conditions – even while tours and velocity have increased and several metro areas have moved into equilibrium.

Canada Overview

U.S. Overview

anada’s office market, at 491 million square feet (msf ) and growing, closed the first half of 2013 with 7.9% vacancy – up from 7.1% at mid-year 2012, but remaining below the recent recessionary peak of 9.9% in mid-2010. Half of the 12 Canadian markets were below the national average and 10 posted single-digit vacancy. The gap in vacancy between Western and Eastern markets narrowed during the last 12 months. Representing two-thirds of the national inventory, the Eastern markets closed the first half of 2013 with a collective vacancy rate of 8.4%, or +70 basis points (bps), with Ottawa the lowest at 6%. The growing Western markets combined for a vacancy rate of 7.1% (+100 bps), with Regina reporting a national low vacancy of 5.2%. Corporations seeking to attract and retain the young and highly educated workforce increasingly living and working in urban areas have created competition in most downtowns. Corporate restructuring, downsizing and consolidations have raised sublease vacancy in some markets, elevating Canada’s downtown vacancy 40 bps over 2012 to 5.6% at mid-year 2013. The tightest markets are Calgary (4%, +80 bps), Ottawa (4.4%, -140 bps) and Vancouver (4.6%, +130 bps). Unsurprisingly, these markets have the highest average gross rents for class A space, led by Calgary ($57 per square foot (psf ), a $5.66-psf rise from 2012), Vancouver ($52 psf, -$2 psf ) and Ottawa ($47.95 psf, -$0.53 psf ). In contrast, new supply outpaced demand in some markets, pushing national suburban vacancy to 10.6% – up 130 bps since mid-2012 – with seven of the 12 markets below average. Except for Lethbridge and Vancouver, single-digit vacancy persists in the same markets as one year ago. Once again, Regina (3.1%, +170 bps) had the lowest suburban vacancy and Mississauga (Toronto West) (13.7%, +130 bps) the highest, while Lethbridge (11.6%) experienced the greatest yearover-year swing, spiking 350 bps. Calgary and Regina have the priciest suburban markets with average gross rent for class A premises of $37 psf, followed closely by Vancouver ($36 psf ). Office space under construction has increased by 4.5 msf since mid2012 to nearly 22 msf (53% preleased), with a 60/40 downtown/ suburban split. Toronto is the biggest development market in the country, with 7.1 msf (49% preleased) – one-third of the national total – and also leads with 5.3 msf (47% preleased/41% of national downtown total) underway downtown. However, Calgary is narrowly outpacing Toronto on the suburban front with almost 2 msf (78% preleased) under development – accounting for 23% of the national suburban total. For the second half of 2013, tight conditions will persist in most downtown office markets as tenants face eroding space options and likely higher rents. More options will present themselves later this year and into 2014 as new supply comes online. In contrast, more favourable space and rental-rate alternatives will be commonplace in select suburban markets across the country.

he 10.3-billion-sf U.S. office market continued its bumpy recovery over the last 12 months and ended the second quarter of 2013 with an overall vacancy rate of 11.7%. Looking at Avison Young markets, vacancy rates remained in the double digits at mid-year 2013, with an overall average vacancy of 14.7%, down slightly from 14.8% at mid-year 2012. Nevertheless, 16 of the 20 Avison Young markets reported lower vacancy rates when compared to 2012. Class A rents averaged $48 psf and $27 psf (USD) for central business district (CBD) and suburban markets, respectively. San Francisco again saw a significant increase in CBD class A rent this year, ending the second quarter of 2013 at $52.50 psf, an 11.7% increase from the second quarter of 2012, following a remarkable 18% spike in rents between the second quarter of 2011 and the second quarter of 2012. Vacancy fell 140 bps year-over-year to 8.9%. The highest CBD class A rents currently are in New York, where the $64-psf rate was a 2.3% increase compared with 2012, and in Washington, DC, a 1.3% change at $56 psf. There is currently more than 43 msf under construction, 72% of which is in four markets – Houston (10.6 msf ), Metropolitan Washington, DC (7.8 msf ), New York (7.5 msf ) and Boston (5.3 msf ). Pittsburgh’s metropolitan area recorded an 8.2% vacancy rate at midyear 2013 – the lowest of the Avison Young U.S. markets and one of only two U.S. markets with a total vacancy rate in the single digits. Although the Metropolitan Washington, DC office market remains relatively healthy (posting an average CBD vacancy of 9.3% at mid-year 2013), the region was one of four U.S. markets to see its overall vacancy increase (13.8%, +70 bps) over the past year. New Jersey currently has the highest vacancy, after experiencing a year-over-year increase in its vacancy rate (20.9%, +30 bps), although the market is headed in a positive direction after posting 21.4% vacancy in the first quarter of 2013. Elsewhere, Chicago’s total office market vacancy rate improved to 13.8% at mid-year 2013, down from 14.1% at mid-year 2012. In New York, leasing activity rebounded, but with large blocks of space being returned to the market, vacancy rose to 12.1% at mid-year 2013. Los Angeles is experiencing a slow but stable recovery with strong leasing activity, although the vacancy rate climbed 330 bps year over year to 16.3% by mid-year 2013. Atlanta’s elevated vacancy rate persisted and ended the second quarter at 19.7%, albeit down from 21.7% at midyear 2012; and in South Florida, vacancy improved for the third straight quarter to 15.4%. Turning to Texas, Dallas recorded a vacancy decrease of 60 bps year-over-year, falling to 15.6%, while energy-driven Houston ended the second quarter of 2013 with an 11.1% total vacancy. After years of uneven recovery led by a handful of standout markets, many U.S. markets remain oversupplied. Expect vacancy to stay on its downward trajectory through year-end 2013 and some markets to demonstrate landlord-favorable conditions in the coming months.

Mid-Year 2013 Canada, U.S. Office Market Report

Canada & U.S. Market Highlights Canada Metropolitan Area Canada Metropolitan Area Office Vacancy Rate Comparison Office Vacancy Rate Comparison 25% 20% 15% 10% 5% 0%

Mid-Year Mid-Year 2012 2012

Mid-Year 2013

U.S. Metropolitan Area U.S. Metropolitan Area Office Vacancy Rate Comparison Office Vacancy Rate Comparison 25% 20% 15% 10% 5% 0%

Mid-Year 2012

Mid-Year 2012 4

Mid-Year 2013 Canada, U.S. Office Market Report

Mid-Year 2013

Canada & U.S. Market Highlights Canada Canada Downtown & Suburban Office Vacancy Rates Downtown & Suburban Office Vacancy Rates 30% 25% 20% 15% 10% 5% 0%

Downtown

Suburban

U.S. U.S. Downtown & Suburban Office Vacancy Rates Downtown & Suburban Office Vacancy Rates 30% 25% 20% 15% 10% 5% 0%

Downtown

Suburban

Mid-Year 2013 Canada, U.S. Office Market Report

Canada & U.S. Market Highlights

Canada Downtown Class A Average Asking Gross Rents

Canada Suburban Class A Average Asking Gross Rents

Canada Downtown Class A Average Asking Gross Rents

Canada Suburban Class A Average Asking Gross Rents

$60

$50

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$10

Downtown Class A Average Asking Rent ($psf net) Downtown Class A Average Asking Rent ($psf net)

ad Ca n

Ca n

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Downtown Class A Average Additional Rent ($psf)

Suburban Class A Average Asking Rent ($psf net)

Downtown Class A Average Additional Rent ($psf)

Suburban Class A Average Asking Rent ($psf net)

* Rental rates are shown in CAN $

Suburban Class A Average Additional Rent ($psf) Suburban Class A Average Additional Rent ($psf)

* Rental rates are shown in CAN $

U.S. Suburban Class A Average Asking Gross Rents

U.S. Downtown Class A Average Asking Gross Rents U.S. Downtown Class A Average Asking Gross Rents

U.S. Suburban Class A Average Asking Gross Rents

$60

$50

$40

$30

$20

$10

Downtown Class A Average Asking Rent ($psf net) Downtown Class A Average Asking Rent ($psf net)

Downtown Class A Average Additional Rent ($psf) Downtown Class A Average Additional Rent ($psf)

* Rental rates are shown in U.S. $

Mid-Year 2013 Canada, U.S. Office Market Report

M U. S. AY

U. S.

ar ke ts

$70

ar ke ts

$70

Suburban Class A Average Asking Rent ($psf net) Suburban Class A Average Asking Rent ($psf net)

Suburban Class A Average Additional Rent ($psf) Suburban Class A Average Additional Rent ($psf)

* Rental rates are shown in U.S. $

Canada & U.S. Market Highlights Canada Canada Office OfficeArea AreaUnder UnderConstruction Construction 12 10

Millions sf

8 6 4 2 0

Downtown Office Area Under Construction (sf)

Suburban Office Area Under Construction (sf)

U.S. U.S. OfficeArea AreaUnder UnderConstruction Construction Office 12 10

Millions sf

8 6 4 2 0

Downtown Office Area Under Construction (sf) Downtown Office Area Under Construction (sf)

Suburban Office Area Under Construction (sf) Suburban Office Area Under Construction (sf)

Mid-Year 2013 Canada, U.S. Office Market Report

Canada & U.S. Market Highlights Canada Construction Canada&&U.S. U.S.--Office Office Area Area Under Under Construction Houston Washington, DC New York Toronto Boston Calgary Vancouver Montreal Atlanta Dallas Ottawa Toronto West/Mississauga Pittsburgh Chicago San Francisco Edmonton Irvine Los Angeles Quebec City Denver San Diego South Florida New Jersey Regina Halifax Raleigh-Durham Charleston Winnipeg Reno Lethbridge Las Vegas Detroit

6 Millions sf

Canada & U.S. Canada U.S.--Office OfficeArea AreaPreleased Preleased San Diego Reno Irvine Lethbridge Winnipeg Houston Denver Atlanta Quebec City Calgary Regina Dallas New Jersey Raleigh-Durham Toronto West/Mississauga South Florida Ottawa Boston New York Edmonton Washington, DC Toronto San Francisco Vancouver Chicago Montreal Halifax Los Angeles Pittsburgh Charleston Las Vegas Detroit

20%

Mid-Year 2013 Canada, U.S. Office Market Report

40%

60%

80%

100%

Calgary Office Market

algary’s office market has changed significantly from a year ago. Vacancy has been on the rise for three straight quarters and increased to 6.2% by the end of the second quarter of 2013. This is in large contrast to one year ago, when overall vacancy recorded its 11th consecutive quarter of decline, dropping to 4.6% by the end of the second quarter of 2012. Sublease space has been the major contributor to this market swing. Notably, sublease vacancy in the downtown was equal to head lease vacancy by the end of the second quarter of 2013. Both totalled 2%, resulting in a downtown vacancy rate of 4%. With a drop in the price of WTI oil and the ability of firms to borrow capital, activity in the energy sector has definitely cooled. Energy companies are responsible for 62% of all sublease space being offered downtown. Absorption levels have also dropped across all submarkets. After three consecutive years of intense market activity, during which time annual office absorption averaged more than 3 msf per annum, 2013 year-to-date absorption is negative 1 msf. Downtown, in particular, registered 346,000 sf of negative absorption in the second quarter of 2013 compared with 64,000 sf in the second quarter of 2012.

Calgary Office Vacancy Rates 28% 26% 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Q2 2009

Q2 2010

Q2 2011

Downtown

Q2 2012

Q2 2013

Suburban

Asking rental rates have steadily increased during the past three years to the point where they are among the highest nationwide. However, they are beginning to show signs of retreat in response to the slowdown in market activity. The exception is class AA rates, which are as high as $50 psf due to upward pressure stemming from 0.4% vacancy. Despite diminishing leasing activity, construction activity remains strong. In the downtown, there are four office towers under development comprising 2.6 msf of space – 60% of which is preleased. In July (and thus not reflected in our mid-year numbers), Manulife Real Estate and Brookfield Properties each announced new construction projects, with Brookfield’s 225 Sixth, at 56 storeys, set to surpass the Bow as Western Canada’s tallest tower.

Edmonton Office Market

ith a stable economy and favourable vacancy rates, Edmonton has emerged as a preferred market in which to invest in Alberta. This situation is expected to change to a landlord’s market by the end of 2013 as a few key transactions close and available space fills. Edmonton’s vacancy rate has enjoyed a relatively long period perched at approximately 8% – the sweet spot, where both sides of the market enjoy favourable outcomes. In the second quarter of 2013, the city’s overall vacancy rate held steady at 8.7% from the previous year. The suburban market experienced a greater change, with vacancy rising 50 bps to 11.3% year-overyear. In the downtown market, vacancy registered 7.2% in the second quarter of 2013 compared with 7.5% in 2012 and 7.2% in 2011. Absorption was varied across the Edmonton market, resulting in a net absorption of merely 2,814 sf for the second quarter, which is in stark contrast to the 226,578 sf of positive absorption recorded in the second quarter of 2012. Downtown office inventory remained unchanged at mid-year, holding at 16.3 msf, while 280,000 sf of space was added in the suburban market during the last 12 months, bringing the suburban total inventory to 9.2 msf as of June 30.

Edmonton Office Vacancy Rates 28% 26% 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Q2 2009

Q2 2010

Q2 2011

Downtown

Q2 2012

Q2 2013

Suburban

Currently, the average rental rate for class A and AA buildings in the downtown core is $24 psf, as landlords have kept rates steady to fill vacancies. This trend is consistent with other classes in the downtown core that are holding steady at market rates. EPCOR Tower is advertising an above-market net rental rate of $37 psf and still has 172,000 sf of vacancy. Manulife Place and Commerce Place are advertising market rates at $27 to $28 psf. Overall, the Edmonton market is showing stability but without an excess of growth or major transactions.

Mid-Year 2013 Canada, U.S. Office Market Report

Halifax Office Market

hile Halifax’s overall office vacancy rate is up slightly year-over-year from 8.2% to 9.1%, the market is relatively stable. New office product in the suburbs continues to be absorbed as does the new downtown RBC Waterside office building. The most significant office developments in the suburban market include the Intact building and the Blue Frog building, which total approximately 150,000 sf. There has been no change in overall asking rents in the Halifax office market yearover-year. Little movement is expected in face rates during the next 12 months but operating costs will continue to increase due to increases in municipal taxes, power and water rates. Current market activity is not as robust as in the past few years but the market is expected to improve as the economic impact of previously announced projects takes effect. Most notably, these projects include: the federal government’s National Shipbuilding Procurement Strategy, Encana’s Deep Panuke offshore natural gas project, and Shell’s $971-million offshore exploration project.

Halifax Office Vacancy Rates 28% 26% 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Q2 2009

Q2 2010

Q2 2011

Q2 2012

Q2 2013

The tug-of-war between the downtown and suburban office markets continues Downtown Suburban in Halifax. It appears the suburban office market is growing at the expense of the downtown as there has been an exodus of certain sectors to suburban locations. With that said, the downtown may be in the middle of a transition period and in the process of dramatic positive change. While there are vacant storefronts in the downtown, most are vacant because they are being redeveloped or will be redeveloped in the very near future. To put things in perspective, there is currently more development and redevelopment taking place in downtown Halifax than at any point during the past 25 years, and the market is expected to continue to change for the better in the coming months.

Lethbridge Office Market

ethbridge’s downtown class A vacancy rate increased to 11.2% over the past 12 months. This increase is mainly due to the nearly completed redevelopment of Lethbridge Centre from retail to a major office centre. When finished, the project will increase class A inventory downtown from 286,370 sf to 426,400 sf. The average asking rental rate for downtown class A office space is $15 psf, and currently includes aggressive tenant-inducement allowances due to competition. Downtown Lethbridge continues to draw professional tenants due to easy accessibility from all areas of the city and availability in prime buildings. The ongoing revitalization of downtown heritage buildings, the opening of Casa (a $34-million performing arts centre), and an owner/user development comprising more than 15,000 sf on the downtown’s last large vacant lot highlight renewed investment in the city core.

Lethbridge Office Vacancy Rates 28% 26% 24% 22% 20% 18% 16% 14% 12% 10% 8% 6%

4% Suburban office space is attracting users for different reasons. Easy access from 2% highways and main roads, abundant free parking, and proximity to retail centres 0% and residential areas make the office space easier to access for clients. The space Q2 2009 seems to attract tenants such as engineering firms, call centres and surveyors who do not need to be in the downtown core and have less business-based traffic. Class A suburban space is mostly made up of newer construction and, thus, carries an average lease rate of $20 psf, and vacancy similar to downtown at 12.7%. The suburban market also attracts office users wanting to own, as downtown has limited opportunity for owner/users.

Q2 2010

Q2 2011

Downtown

Q2 2012

Q2 2013

Suburban

(Data not available for 2009)

Overall, the Lethbridge market remains strong, with a balance of both class A and B vacancy, and as suburban markets continue to expand, the availability of space for lease will continue to increase. By year-end 2013, the market is expected to witness a slight increase in both class A and B inventory. This is mainly due to new construction being occupied by owner/users, who are vacating existing class B and – to a lesser degree – class A space.

Mid-Year 2013 Canada, U.S. Office Market Report

Mississauga (Toronto West) Office Market

Mississauga (Toronto West) Office Vacancy Rates verall office vacancy in Toronto West has risen during the past 12 months, finishing the second quarter of 2013 at 13.7%, up 130 bps from mid-year 28% 2012. This is the highest level of vacancy the market has recorded since the 26% 24% beginning of 2011. This rise in vacancy is largely attributable to new construction 22% activity in Toronto West together with corporate restructuring/downsizing and 20% consolidation. 18% In the past year, the Toronto West market has seen the addition of 1 msf of new 16% supply. Developers continue to be active, with approximately 1.3 msf of new 14% 12% office product under construction at mid-year 2013 - of which almost 60% is 10% preleased across 13 buildings. The Heartland office leasing node comprises the 8% bulk of the new supply with more than 400,000 sf under construction. Of this, 6% 335,000 sf is at 60 Standish Court, a new development by Orlando Corporation, 4% where TJX Company Inc. (owners of retail chains Winners, Marshalls and 2% HomeSense) is expected to open its new Canadian head office in 2015. Other 0% Q2 2009 Q2 2010 Q2 2011 Q2 2012 Q2 2013 new developments include Carttera’s 7100 West Credit Avenue, which will deliver Suburban approximately 95,000 sf of speculative office development to the Meadowvale market in fall 2013. While there is some large-tenant activity in the market, overall velocity has been moderate. This velocity trend should improve as fall begins and the improving U.S. economy has a positive effect on absorption. Relative to one year ago, the average asking net rental rate and additional rent have remained status quo for class A suburban office product in Toronto West. The average asking net rental rate was approximately $17 psf at mid-year 2013 while additional rent was close to $13 psf. Rental rates are expected to remain relatively flat in the latter half of 2013, with new construction having little impact on the Toronto West market in late 2013 or early 2014.

Montreal Office Market

Montreal Office Vacancy Rates he vacancy rate in the Montreal office market reached 9.3% at the end of the second quarter of 2013 compared with 7.7% 12 months earlier. The 28% downtown vacancy rate increased slightly during the past year as well, rising 26% 24% to 6.8% from 5.7%. 22% Since mid-year 2012, most of the major leasing transactions in the downtown 20% area were lease renewals. These included Intact Insurance, for 268,000 sf at 18% 2020 University; Ubisoft’s lease of 248,821 sf at 5505 St-Laurent; Heenan Blaikie 16% taking 125,000 sf at 1250 René-Lévesque West; FedNav’s deal for 42,576 sf at 14% 1000 de la Gauchetière; and SITA leasing 33,000 sf at 770 Sherbrooke West. 12% 10% In addition, KPMG renewed and expanded its existing space – now totalling 8% 155,835 sf – at 600 de Maisonneuve Boulevard West. The Quebec government 6% also renewed more than 70,000 sf of office space across several buildings in 4% Old Montreal. 2% Construction projects announced in 2012 are currently in progress. Major 0% Q2 2009 Q2 2010 Q2 2011 Q2 2012 Q2 2013 projects include the Aimia Tower (the office component of the Altoria project), Downtown Suburban consisting of 230,000 sf of class A office space and 25 floors of condominiums; and Cadillac Fairview’s 514,000-sf office tower, adjacent to the Bell Centre, which is scheduled to be delivered in 2015. Deloitte has leased 160,000 sf for 15 years, thus freeing 185,000 sf at Place Ville-Marie in 2016. In addition, Rio Tinto also recently leased 190,000 sf in the project, bringing the preleasing of the Deloitte Tower to 70%. Other projects are under consideration – namely the Wilder building, property of SIQ, in the Quartier des Spectacles (Ste-Catherine Street and St-Laurent Street), which is expected to be redeveloped with nearly 100,000 sf of additional office space. FTQ Real Estate Fund also has a project under consideration in the area. Other projects could be announced in the near future. In the Downtown East area, the CBC lands and l’Îlot Voyageur are also in the process of redevelopment.

Mid-Year 2013 Canada, U.S. Office Market Report

Ottawa Office Market

acancy statistics in Ottawa’s downtown core node reveal a trend worth following. At the end of the second quarter of 2013, the overall vacancy rate in the downtown core was 4.5%. While this figure represents a drop since the end of 2012, the availability rate (space that is occupied but will be coming available in the next 12 months) is now approaching 8%. Not included in the availability numbers are new buildings under construction, which in the case of the downtown core are 90 and 150 Elgin Street. 90 Elgin is fully leased to Public Works and Government Services Canada (PWGSC) and 150 Elgin has secured approximately 170,000 sf of tenancies, leaving an additional 210,000 sf of availability that does not show up in the current availability numbers. Net space absorption in the downtown core has been near zero since 2010, with only Export Development Canada (EDC) taking possession of its new building on Slater Street in late 2011 and the Bank of Canada backfilling the vacancy created by EDC vacating Plaza 234 Laurier in early 2013. As the new Government of Canada Workplace 2.0 standards continue to be implemented, the resulting pressure on private landlords will continue as the federal footprint of leased space continues to shrink. If anemic net private sector absorption rates continue, downtown core vacancy rates could approach double digits.

Ottawa Office Vacancy Rates 28% 26% 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Q2 2009

Q2 2010

Q2 2011

Downtown

Q2 2012

Q2 2013

Suburban

Exacerbating the situation in the core are recent stories in the print media suggesting the government’s plans for the relocation of the Department of National Defence (DND) to the former Nortel campus on Moodie Drive in the city’s West End may be reconsidered. Due to enhanced security levels required by DND, PWGSC is reported to be looking at alternative departments and agencies to occupy the sprawling suburban campus to keep costs more in line with the original budget estimates that were put forward when the campus was acquired.

Quebec City Office Market

ollowing the delivery of 1 msf of office space in 2011 and 2012, the construction of new buildings in the Greater Quebec City area continues with slightly more than 800,000 sf of new product under construction, of which approximately 589,000 sf (74%) has already been leased. At the end of the second quarter of 2013, the overall vacancy rate in Quebec City remained substantially the same as one year ago, dipping only slightly to 6.7% from 6.8%. Meanwhile, vacancy in the downtown core dropped to 7.8% halfway through 2013, compared with 8.6% at the same time in 2012. With all of these projects under development, there is a shift in office market activity from the downtown area to surrounding areas such as Lebourgneuf and Laurier Boulevard. This increase in construction activity will undoubtedly have an impact on vacancy rates, which are expected to increase even though they are still relatively low in comparison with other Canadian markets.

Quebec City Office Vacancy Rates 28% 26% 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0%

Q2 2009 Q2 2010 Q2 2011 Q2 2012 Q2 2013 Key development projects include three buildings in the Lebourgneuf sector, Downtown Suburban totalling 280,000 sf. In Lévis, the second phase of Complexe des Rives is expected to be completed within the current year. Moreover, Cité Desjardins de la coopération a 330,000-sf development project occupied entirely by Desjardins Financial Security in Lévis - is scheduled to be completed in 2014. Phase 2 of Groupe GP Real Estate’s Henri-IV Business Complex (totalling 94,000 sf) should also be delivered in 2014. Other projects are also under consideration, such as SSQ Insurance, which is planning an office building on Laurier Boulevard. The number of new projects in recent years and the stability of vacancy rates have kept average gross rents around $28 psf.

Demand for large space in recent years has mostly been driven by the insurance and financial services industries. In the current context, a slowdown in the construction of new office buildings is expected, in order for the market to absorb the new space and consequently slow progression of rental rates.

Mid-Year 2013 Canada, U.S. Office Market Report

Regina Office Market

egina has more than 200,000 sf of office inventory on the market in a variety of sizes and locations, with more slated to become available in the near future. Announced future inventory currently totals 700,000 sf, although it is reasonable to expect that not all projects will proceed if supply becomes excessive. Regina’s combined office vacancy rate currently sits at 5.2% and is expected to increase to 6.5% moving into 2014. The market has rebounded significantly from the low vacancy rates of past years and now includes choices for tenants in the downtown and suburban areas. Supply and demand have levelled off, indicating lease rates will as well. Class A space represents 39% of the total inventory in the city’s competitive office market, of which 93% is concentrated in the downtown core. Demand for class A space remains high because of location, high-quality amenities and, most importantly, the region’s sustained economic growth. The current vacancy rate for class A buildings has increased to 1.8% due to the addition of Hill Tower III, but remains one of the lowest rates in North America. Net lease rates for existing class A buildings range from $20 psf to $26 psf, while rates for new space are well into the $30-and-higher psf range.

Regina Office Vacancy Rates 28% 26% 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Q2 2009

Q2 2010

Q2 2011

Downtown

Q2 2012

Q2 2013

Suburban

Class B-plus buildings represent 15% of Regina’s inventory, with 71% of the class B-plus space in the downtown core and the remainder located primarily at Innovation Place near the University of Regina. Demand for this space is high and generally for the same reasons as for class A space. Class B vacancy climbed to 7.1% this past year due to the relocation of some government departments. Net lease rates have remained stable, ranging between $18 and $26 psf. Class B space represents 46% of Regina’s overall office inventory and currently has a vacancy rate of 7.5%. Net lease rates range from $14 to $21 psf given the wide variety of locations and quality.

Toronto Office Market

stalwart during and since the recession, Toronto has succumbed to sporadic leasing activity, leading to less-than-stellar results during the past year – especially in the first half of 2013. Market-wide office vacancy for the Greater Toronto Area (GTA) stood at 8.6% midway through 2013 – a modest 50-bps increase from one year ago. Downtown vacancy is 5.4% (+10 bps), leaving tenants with limited space options, while landlords with little existing or near-term vacancy exposure continue to push rents higher. In contrast, new supply is outpacing demand in the suburbs, prompting vacancy to climb 130 bps since mid-2012 to 11.8%.

Toronto Office Vacancy Rates 28% 26% 24% 22% 20% 18% 16% 14% 12% 10%

Development activity has accelerated. While 13 buildings comprising 1.3 8% msf (with 86% in the suburbs) were delivered in the past year, a further 25 6% projects totalling 7.1 msf (49% preleased) are under construction as of mid- 4% 2% 2013, with delivery starting later this year and into 2017. This compares with 0% 5.5 msf (43% preleased) one year ago and 7 msf (59% preleased) at the onset Q2 2009 Q2 2010 Q2 2011 Q2 2012 Q2 2013 of the recession in fall 2008. Three-quarters, or 5.3 msf (47% preleased), is Downtown Suburban in Downtown Toronto, driven largely by corporations seeking to attract and retain the growing young and highly educated workforce living and working downtown. The most notable new development is Oxford Properties’ Ernst & Young Tower: a 900,000-sf, 40-storey, class AAA, LEED Platinum tower in the financial core, to be completed in June 2017. The tower is 45% preleased to Ernst & Young and TMX Group. Given that 4.5 msf was built between 2009 and 2012, heightened downtown construction activity is raising some concern over the market’s ability to absorb not only the remaining new supply, but also the residual vacancy left behind by relocating tenants. For the second half of 2013, demand will be muted, and until the bulk of new supply comes online in mid-to-late 2014, limited options and higher rents will persist downtown, while more favourable space and rental rate alternatives will be more common in the suburbs.

Mid-Year 2013 Canada, U.S. Office Market Report

Vancouver Office Market

acancy in Metro Vancouver’s office market rose during the past year, with the increase in the downtown core largely attributable to small increases in vacancy across numerous locations rather than a few significant events in specific buildings. Meanwhile, vacancy in most substantial suburban markets rose slightly or remained stable with some exceptions. Following more than 640,000 sf of positive annual absorption in 2012, Metro Vancouver recorded six-month negative absorption in the opening half of 2013 for the first time since 2009. The region’s overall vacancy rose to 7.6% from 6.7% a year earlier. Downtown vacancy increased even further, climbing to 4.6% from 3.3% at mid-year 2012. Despite the rise in downtown vacancy, the leasing programs in five of six new office developments now under construction remained strong with more than 50% leased to date and more announcements expected. These projects will add nearly 1.8 msf of class AAA space to the downtown inventory by mid-2015. Four other office developments totalling an additional 1 msf are in the pipeline and could start to deliver additional product as early as 2016.

Vancouver Office Vacancy Rates 28% 26% 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Q2 2009

Q2 2010

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Downtown

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Suburban

Meanwhile, suburban vacancy rose to 10.1% at mid-year 2013 from 9.6% at midyear 2012. There is more than 150,000 sf of new office product set for delivery in the second half of 2013. Approximately 830,000 sf is set for completion in 2014, including the 411,000-sf Metrotower III in Burnaby and the 137,000-sf Merchant Square development in New Westminster. Vacant sublease space increased in core and suburban markets with total sublease space rising to 388,061 sf from 269,706 sf. Downtown class A lease rates (asking and additional rent) remained stable, and this will continue as demand-side questions minimize upward pressure on rates. Suburban class A gross rent remained steady, but specific submarkets face downward pressure. Overall, Metro Vancouver’s office market remains stable with key indicators emerging that highlight a return to more normalized conditions.

Winnipeg Office Market

s Winnipeg closes in on 800,000 people within the capital region, the market is experiencing a slight migration of office users to the city’s southwest quadrant. The influx of tenants to this area started a few years ago with some large custom build-to-suits for Nortel and Manitoba Hydro. While Nortel is no more, that large block (92,500 sf ) has since been leased to Convergys Corp. and recently to CP Rail. This is just one example of the voracious appetite for vacant space present in the southwest. In some cases, existing tenants are experiencing renewal shock as their current five-year leases are being bumped up by 15% to 30%. The two reasons for this are a lack of inventory in all sizes but, more importantly, the high costs associated with moving and build-out.

Winnipeg Office Vacancy Rates 28% 26% 24% 22% 20% 18% 16% 14% 12% 10% 8%

Downtown tenants, who have many choices for space (specifically in class B and 6% C space), are also seeing rental rates pushed higher at renewal time – typically 4% by 10% to 12% – because of the inconvenience and high cost of relocating. The 2% 0% South End has wonderful drawing power because of its proximity to affluent Q2 2009 Q2 2010 Q2 2011 Q2 2012 Q2 2013 neighbourhoods, shopping, restaurants, parking, etc. The area’s biggest challenge Downtown Suburban is the commute time from other areas of the city. The difference in lease rates for 10,000 sf of finished office space between other parts of Winnipeg and the South End can be as high as $6 to $10 psf. Many office properties in other suburban locations are older and industrial conversions, which may suffer from tight parking. This exodus is not a tidal wave; however, it is a noticeable migration that several developers are taking into consideration. This demand is driving land prices up and making new developments difficult. In comparison, the downtown office market is steady and very competitive for relocating tenants. Move-in-ready space is attracting the action, while recently demolished properties are moving slowly. Overall, Winnipeg’s office market is steady, characterized by upticks of activity in the south and very motivated landlords.

Mid-Year 2013 Canada, U.S. Office Market Report

Atlanta Office Market

uring the first half of 2013, Atlanta’s office market was buoyed by improved economic conditions. The city’s unemployment rate has decreased to 7.6%, the lowest since the Great Recession. Professional services and IT firms have been expanding their office space and bringing new jobs to Atlanta. Healthcare technology company athenahealth confirmed it will lease 75,000 sf at Ponce City Market, with the possibility of growing to 120,000 sf over the term of the lease. The healthcare IT group will eventually bring 500 new high-tech jobs to the city from Alpharetta, GA. Coca-Cola has announced that it will bring its IT center to Downtown Atlanta, consolidating multiple locations in 275,000 sf at SunTrust Plaza and bringing 2,000 jobs to the city. The positive economic improvements and a willingness expressed by firms to expand have led to gains in the Atlanta office market. Atlanta ended the second quarter of 2013 with a total inventory of 143.5 msf and a vacancy rate of 19.7%. The vacancy rate has decreased 200 bps during the last 12 months. Net absorption for the first half of 2013 totaled 595,445 sf, up slightly from 410,111 sf during the same period in 2012.

Atlanta Office Vacancy Rates 28% 26% 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Q2 2009

Q2 2010

Q2 2011

Downtown

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Suburban

Boston Office Market

oston’s office market continued to experience strong leasing velocity in prime submarkets during the second quarter of 2013, resulting in vacancy declines across most of the class A and B inventory. Vacancies fell to 17.1%, down 190 bps from a year ago, with vacancy in the CBD’s 59-msf market declining to 12.5%. The CBD saw leasing velocity of 2.5 msf, slightly off last year’s annual pace of 5.6 msf. Cambridge and the suburban office markets dropped below 20% vacancy for the first time since 2008. With 5 msf leased in 2013, the suburbs will struggle to keep pace with the 11 msf leased in 2012. Quoted asking rents continued to rise, reaching an estimated $24 psf across the metro – the highest level since 2008. Downtown, full-service rents averaged $50 psf for class A space while tighter highrise listings, as well as select listings in the Back Bay, exceeded $70 psf. Average suburban rents reached $22 psf, an increase of $1 psf versus one year ago, while select suburban submarket class A asking rents moved back to the low $30s.

Boston Office Vacancy Rates 28% 26% 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Q2 2009

Q2 2010

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Downtown

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Suburban

When new construction begins to be delivered in the CBD later this year, a leveling-off in vacancy rates is expected downtown - with major tenants migrating to the new properties, returning excess square footage to the market, while landlords continue to trade vacancies. Meanwhile, the limited suburban development is almost entirely build-to-suit and should not impact vacancies greatly. However, as leasing activity is not expected to keep pace with the last several quarters, a leveling-off of vacancy rates may occur until the business community gains more comfort with federal fiscal policy. When this occurs, office-using employment should resume its assault on Massachusetts’ overall unemployment rate of 6.6%, which still sits 400 bps above the historic low of 2.6% in October 2000.

Mid-Year 2013 Canada, U.S. Office Market Report

Charleston Office Market

t is often said that retail follows rooftops. In Charleston, the office market is impacted by residential growth as well, with the most notable decrease in vacancy and increase in asking rent centered on Mount Pleasant - Charleston’s densely residential suburb across the Cooper River. Home builders and developers are back in the market as home sales are recovering and interest rates are still very favorable. Two examples are Galloway Homes of Columbia, SC, which just opened a Mount Pleasant office, and DR Horton, which will be increasing its footprint in the Mount Pleasant market. Another driving factor is that people prefer to work near where they live. As business improves for many small-tomedium-sized businesses, owners choose to work closer to home and are willing to pay a little more. Mount Pleasant’s good schools and improved roadways make it a desirable choice for service-oriented businesses. Furthermore, new developments around Charleston - many shelved during the Great Recession - are coming out of the ground now. As Carnes Crossroads, the Horizon project and Carolina Park move forward, residential, retail and office development are part of the plan.

Charleston Office Vacancy Rates 28% 26% 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Q2 2009

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Suburban

Other factors shifting the office market are Boeing’s expansion and the changing ownership of several local office properties. As Boeing delivers its first 787 to China, the company continues to expand its campus. Vendors and suppliers of this aerospace giant that benefit from being nearby will surely drive demand for office space. In the last quarter alone, four major office properties in Mount Pleasant and Daniel Island have changed hands. Rising interest rates combined with confidence in the market have triggered investors to seize the opportunity to gain a stake in the office sector. As a whole, Charleston’s market-wide vacancy remains stable at 14.8% compared with 15.1% in the second quarter of 2012.

Chicago Office Market

he Chicago office market ended the first half of 2013 with a vacancy rate of 13.8%, down slightly from 14.1% one year earlier. With an inventory of 142 msf, Chicago’s CBD recorded a vacancy rate of 12.2% – a moderate increase from last year. Vacancy in the suburban office market recorded a decrease of 80 bps since mid-year 2012, ending the first half of 2013 at 15.7%. Class A rental rates have experienced relatively little growth during the last 12 months. The River North and West Loop submarkets continued to attract the highest rental rates within the CBD – currently $39 and $36 psf, respectively.

Chicago Office Vacancy Rates 28% 26% 24% 22% 20% 18% 16% 14% 12%

Overall leasing activity slowed throughout the first half of 2013. The two 10% largest lease transactions to date have occurred in the CBD. Law firm SNR 8% Denton leased 217,000 sf, moving into vacated space within the Willis Tower; 6% and ComPsych Corporation renewed and expanded into 128,000 sf at NBC 4% Tower. Large blocks of desirable space are increasingly scarce in both the CBD 2% and suburban markets, prompting concern for tenants with requirements 0% Q2 2009 Q2 2010 Q2 2011 Q2 2012 Q2 2013 greater than 100,000 sf. Of the 32 buildings that have been built since 1990 Downtown Suburban within the CBD, only six can accommodate tenants looking for more than 100,000 sf of contiguous space. While no new product has been added to the CBD since 2009, construction has commenced on River Point. The 861,000-sf building is 26% preleased to McDermott Will & Emery. Delivery is set for early 2016 and is a joint venture between Hines Interests and Montreal-based Ivanhoé Cambridge. The technology and healthcare sectors continue to be major employment drivers. Several local technology companies have committed to adding more than 2,000 jobs by 2015. Unemployment remains above the national average – 9.4% compared with 7.6% nationally. While the Chicago office market has improved, the remainder of 2013 is expected to remain much the same. CBD leasing activity should see an uptick.

Mid-Year 2013 Canada, U.S. Office Market Report

Dallas Office Market

he Dallas/Fort Worth economy continues to grow at a rapid pace, adding 107,800 jobs in the 12 months ending in May. Employment in Dallas is growing at an annual rate of 3.6%, making Dallas the fastest-growing of the 20 most populous metro areas in the United States. The unemployment rate continues to trend downward and currently stands at 6.3%. A large portion of the added jobs are in the traditional business sector, causing an uptick in office leasing activity. The strong market fundamentals have translated into healthy absorption gains to date in 2013. The Dallas office market recorded 483,869 sf of positive net absorption in the first half of 2013, down slightly from the 563,432 sf in the first half of 2012. A healthy demand for space pushed the overall vacancy rate down by 60 bps from mid-year 2012 to 15.6%. Downtown Dallas continues to struggle with a high vacancy rate of 26.9%. Asking rates in the downtown are still below those found in key suburban submarkets, although rates are beginning to firm up. Demand has largely shifted to the suburban markets, particularly Uptown and North Dallas, where vacancy continues to trend downward and asking rates continue to rise. Following the demand, 1.7 msf is under construction in the suburban markets, 61% of which is preleased.

Dallas Office Vacancy Rates 28% 26% 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Q2 2009

Q2 2010

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Suburban

The Dallas metro area is currently experiencing the highest rate of job growth in the country, which will translate into increased demand for office space for the remainder of 2013. Downtown will likely continue to recover at a slow pace. Until the 1.7 msf currently in development begins to deliver later this year, space will remain tight in the most sought-after suburban submarkets, putting upward pressure on rents as space continues to disappear from the market.

Denver Office Market

he Denver office market, consisting of approximately 187 msf across 40 different submarkets, concluded the second quarter of 2013 with steadily improving vacancy rates and positive absorption. The overall vacancy rate came in at 11.6%, down from 12.2% at the same time in 2012. Suburban vacancy rates are especially improving, and are down to an average of 11.7% – almost 100 bps lower than in the second quarter of 2012. Absorption for the first half of 2013 ended positively at 1.1 msf with the suburban markets, especially the Southwest Denver submarket, leading the way with more than 1 msf of positive absorption. Leasing activity is down slightly from this time in 2012, but is expected to rebound in the coming quarters.

Denver Office Vacancy Rates 28% 26% 24% 22% 20% 18% 16% 14% 12% 10% 8%

Another indicator of the strong market in Denver is the number of active 6% construction projects in the area. Both downtown and suburban markets 4% boasted new construction, with a total of 793,265 sf in the works. Of this figure, 2% approximately 76% is preleased. Some projects under construction include the 0% Q2 2009 Q2 2010 Q2 2011 Q2 2012 Q2 2013 275,000-sf Kaiser Permanente building at 10240 Park Meadows Drive; 145,158 sf Downtown Suburban at 1550 Market Street; and Union Station North Wing, a 112,000-sf office project. Additionally, 508,681 sf of office space was completed during the first half of 2013. Some noteworthy new office buildings include the 180,000-sf TriZetto world headquarters, the 125,000-sf Trimble headquarters, and Suncor Energy’s 84,086-sf building at 5455 Brighton Boulevard. Denver’s average asking rates continued the upward trend witnessed since the conclusion of 2011. The average mid-year 2013 rental rate was $21.18 psf, up from mid-year 2012’s average of $19.95 psf. Class A asking rental rates were up almost $2 psf from the same point in 2012, finishing out the second quarter at $26.32. The average asking rate for class B office space also increased to $18.92 psf.

Mid-Year 2013 Canada, U.S. Office Market Report

Detroit Office Market

fter much anticipation, the City of Detroit filed for Chapter 9 Bankruptcy protection on July 18, 2013. Kevyn Orr, the state-appointed emergency manager, has been telegraphing this move since his first days on the job as the only realistic course for the City of Detroit to follow, given more than 40 years of mismanagement and financial negligence. With over $28 billion in long-term debt, the filing represents an opportunity for the southeast Michigan region to hit the “reset” button on Detroit and move forward under a more sustainable financial structure. Vacancy rates in the 145-msf market slipped to 19.3% from 20% on a year-overyear basis. The downtown market, which comprises approximately 33 msf, represented the largest vacancy reduction in the market, dropping to 16.9% from 19.9% as a result of local investors and occupiers that have continued to acquire properties in the downtown and midtown areas of the Detroit CBD with intent to redevelop space into office or much needed residential stock. It is anticipated that major infrastructure projects, such as the $130-million M-1 rail project and the new $650-million Detroit Red Wings hockey arena and entertainment development, will proceed as planned.

Detroit Office Vacancy Rates 28% 26% 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Q2 2009

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Suburban

On a regional basis, average annual rental rates have held steady in their respective submarkets despite a very broad range of $15 to $30 psf on a gross basis. The market continues to have a short supply of quality blocks of class A office and high-cube distribution space. Development activity for build-to-suit industrial requirements is significantly higher but it is anticipated that no class A office will be developed on a speculative basis in the near term as remaining class A and B vacancy is absorbed.

Houston Office Market

he American drilling renaissance has brought about significant changes on a national and international scale. At the mid-year point, the Houston office market continued to benefit from the energy boom and sustained high oil prices as companies grow and expand their footprint in the “Petro Metro.” In an effort to retain top talent, energy companies have shifted towards high-quality office product. Available class A space in Houston’s most sought-after areas became practically non-existent in early 2013, causing absorption to slow during the first quarter as companies awaited new product to come online. Absorption picked up in the second quarter, totaling 714,152 sf year-to-date. Although absorption is down compared with the first half of 2012 (2 msf ), absorption is projected to increase substantially throughout the remainder of 2013 as new projects deliver. Square footage under construction rose by nearly 8 msf from mid-year 2012. In one of the best illustrations of Houston’s demand, 78% of the 10.6 msf under construction is already preleased.

Houston Office Vacancy Rates 28% 26% 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Q2 2009

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Demand continues to be centered around West Houston and The Woodlands. Downtown Suburban The “Energy Corridor” has the largest concentration of energy companies in the United States and is undoubtedly the most sought-after area in Houston. However, Exxon’s 3-msf campus in The Woodlands has caused an influx of tenants to the area who wish to be near the energy giant. The majority of the new construction is occurring in these two submarkets. Vacancy has remained stable in the CBD since mid-year 2012, while vacancy in the suburban markets fell by 40 bps. As a result, overall vacancy dipped to 11.1% from 11.4% at mid-year 2012. In response to the demand, city-wide asking rates increased by $0.17 psf to $24.21 psf. Leasing activity and absorption in the Houston office market are expected to increase throughout 2013 as the city’s strong market fundamentals and employment outlook translate into increased demand for office space.

Mid-Year 2013 Canada, U.S. Office Market Report

Irvine Office Market

he Orange County office market exhibited signs of recovery in the second quarter of 2013, demonstrated by more than 700,000 sf of positive net absorption. Additionally, average asking lease rates increased, indicating a bottom in the downward trend of asking lease rates, and further supporting the recovery of the past 24 months. Countywide, the office market posted more than 1.3 msf of positive net absorption in the first half of 2013, giving the market total positive absorption in excess of 6 msf during the last three years. There was a resurgence of demand for class A space in the second quarter of 2013, resulting in 470,000 sf of positive absorption. Renewed interest in class A space demonstrated ongoing confidence in the office market.

Irvine Office Vacancy Rates 28% 26% 24% 22% 20% 18% 16% 14% 12% 10%

Orange County is among the leading regions in the country in multi-family 8% development. Specifically in Irvine, the Irvine Company is developing more than 4,000 6% units that are either under construction or in the pipeline. Orange County will lead 4% the region in employment gains, fueled by high-tech manufacturing and services, 2% tourism, entertainment, professional and business services and construction. The 0% Q2 2009 countyâ&#x20AC;&#x2122;s recovery will continue to outpace the rest of California, with gains of 22,300 jobs in 2013. The unemployment rate in Orange County, which peaked at 9.5% in 2010, dipped to a lean 6.8% in 2012 â&#x20AC;&#x201C; the lowest in Southern California. Strong economic fundamentals and increased payroll averages will attract residents in need of housing to the region.

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Vacancy and availability also declined in the second quarter, demonstrating further market strength. Vacancy in direct and sublease space finished the quarter at 15%, a decrease from the first-quarter rate of 16.7%. Vacancy will continue trending downward in 2013, ending the year at approximately 12%. As the Orange County office market moves into the second half of 2013, there will be continued progress, including positive net absorption, rising lease rates and strong levels of leasing activity.

Las Vegas Office Market

he Las Vegas office market continued to show signs of improvement as vacancy dropped to 19.5% in the second quarter of 2013 from 23.6% in the second quarter of 2012. Conversely, medical office vacancy increased to 19.9% in the second quarter of 2013 from 18.5% one year ago. Medical office vacancy has been slowly increasing in recent years. This trend may be due, in part, to some medical practices downsizing or certain doctors closing their practices altogether and joining hospitals. Since January 2013, there have been approximately 155 leases and 80 sales completed in the valley. Of the 80 office buildings sold, 14 were medical buildings. The majority of tenant activity took place in the South and Southwest submarkets in the first half of 2013, with lease deals averaging less than 10,000 sf. Average asking class A lease rates remain at similar levels as in recent quarters. Average asking class B lease rates, however, continue to drop as landlords are still competing with each other to attract new tenants or negotiate with existing tenants on renewals.

Las Vegas Office Vacancy Rates 28% 26% 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Q2 2009

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Suburban

The local unemployment rate continued its steady decline, reaching 9.5% in May, down 70 bps from January. This trend bodes well for the office market. With approximately 5,000 people moving to Las Vegas every month, the job market remains highly competitive. The continual increase in jobs in the valley will once again push the greatly needed demand for office product that will help absorb existing vacant space across the Greater Las Vegas marketplace. Once developers see enough positive sales and leasing activity, new construction will achieve forward momentum in what has historically been one of the fastest-growing markets in the nation.

Mid-Year 2013 Canada, U.S. Office Market Report

Los Angeles Office Market

ecovery in the Los Angeles office market has been slow, but stable. The second quarter of 2013 ended with a countywide vacancy rate of 16.3% – on par with the first quarter of 2013. Leasing gained momentum as 3.3 msf was leased, boosting the year-to-date total to 6.5 msf. Rental rates remained stable, with consecutive quarters above $30 psf. Space requirements are trending smaller as tenants focus on using space more efficiently and reducing overall square footage. The Great Recession allowed for companies to downsize and re-examine conventional space usages. The majority of new leases signed in Los Angeles County are for premises less than 20,000 sf. Many white-collar businesses, such as law firms and financial consulting firms, make smaller commitments to office space when they renew leases for five or more years. Demand for space countywide yielded positive net absorption of 90,000 sf in the second quarter of 2013, up from negative absorption of 102,000 sf in the second quarter of 2012.

Los Angeles Office Vacancy Rates 28% 26% 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4%

A major reason buildings have been slow to fill is that some companies are still giving up 2% office space they agreed to lease before the recession forced layoffs. Other employers 0% Q2 2009 Q2 2010 Q2 2011 Q2 2012 Q2 2013 are packing more workers into less space, even though their firms are hiring. In spite Downtown Suburban of this trend, a handful of tenants moved into large blocks of space in 2013, including PricewaterhouseCoopers LLP into 133,363 sf at Figueroa at Wilshire; HULU into 85,113 sf at Colorado Center; and Westfield into 81,124 sf at Century Plaza Towers. Sales, investments and acquisitions have also characterized the first half of 2013, fueled by lower sale prices and distressed ownerships. The creative office market demand will continue to lead the recovery in Los Angeles County, particularly in the Santa Monica and Lower Westside areas. As the Silicon Beach corridor continues to become saturated, technology and media tenants will seek space in the environs, including Playa Vista, an emerging market.

New Jersey Office Market

arket indicators as of mid-year 2013 revealed that the New Jersey office market is being resuscitated through the combined impact of the life science and healthcare industries. Five of the top six lease transactions that contributed to office space absorption during the second quarter were by these sectors, reinvigorating New Jersey’s reputation as the “Medicine Chest” of the United States and helping to bring about the largest decrease in New Jersey’s overall office vacancy rate since the third quarter of 2011. During the second quarter of 2013, the New Jersey office market experienced positive net absorption of 676,000 sf, which contributed to a decrease in the overall vacancy rate to 20.9% at the mid-year point from 21.4% the previous quarter, but remained slightly higher than 20.6% year-over-year. Average asking rents also responded to the slowly improving market conditions, increasing to $22.58 psf gross, plus tenant electric during the quarter – the largest upturn since the first quarter of 2011.

New Jersey Office Vacancy Rates 28% 26% 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Q2 2009

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The healthcare industry has been the fastest-growing sector in New Jersey, Suburban adding 171,100 new jobs from 1990 through 2011, while all other private sector employment has had a net increase of only 6,800 jobs. The life sciences industry in New Jersey is home to more than 350 biotechnology companies and 17 of the 20 largest pharmaceutical companies, employs 121,000 people in New Jersey and contributes more than $58 billion to the state economy. According to the U.S. Census, baby boomers make up the largest increase of all age groups, providing the foundation for a continued and increasing demand for healthcare and life science services and products. In the second half of 2013, the ongoing growth of these two sectors is expected to fuel office market activity and strengthen conditions, particularly in central New Jersey where the presence of life science companies is so prominent.

Mid-Year 2013 Canada, U.S. Office Market Report

New York Office Market

ndicators for the Manhattan office market were conflicting at mid-year 2013. Overall, activity has increased as tenants finally begin to make decisions after waiting for the economy to gain footing – but large blocks of space are still being placed on the market. Demand for view space in trophy properties has been robust of late, but base floors have just started to see interest.

New York Office Vacancy Rates 28% 26% 24% 22% 20%

After rising during the first quarter, Midtown’s class A vacancy reversed direction during the second quarter, dipping to 12.3% from 12.5%. Illustrating a demand for new product, two of the largest deals for the quarter were completed in Hudson Yards. L’Oreal and SAP leased 402,000 sf and 115,000 sf, respectively, in towers that will be constructed on Manhattan’s far West Side.

18%

With a class A vacancy rate of 7% and an overall rate of 9.3%, Midtown South remains the tightest market in the city. Both Midtown and Downtown are catching demand from tenants who need large blocks of space or who simply find Midtown South unaffordable. Meanwhile, in Downtown Manhattan, class A vacancy spiked to 16.8% during the second quarter, up from 14.8%, as 750,000 sf was added to the market at 180 Maiden Lane. The rate will likely escalate again before the end of the year as space at One World Trade Center is added.

16% 14% 12% 10% 8% 4% 2% 0% Q2 2009

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Downtown

On the whole, average asking rents across Manhattan rose during the quarter. Class A rents finished at $64.45 psf, up from $63.66 psf at the same time last year. Price escalation is occurring at the high end of the market. To date, there have been 31 lease deals with starting rents north of $100 psf compared with 34 such deals in all of 2012. The second half of 2013 begins with expectations that leasing activity will moderate through the summer months, followed by high activity and positive absorption in the final quarter.

Pittsburgh Office Market

hroughout the first half of the year, the Pittsburgh office market has seen financial services, healthcare and technology pick up where the education sector has slightly tapered off. These core sectors of Pittsburgh remain the strength of the region’s employment.

Pittsburgh continues to be in the national spotlight as unemployment decreases and vacancy remains low. With more than 1 msf under construction, building activity is up as many developers have a shovel in the ground, while several others await final approvals. Noteworthy transactions from the second quarter include Chevron’s purchase of 61 acres in Moon Township - leading many to believe this site is where the company will build its regional headquarters - and Dick’s Sporting Goods leasing 73 additional acres in order to construct a 180,000-sf expansion to the firm’s existing headquarters in Findlay Township.

Pittsburgh Office Vacancy Rates 28% 26% 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4%

Investment activity remains strong as several buildings valued at more than $3.5 2% million changed hands in the last quarter. Outside investors are still highly interested 0% Q2 2009 Q2 2010 Q2 2011 Q2 2012 Q2 2013 in entering the Pittsburgh market to consider all acquisition opportunities, from Downtown Suburban office complexes to multi-family portfolios and everything in between. Carrying over from the previous year, leasing activity remained strong as many companies – ANSYS, Google, Netronome, Rex Energy, Halcon Resources, the NSABP foundation and RBC Capital, to name a few – continued to expand and added to the never-ending list of companies planting roots in the region. The continued expansion and arrival of such renowned companies should come as no surprise to many who have followed the national media’s ongoing coverage of the resurgence and unrelenting growth of the Pittsburgh CBD and surrounding areas. Much like its recent past, the Pittsburgh office market’s future looks promising. Pittsburgh appears to be on the cusp of another wave of activity in the market with U.S. Steel’s forthcoming decision on whether to renew or relocate its operations.

Mid-Year 2013 Canada, U.S. Office Market Report

Raleigh-Durham Office Market

acancy in the Raleigh-Durham office market resumed its downward trend in the second quarter of 2013 following an anticipated stumble earlier in the year that sent absorption into the red for the first time in six quarters. Vacancy in the region’s CBD ended the second quarter at 10.4%, down by 80 bps since the second quarter of 2012. In the suburban markets, where landlords are facing a glut of class B space, vacancy ended the second quarter at 19.1%, down by 120 bps year-over-year. While overall vacancy remained well above equilibrium (10% to 12%), class A options in prime locations are dwindling, and tenants are increasingly being forced to settle for their second or third location option. At mid-year, class A vacancy stood at 14.7% in the suburbs and at just 8.5% in the CBD. This lack of large blocks of class A space is keeping a lid on absorption. During the second quarter alone, transactions totaling nearly 100,000 sf were consummated in buildings that will not break ground until later this year. As tenants with large requirements are forced to turn to proposed buildings to accommodate their needs, the development pipeline is beginning to fill again. Landlords are starting to hold the line on concessions and, in select cases, beginning to raise asking rates. This trend will likely escalate heading into 2014, buoyed in part by the delivery of newly constructed space at a higher price point.

Raleigh-Durham Office Vacancy Rates 28% 26% 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Q2 2009

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Office vacancy should continue to fall through the remainder of 2013, albeit at a measured pace, as an improving job market fuels increased demand. Raleigh-Durham’s unemployment rate fell to 7.3% in the second quarter, down from 7.8% one year ago and from a peak of 9.5% in early 2010. The region remains prominent on the radar of businesses looking to relocate or expand. Earlier in the year, MetLife announced it will open a new global technology and operations center in Cary, creating approximately 1,200 jobs.

Reno Office Market

he Reno office market witnessed a significant improvement in the first half of 2013 compared with the same period in 2012. Downtown vacancy increased to 17.2% from 15.3%, but in suburban markets (where a majority of office space is located), vacancy fell to 15.7% from 17.2%. Most significant transactions in the first half of 2013 were in suburban areas. Among them were two call centers totaling more than 40,000 sf, a staffing agency moving into 6,040 sf and a large national engineering firm taking 14,000 sf. Rental rates have stabilized in the Reno market. Positive absorption in the suburban markets and a lack of new construction in both the downtown and suburban markets have finally caused rental rates to reverse a five-year downward trend and start to head in a slightly upward direction. Leading the way have been several large class A buildings in the suburban market which have raised gross rents to $23 psf as vacancy dipped below 5%.

Reno Office Vacancy Rates 28% 26% 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0%

Local economic development authorities have experienced near-record Q2 2009 Q2 2010 Q2 2011 Q2 2012 Q2 2013 inquiries and site visits from out-of-state companies looking to explore Reno’s Downtown Suburban positive business climate and proximity to California. Reno’s transportation (Data not available for 2009-2010) infrastructure, excellent airport and solid employment base have led several companies to locate subsidiaries in the region. In addition, local city and county municipalities have turned the financial corner, creating a pervading sense of optimism that has spread to the business community. Very little of this optimism existed in the first half of 2012. Finally, unemployment rates in Reno have fallen to 9.2%, down from 11.8% in the first half of 2012. A continued lack of new construction and an upwardly mobile economy will drive Reno office vacancy to below 16% by year end.

Mid-Year 2013 Canada, U.S. Office Market Report

San Diego Office Market

uring the first half of 2013, the San Diego office market recorded 142,152 sf of positive net absorption countywide. The second quarterâ&#x20AC;&#x2122;s net absorption level was slightly below the post-recession quarterly average of 195,000 sf; however, it was an improvement compared with the negative net absorption recorded during the second quarters of the previous two years. Nearly one-third of the 1,362 existing office properties tracked countywide experienced activity, with 17% reporting positive net absorption totaling 1.14 msf. The average amount of space tenants vacated during the second quarter was approximately 5,300 sf. The trend of tenants decreasing their overall footprint and/or square feet per employee is one that will continue to be felt. Tenants are increasingly evaluating ways to improve their overall operating efficiency while rightsizing. Employees, similarly, are increasingly favoring flexible work schedules, including telecommuting, which is contributing to smaller footprints and will likely impact future average absorption numbers.

San Diego Office Vacancy Rates 28% 26% 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Q2 2009

Total vacancy in the suburbs for all classes, including sublease space, was 14.4% in the second quarter of 2013, compared with 17.6% in the second quarter of 2012. Sale and lease transactions totaled 2.2 msf in the second quarter, in line with the 2.3 msf transacted in the first half of 2012.

Q2 2010

Q2 2011

Downtown

Q2 2012

Q2 2013

Suburban

Recovery has not yet been overwhelming in San Diego; however, overall, the office market has been steadily improving during the last three years. With few new deliveries in the pipeline to apply upward pressure on vacancy, the market is stabilizing. Lease rates have begun rising for class A property in some central areas. Leasing activity should increase as many short-term deals come up for renewal. Unemployment rates have continued to trend downward since the peak in 2010. As job creation continues and consumer confidence stabilizes, the office market will see further recovery.

San Francisco Office Market

ompared with the first half of 2012, leasing activity in the city decreased nearly 50% in the first half of 2013. However, even with the slowdown in leasing, the San Francisco market continued to have strong, positive absorption, and at mid-year 2013 hit the three-year mark for consecutive quarters of declining vacancy. Vacancy stood 140 bps lower at mid-year 2013 compared with a year earlier. Because of the impressive, record-breaking leasing activity seen in 2012, vacancy is expected to drop even further as prominent tenants such as Salesforce, Macys.com, Riverbed Technology and Yelp move into large blocks of space in 2013 and 2014. As a result of sustained success in the San Francisco market, rental rates have continued to push upward. Class A rent increased 12.8% from mid-year 2012 to mid-year 2013. The growth can be partially attributed to the large number of buildings that traded hands in 2012, driving rents upward as owners seek quick returns on their new investments. Perhaps because of the large increase in class A rental rates, the class B market tightened at a greater rate in 2013. Class B availability decreased by 350 bps in the first half of 2013, while class A availability actually bumped up by 60 bps during the same period.

San Francisco Office Vacancy Rates 28% 26% 24% 22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Q2 2009

Q2 2010

Q2 2011

Q2 2012

Q2 2013

Downtown

With few large blocks of space remaining in the city, speculative development has picked up steam. If 2012 was the year of building sales, 2013 is shaping up to be a year of new development. Three buildings, totaling more than 1 msf, were under construction by mid-year 2013, with another class A highrise expected to break ground in the second half of the year. Even though leasing has slowed down in the first half of 2013, San Francisco remains a hot market as investors and tenants continue to show a strong interest in the city and its amenities.

Mid-Year 2013 Canada, U.S. Office Market Report

South Florida Office Market

emand for office space in the South Florida market continues to show signs of strengthening in the wake of the Great Recession. A major contributing factor to this persistent rise is Florida’s ever-improving employment market. According to the Florida Department of Economic Opportunity’s Local Area Unemployment Statistics (LAUS), as of May 2013, unemployment in the South Florida area continued to fall as the region gained more than 46,000 jobs year-over-year, pushing the unemployment rate down by 120 bps to 7.6%. As a result, demand for both downtown and suburban office space within Miami-Dade, Broward and Palm Beach counties remained on an upward trajectory as evidenced by declining vacancy rates, persistently positive absorption and increased construction activity.

South Florida Office Vacancy Rates 28% 26% 24% 22% 20% 18% 16% 14% 12% 10% 8%

The South Florida office inventory consists of approximately 158 msf in more than 6% 2,300 buildings. Vacancy rates continued to tighten, dropping for the third straight 4% quarter to 15.4%, a 70-bps decrease from the second quarter of 2012. Downtown 2% class A buildings led the year-over-year decline with a solid 150-bps decrease from 0% Q2 2009 Q2 2010 Q2 2011 Q2 2012 Q2 2013 the first half of 2012. Absorption within the South Florida Metropolitan Statistical Downtown Suburban Area remained positive with 486,000 sf being absorbed during the first half of 2013. Suburban class A buildings accounted for more than 44% of this absorption with 179,000 sf of year-to-date absorption. Increasing demand in South Florida was also evidenced through the growth in construction activity. Currently, more than 730,000 sf of office space is under construction, an increase of nearly 30% from the first half of 2012. With future employment projected to outpace inflation - growing an estimated 2.2% per year versus inflation at 1.7% to 2% (based on the Federal Reserve Board’s June 2013 projections) - and unemployment predicted to stay on its declining path to an estimated 6.1% in 2016, the South Florida office leasing market should continue to experience an increased demand for both downtown and suburban space.

Washington, DC Office Market

ue to recent new deliveries and tenant consolidation, the Washington Metropolitan office market has seen its vacancy rate increase by 70 bps since mid-year 2012, ending the second quarter at 13.8%. Importantly, all three jurisdictions that make up the region – the District of Columbia (DC), Northern Virginia and Suburban Maryland – had increased levels of vacancy. Nevertheless, after 2012’s substantial negative net absorption of 2 msf, year-to-date absorption for the region is positive, albeit nominal at less than 800,000 sf for this 369-msf market.

Washington, DC Office Vacancy Rates 28% 26% 24% 22% 20% 18% 16% 14%

Well-located construction has successfully attracted tenants at the expense of older 12% properties, some of which will be adapted for uses other than office, demolished or 10% substantially upgraded for re-tenanting. This year, 5.9 msf is expected to be delivered 8% and another 2.7 msf will be completed in 2014. Projects under construction boast a 6% 50% prelease rate, some at record rent levels. One of the largest deals year-to-date is 4% the long-anticipated resolution of the National Science Foundation’s (NSF) expiring 2% lease in Arlington, VA. NSF announced in the second quarter that it will relocate 0% Q2 2009 Q2 2010 Q2 2011 Q2 2012 in 2017 to a new development in Alexandria, VA near the headquarters of the U.S. Downtown Suburban Patent and Trademark Office. In DC, National Public Radio (NPR) completed its move to a new headquarters just north of Capitol Hill. NPR’s former headquarters will be razed and Boston Properties will develop a new building on the site, which is already 80% preleased to Arnold & Porter.

Q2 2013

Transaction velocity, as in 2012, remains well below average volume. Continued uncertainty due to sequestration, which took effect in March 2013, and the failure of the President and Congress to agree on a federal budget, has driven many tenants to the sidelines. Various notable contractors who knew they could be impacted by sequestration began preparing months prior to the law’s implementation by systematically rightsizing. Look for the region’s tenant-favorable conditions to be sustained well into fiscal year 2014 as vacancy rates remain elevated relative to this market’s historical performance.

Mid-Year 2013 Canada, U.S. Office Market Report

Avison Young Research Canada & U.S. Publications Turning Information into Intelligence

vison Young’s multi-disciplinary group of dedicated research professionals works collectively to deliver market analysis and insights that drive value in real estate decisions. We translate data into market intelligence to help our clients strategically solve their real estate concerns and concentrate on what their business does best. Avison Young regularly produces an array of local, regional and North American market research, including quarterly and special reports, and annual forecasts. Our research is quoted extensively in local, national, business, and global media outlets. Through Avison Young’s professionals, our research team engages with a wide variety of corporate, investor and institutional clients to conduct customized research, due diligence and market assessments, as well as demographic and location analysis. Leveraging in-depth knowledge from our broad services platform with information from internal proprietary and independent third-party data-tracking systems, our clients’ real estate decisions are fully supported by best-inclass, interpreted data – true market intelligence. Washington, DC Rosslyn-Ballston Corridor facing a new reality

ollowing several years of less than 7% vacancy, Northern Virginia’s 22-msf Rosslyn-Ballston (R-B) Corridor saw vacancy begin to climb in 2011 and reach 15% by the first quarter of 2013. Many factors contributed to this dramatic change and will likely test the market for years to come. The consolidation related to the Base Closure and Realignment legislation of 2005 (BRAC) – wherein defense agencies vacate Multi-residential development leads market leased space in the private-sector Recent Lease Transactions Casto Investments Company, LLP (retail) – 126,400 sfmarket and move to governmentowned facilities – was to have he unending wave of multiLNRNorth Property Corporation - 28,100 In late 2012, 4040 Fairfax Drive (retail) felt the effectssf been completed in 2011. The residential development Call Experts, LLC (office) 26,500 sf of BRAC whenInBound the entire building was –vacated. program will now carry on at least that took place Renovations in South areTNHYIF REIVinKilo sf attract planned an(office) effort–to16,700 better through 2015 with some 2 msf of Florida during recent tenantsyears to backfill the space. LFC Development, LLC (office) – 12,900 sf additional move-outs planned in brought with it some concern Boca R & D Project (office) – 12,600 sf this submarket. 4040 North Fairfax as to whether the market could MS Eastchester, LLC (retail) – 12,300 sf Drive activity. is a prime example. A back-office function for the Department of Defense vacated the handle such robust Boca R & D Project 7, LLC (office) – 10,500 sf entire 184,000-sf building at the end of 2012 and moved to a neighboring submarket. As the South Florida Business Recent Exclusive Lease Listings Newrecently, development activity is currently outpacing absorption. The R-B Corridor’s 10-year average Journal reported 3998 FAU Boulevard, Raton – 283,900 sf sf of speculative construction annual is 273,000 sf and Boca by the end(office) of 2013, 538,000 development activity hasabsorption been 5900 N. Andrews Avenue, Lauderdale (office) (nearly two years’ supply) is slated toFt.be delivered in –a215,000 singlesfbuilding at 1812 North Moore strong and experts believe the 100 W. Cypress Creek Road, Ft. Lauderdale (office) – 215,000 sf by Monday Properties. market is ready forStreet, it. being developed 8051 Congress Avenue, Boca Raton (office) – 160,000 sf That being said, owners of new buildings can expect to attract a fair share of tenants. A significant Musical chairs for startups and techs One of those experts, Alliance Recent Lease Transactions 1875 NW Corporate Boulevard, Boca Ratonproperties and older ones beyond the View of Sunny Isles, Florida - home to many of South dichotomy exists between the performance of newer Caliper Life Sciences (office/R&D) – 198,300 sf Residential chief operating (office)trend – 123,800 Florida’s marquee condominiums. general flight-to-quality also sfat play. The 22 newest buildings in the R-B Corridor, which officer Brad Cribbins, pointed 900 Broken Sound, Boca Raton (office) – 120,700 sf ewly founded tech-focused athenahealth, Inc. (office) – 83,000 sf were delivered between 2002 and 2012, averaged 424,000 sf of absorption annually during that fueling the 1100, 2200 & 2100 Park Central Boulevard, companies have specific needs Emerson Hospital (office/medical) – 80,800 sf out one trend period and boasted an 8.6% vacancy rate at year-end 2012, compared with 14.9% for buildings market public demand: “Much of what is getting built is midrise downtown/urban buildings. in choosing a location: Beach (office) –are 112,500 sf PayPal (office) – 62,800 sf completed prior toPompano 2002. Able landlords renovating or repositioning older assets to help What’s drawing people to that particular building type is mobility. ” He adds that “the transportation, downtown access, Sawgrassthem Corporate Parkway, them stand out or1300 converting to other uses Sunrise such as multi-residential projects. Proto-Pac Engineering Inc. (industrial) – 45,900 sf 25- to 35-year-old group is redefining how long they want to be tied down to a home.” affordable living accommodations (office) – 106,600 sf Additional market challenges include Metrorail’s Silver Line extension into Tysons Corner which, A.I.M. Mutual Insurance Companies (office) – 34,500 sf and, of course, access toFurther inexpensive supporting the claim that demand in the multi-residential market Universitymore Drive, Coral Springs (office) – 105,900 sf whenremains completed,3201 willN. create affordable leasing opportunities for occupiers seeking Zwicker & Associates PC (office) – 34,400 sf real estate – be it office, healthy lab or flexible is CVR Realty’s report that South Florida is on pace to surpass the 100 proposed locations. 150 S. Pine Island Plantation (office) – 102,000 sf from federal tenants due to a Metrorail-served ThereRoad, is also a pullback, beyond BRAC, Acacia Communications – 28,200 sf as many as 15 condominium space. Years ago, Eastcondominium Cambridge developments threshold(office) in 2013 with 2307space-use W. Browardefficiencies Boulevard, Ft. Lauderdale mandate to increase and pending further tightening, from government Vecnaconstruction. Technologies, Inc. (office) 26,600projects sf became one of the world’s projectslargest already under Most of –these are midrise developments – 66,900 sf contractors as well, (office) as a result of sequestration’ s spending cuts. Similarly, space utilization rates TeraDiode, (industrial) – 24,500 sf totals to the broad scope of South launch pads for startups and techs. urban near thriving areas. Inc. Adding these condo Banyan Trail, Bocaas Raton (office) – 65,000 sf brought about by a younger are falling among604-622 private-sector tenants work culture changes Sotax Corporation (office) –boosts 21,900 sfthe local market to the workforce The area met every demand including Florida’s multi-residential development top of most 141 NW 20th Boca – 61,800 sf open-workspace floor plans. and technology areStreet, leading toRaton more(office) densely packed, MIT, one of the largest generators metros nationwide.Park Place International (office) – 17,800 sf Despite the R-B Corridor’ desirable qualities, it is expected that these market influences Recents many Properties Sold of startups in the nation. Today, withaccording Vantage Partners, LLC (office) – 16,200 sf Additionally, to Multi-Housing News, at year-end 2012, the South Florida market will lead to a prolonged underlying Stearns Bank (office) –vacancy, 14,200 sfespecially in class B buildings. The R-B Corridor is PayPal’s lease of 62,814 sf at 1 International East Cambridge rents leading Greater had vastly outsoldMaidPro its share of multi-residential development the Franchise Corporation (office) – 13,900 sf sites compared likelywith to experience intenseSale competition for viable tenants for the foreseeable future. Place has changed the way companies view the Boston, many startups will need Recent Properties Listed Spring/Summer 2013 rest of the country,Crunchtime! with more than $315 million in sales (compared with second-place Information Systems, Inc. (office) – 13,700 sf downtown market. 604-622 Banyan Trail, Boca Raton (office) – 65,000 sf alternative location options. Los Angeles at more than $108 million).(office/medical) – 12,200 sf Lexington Eye Associates 6501 & 6531 Park of Commerce Boulevard, The relocation patterns of these young, nimble and technology-driven Thecompanies South Florida sites seeing the most activity seem Flexion Therapeutics (office) – 11,800 sf to be infill locations in the primary Boca Raton (office) – 50,900 sf Y are explained by the decisions of their global corporate counterparts, such as GoogleOnceSmart submarkets. the new supply(office) hits the market, it does not take long to sell. As ISON OU Destinations – 10,900 sf 900 Broken Sound, Boca Raton (land) – 17 acres and Microsoft. In an effort to coexist, industry behemoths effect supplyanticipated, and demand class A inventory is still expected to be the product to beat. Reports show Recent Exclusive Lease Listings constraints upon smaller, younger firms. Hoping to capitalize on the human capital that brandthat new product sells very quickly, with the majority of the highly coveted projects 526 Main Street, Acton, MA (office) – 36,000 sf is so critical to their core business, these global companies occupy real estate locations all-cash stillinattracting buyers as the top bidders. Recent Sold should maintain a steady dense with startups. As corporations absorb spaces upwards of 200,000 sf, theofmarket 32 growthAvison Most the region’s expertsProperties believe the market rate as Young Commercial Real Estate Newsletter (Canada, U.S.) Baker Avenue, easier Concord,toMA (land) and – 6.3 acres tightens. The areas become less affordable for the very tenants who createdconstruction the desire toloans221 Generations and technology – transforming the workplace have become obtain capital from secondary markets theevident market not – early-stage and tech ventures. Recent SaleForeign Properties Listedespecially from Latin America, also is starting to become a factor. investment, oday’s workforce spans four generations: assigned workplaces – enter a trend only CANADA In buildings. 1995, office was renting in the mid $20s psf in East Cambridge. remains As rents as have Mature/World War II (born pre-1946); Baby in new, but also existing In space the iconic a strong component of private capital with VT more overseas interest growing 354 & 356 Mountain View Drive, Colchester, 2 Calgary Boomers (1946-1965), Generation X (1966-1980) 1960s-era TD Centre indoubled Toronto’s financial core, – and, in some cases, tripled – there has been a tremendous shift.by Startups and Simply the quarter. stated, the sustained level of activity across the multi-residential (office) – 110,400 sf 3 Edmonton and Gen Y/Millennials (1981-2000). According to TD Bank is retrofitting techs 20 storeys old offices beganoftaking space in the Seaport District in 2009. Dubbed the Innovation marketDistrict seems to indicate that the sector should 393 Fortune Boulevard, Milford, MA remain one of the hottest commercial 4 Guelph Statistics Canada and the U.S. Bureau of Labor with an array of flexible areas. Elsewhere, bywork Boston Mayor Thomas Menino, the Seaport, with its vibrant lifestyle and lower rents, markets in South Florida. (office/retail) – 107,600 sf 5 Lethbridge Statistics, Gen Y represents approximately 35% Deloitte introduced has the attracted “Deloittemany Journey”, small thriving companies. In recent years, however, $25 psf rents 6 Mississauga 60 Hartland Street, East Hartford, CT (office) – 40,800 sf The Trade Centre South building, located and 34% of the Canadian and U.S. labour forces, replacing assigned desks with shared work have become $38 psf rents. Availability has dropped with the addition of companies 7 Montreal in Fort Lauderdale, continues to attract respectively. Educated and tech-savvy, they spaces. In contrast, Yahoo! clearly values faceranging from Life Is Good to Vertex Pharmaceuticals. Tenants nearing lease expirations high-end office tenants. 8 Ottawa are transforming the workplace, physically and to-face interaction, recalling work-from-home face proposals that are as much as 30% higher than their current lease rates, so the cycle ISON YOU 9 Quebec City psychologically. employees back to the office in a bid to rebuild continues. the competitive advantage it once had. 10 Regina For decades, office designs changed little, with tight markets in Seaport and 11 Cambridge, Toronto startups and techs are seeking rent relief. traditional private offices, cubicles and meeting The rise in the urban With supply pipeline and the is expected companies will attracted to the South Station and North Station rooms. In the 1990s, personal computers, mobile technological advancesItbeing offered that are making 12 be Toronto North Avison Young Commercial Real Estate Newsletter (Canada, U.S.) 31 rents can still be found starting in the high $20s psf. Many should phones and the Internet brought dreams of a some lease renewals submarkets, problematicwhere as tenants 13 Vancouver considerTraditional the financial district. 14 Although previously too expensive, the high vacancy paperless office and hotelling. Still, over the past eschew in-place renovations. office Winnipeg 20 years, office space looked much the same. configurations simply stemming won’t work. fromGenerally, the Great Recession is providing opportunities for affordable class B U.S. tenants are taking lessspace. spaceCompanies on a per-person such as PayPal (an eBay subsidiary) have taken advantage of the glut Enter Gen Y: today, CEOs are in cubicles and there 15 Atlanta basis as they relocate. of A 2012 study vacancy found that is a new business glossary: “distributed workforce” lower-floor within the financial district’s class A highrises. As it turns out, early16 Boston corporations are lookingstage to reduce office space by – hiring regardless of geography; “BYOD” – and technology-driven companies are provided with more geographic options 17 Charleston 17% by 2020 – leaving than older,ever; obsolete buildings bring your own device to work; and “ROWE” – gone are the days when EastChicago Cambridge was the only choice. The real question 18 ready for renovation and adaptive re-use. results-only work environment. Smart phones is: what submarket will hold the19crownDallas as Boston’s innovation hub in five years’ time? have become virtual desks, offering “unified As office space per employee continues to decline, Boston’s Hubway bicycle rental network 20 Detroit communications” across platforms and media. what happens to all of the underutilized space, is a valuable amenity to employees and 21 Houston According to CTIA – The Wireless Association, and, indeed, to the traditional single-purpose residents alike. N YOU 22 Irvine American data usage from July 2011 to June office building? The future of office Ibuildings SO 2012 increased 104% from the previous year. may end up being the “Hackable Building” – a 23 Las Vegas Work is now mobile and, when it comes to office term coined in global architecture firm Gensler’s 24 Los Angeles premises, less is more. recent work on the evolution of the North 25 New Jersey American building. A Hackable Building is an Gen Y’s work characteristics (more flexibility, flat 26 Real NewEstate York Newsletter (Canada, U.S.) Avison Young Commercial existing structure16 that has been updated beyond hierarchy, mobile devices and social networking) 27 Pittsburgh recognition to incorporate a diverse mix of uses and businesses’ focus on cost reductions have 28 Raleigh-Durham such as residential, office, retail, educational and changed the office landscape toward open plans 29 Reno public spaces. and a collaborative work environment. Eroding 30 San Francisco work-life boundaries means work is no longer Advancing technology and generational 31 South Florida where you go, it’s what you do. Since Gen Y will shifts continue to shape the evolution of the 32 Washington, DC become the dominant group in the workforce, workplace. When these changes have played 33 About Avison Young businesses are adapting to attract top talent. out, what will the office of the future look like? 34 Avison Young Research Cisco’s “Connected Workplace” is a big draw Only time will tell. 35 Our Offices with new recruits, where many staff don’t have

South Florida

Boston

Recent Lease Transactions

Recent Exclusive Lease Listings

Recent Properties Sold

Avison Young Commercial Real Estate Newsletter

Partnership. Performance.

Avison Young acted on behalf of the buyer in the purchase of 10740 Parkridge Boulevard in May 2012 and has since represented the new landlord in three lease transactions totaling 170,000 sf.

(Canada, U.S.)

Washington, DC

L to R: Tysons Tower, Constitution Center, 1812 North Moore

Region in transition in 2013 as sequestration plays out

B CANADA OVERVIEW & FORECAST

y November 2012, the Washington metro area’s unemployment rate was 5.3%, one of the lowest levels in the U.S. Washington’s employment gains and other strong indicators belie the overall sense of caution that has existed since mid-year. In 2012, anticipated vacancies due to Base Closure and Realignment of 2005 (BRAC), constrained federal government leasing, new construction and private-sector tenant consolidation resulted in a softer real estate market. At the same time, strong tenant-favorable conditions created opportunities for occupiers, and some tenants restructured leases well in advance of expiration dates for significant savings.

Avison Young Commerical Real Estate Newsletter Canada, U.S. (Spring/Summer 2013)

The next 12 months will be a time of transition while the market waits out the budget impasse and the federal government implements new policies regarding space utilization, security standards and energy efficiency. The sense of uncertainty will persist in early 2013 with deal velocity gradually improving in the second half of the year.

MESSAGE FROM THE CEO EDMONTON CALGARY

QUEBEC CITY

WINNIPEG

Office

REGINA

VANCOUVER

MONTREAL

The metroTORONTO market’s vacancy rose to 13.3% in 2012 from 12.2% at MISSISSAUGA year-end 2011, while transaction velocity fell and net absorption (TORONTO WEST) turned negative. Construction increased last HALIFAX year as 3.5 msf was completed, with roughly 65% preleased. Another 4 msf is OTTAWA scheduled to deliver this year. Notably, some sizable developments Decrease > 20 bps were started speculatively in 2012. Among them were Monday Canada Overall Office VacancyProperties’ Rate Comparison 540,000-sf 1812 North Moore Street in Rosslyn and 14% Macerich’s 530,000-sf Tysons Tower in Tysons Corner. transactions, if one knows where to look. At Avison Young, we have 12% been very successful in helping our clients do just that. With favorable conditions for tenants, renewals still dominated Office Vacancy Forecast 2013: Increase > 20 bps

2013: A year to position for the future

LETHBRIDGE

Flat -20 to 20 bps

Looking much like 2012, minus the Mayan end of the world

What we at Avison Young have been advising for the last three years will continue to be our mantra: stay patient, risk-manage your strategy on the buy-side, and take advantage of off-market and distressed opportunities when they present themselves. As a seller, do not be afraid to take some profits. Core assets in the major markets are highly sought-after and, therefore, aggressively priced when up for competitive bid. Multi-residential and high-end retail are the favoured assets, but significant office and industrial transactions are occurring. Plenty of opportunities can still be found in off-market

Vacancy Rate (%)

V a n c o u v e r

W i n n i p e g

C a n a d a

Ca na da

T o r o n t o

C i t y

Wi nn ipe g

Cit y

Re gin a

R e g i n a

To ron to

Q u e b e c

Va nc ou ve r

O t t a w a

Ot taw a

M o n t r e a l

Mo ntr ea l

T M o i r s o s n i t s o s a W u e g s a t

Qu eb ec

Ha lifa x

Le thb rid ge

L e t h b r i d g e

(To Mi ron ssi to ssa We ug st) a

Ca lga ry

H a l i f a x

E d m o n t o n

Winnipeg

Canada

Retail Washington continued to attract and retain retailers drawn to the market’s strong demographics in 2012. In the downtown DC market, retail performed well, with national retailers paying upwards of $80 psf in submarkets like Capitol Hill and even higher in destination areas such as Chinatown. Expanding food concepts are being supported by a myriad of multi-residential developments in these neighborhoods. In the suburbs, submarkets such as Clarendon and Reston Town Center are mature mixed-use environments. Plans for a new Tysons, to coincide with the extension of the Silver Metrorail line, will bring an enhanced live-work-play environment to this car-and-mallbased submarket.

Industrial The Washington region’s 187-msf market recorded positive absorption and a decrease in vacancy (to 10.1%) in 2012. Recent significant leases include Nash Finch taking 365,000 sf in Suburban Maryland and Cuisine Solutions committing to 163,000 sf in Northern Virginia. The region’s data center inventory, concentrated in Northern Virginia, is one of the largest in the country and boasts a sub 9% vacancy rate. Virginia’s governor recently signed a bill that expanded sales tax exemptions for data centers, and both the private and public sectors are expected to expand.

Investment By November 2012, year-to-date sales volume for office, industrial and retail properties was $6.4 billion metro-wide. While exceeding 2009 and 2010 totals, volume lagged by 24% of what was achieved during the same period in 2011. That gap was expected to tighten before year-end 2012 as major sales were completed (including Constitution Center, which closed for an estimated $734 million in the fourth quarter), and as sellers rushed to close before any scheduled capital gains take effect. In 2013, the best opportunities will be in high-quality, well-leased suburban office buildings with locations proximate to Metrorail.

)

Thus, as Canada appears to have reached a short-term top in pricing, 8% the U.S. is just beginning to get its sea legs. Assuming Washington can reach agreement and avoid inducing a recession, all signs point 6% to an economy and a real estate environment that has plenty of 4% capacity to recover and grow.

2011 2012 2013F

Avison Young 2013 Forecast

Vancouver

Ca na da

To ron to

Toronto

Va nc ou ve r

Regina

Re gin a

Ottawa

Ot taw a

Mo ntr ea l

Ha lifa x

Le thb rid ge

As we begin0% 2013, we see that leasing generally remains tilted in Calgary Edmonton Halifax Lethbridge Mississauga Montreal West)such as favour of the occupier, except in select oil and gas(Toronto cities Houston and Calgary. Vancouver and Toronto are fairly balanced as well. Most other markets have either been flat-to-down or in unstable recovery mode. We have not seen extraordinary growth in rental rates or a huge reduction in vacancy in any major market in North America. Instead, we continue to see markets that are poised for positive absorption and rental growth when global factors and benchmarks turn positive and decision-makers finally take action. However, there is still too much pessimism and uncertainty in the system for a full-blown recovery. It wants to happen, but confidence needs to lead the way.

Wi nn ipe g

2% Leasing advantage to occupiers

(To Mi ron ssi to ssa We ug st) a

Most economists predict that Canada and the U.S. will grow their respective economies, as measured by gross domestic product, at the rates of 2% and 2.8%, respectively. These rates are still anemic and have some observers worried. However, considering all of the economic and political uncertainty in the world, these rates should be considered positive and definitely on the right track.

C a l g a r y

(

Avison Young Canada, U.S. Commercial Real Estate Investment Review (Fall 2012)

We believe that the real estate community will – and should – position and reposition to take advantage of what will likely be a healthier and clearer picture by 2014. This is not to say that we should write off 2013, or sit on the sidelines. Quite the opposite: there is much to be transacted in 2013 while strengthening positions for the future, as economic and political issues in the U.S. and Europe see some form of resolution.

In 2013, some historically tight suburban Metrorail-served locations, such as Rosslyn-Ballston Corridor and Crystal City, will have further vacancy increases, while DC’s vacancy remains in the single digits. In the latter part of this year, deal velocity around the region will likely begin to accelerate, though many submarkets will remain U.S.: Are we at the bottom? Canada Overall Industrial Vacancy Rate Comparison oversupplied throughout the year. On the other14% hand, in the U.S., the early signs of a housing recovery are triggering the question: “Are we at the bottom?”. The lack of 40 Avison Young 2013 Forecast 12% development is providing confidence for investors making valueadd acquisitions, and core class A product is expensive everywhere. 10% Ed mo nto n

Commercial Real Estate - Canada & U.S.

We are forecasting a similar scenario for 2013, although without the doomsday predictions. Against a global backdrop of financial uncertainty stemming from continuing issues with stability in Europe, a potential slowdown in China, the debt ceiling and new fiscal cliffs in the U.S. and potential plateauing in Canada, North American real estate markets still appear to be the most stable – with a healthy balance of risk and opportunity.

Vacancy Rate (%)

2012 Annual Review

leasing transaction activity, including the National Institutes of Health’s 356,000-sf lease in North Bethesda and the U.S. Small Business Administration’s 254,000-sf lease in Southwest DC. Bucking the renewal trend were TNS Inc., which signed for 120,000 2011 sf in Reston, and Corporate Executive Board’s expansion of 109,000 2012 sf in Rosslyn. 2013F

Canada: Are10% we at the top? In Canada, the shortage of product (evidenced by REITs buying 8% portfolios and private funds buying REITs) and very low current vacancy rates 6% suggest more demand-side price upside, even though the large development pipeline may temper rent growth. 4% The strong Canadian dollar is a problem for the domestic economy, though positive for Canadian institutions going global – a trend 2% that we expect to increase in 2013. These factors, combined with 0% pervasive condo overbuilding, are resulting in “Are we at the top?” questions north of the border.

Ca lga ry

s we go to print with our 2013 Forecast, we at Avison Young are happy to report another year of dramatic growth and solid performance in 2012 for our company. We are proud to have helped clients successfully traverse a North American real estate landscape that was bumpy in some markets and asset classes. We are also pleased that we enabled clients to capitalize on robust growth in the oil and gas regions, relative stability in the major coastal “gateway” markets, and a nascent revival in industrial markets, thanks to a manufacturing sector that began to offer glimmers of hope in 2011.

AVISON YOUNG 2013 FORECAST

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Avison Young 2013 Forecast

partnership. performance.

Avison Young 2013 Canada, U.S. Forecast (2012 Annual Review)

Mid-Year 2013 Canada, U.S. Office Market Report

About Avison Young

EDMONTON

Avison Young at a Glance

CALGARY

VANCOUVER

MONTREAL REGINA

WINNIPEG

IRVINE

QUEBEC CITY HALIFAX

LETHBRIDGE

Founded: 1978 Employees: 1,300+ Offices: 49 RENO SACRAMENTO Markets: 39 SAN FRANCISCO Real Estate Professionals: 500+ SAN MATEO LAS VEGAS Property Under Management: 60 million sf+ LOS ANGELES (4) Projects Under Management: 1.1 million sf+

TORONTO TORONTO (2) NORTH MISSISSAUGA GUELPH DETROIT

CHICAGO (2)

DENVER

TYSONS CORNER, VA

OTTAWA BOSTON PITTSBURGH NEW YORK CITY NEW JERSEY BETHESDA WASHINGTON, DC RALEIGH-DURHAM (2) CHARLOTTE

DALLAS

ATLANTA

SAN DIEGO

SOUTH CAROLINA (2)

HOUSTON SOUTH FLORIDA (4)

Avison Young is the world’s fastest-growing commercial real estate services firm. Headquartered in Toronto, Canada, Avison Young is a collaborative, global firm owned and operated by its principals. Founded in 1978, the company comprises 1,300 real estate professionals in 49 offices, providing value-added, client-centric investment sales, leasing, advisory, management, financing and mortgage placement services to owners and occupiers of office, retail, industrial and multifamily properties.

Transaction Services - Tenant representation, lease acquisition and disposition - Investment acquisition and disposition for owners and occupiers - L andlord representation— all property types—office, industrial, retail, build-to-suit, land and multi-family

Mid-Year 2013 Canada, U.S. Office Market Report

Management Services

Enterprise Solutions

- Project management - Property and operations review - Property/facility management - Tenant coordination and relations - Financial reporting - Lease administration - Operations consulting - First stage lease review

- Integrated services coordination - Transaction management - Optimization strategies - Portfolio lease administration - Project coordination and reporting

Our Contacts Canada & U.S. Canadian Research

Bill Argeropoulos Vice-President & Director of Research (Canada) 416.673.4029 bill.argeropoulos@avisonyoung.com

Canadian Offices

U.S. Research

Margaret Donkerbrook Vice-President, U.S. Research 202.644.8677 margaret.donkerbrook@avisonyoung.com

Corporate Communications & Media

Sherry Quan National Director of Communications & Media Relations 604.647.5098 sherry.quan@avisonyoung.com

Regina 2550-12th Avenue Suite 300 Regina, SK S4P 3X1 T 306.359.9799

Dallas 5956 Sherry Lane Suite 1000 Dallas, TX 75225 T 214.451.6905

New Jersey 1120 Headquarters Plaza West Tower, 4th Floor Morristown, NJ 07960 T 973.898.6360

Toronto North 600 Cochrane Drive Suite 220 Markham, ON L3R 5K3 T 905.474.1155

Denver 1900 16th Street Suite 1300 Denver, CO 80202 T 720.508.8100

New York 623 Fifth Avenue 22nd Floor New York, NY 10022 T 212.729.7140

Edmonton Suite 2800, Bell Tower 10104-103 Avenue NW Edmonton, AB T5J 0H8 T 780.428.7850

Vancouver 2100-1055 West Georgia Street Box 11109, Royal Centre Vancouver, BC V6E 3P3 T 604.687.7331

Detroit T 313.510.2825

Pittsburgh 20 Stanwix Street Suite 401 Pittsburgh, PA 15222 T 412.944.2130

Guelph 299 Brock Road South Building A Guelph, ON N1H 6H9 T 226.366.9090

Winnipeg 330 Portage Avenue Suite 1000 Winnipeg, MB R3C 0C4 T 204.947.2242

Halifax 1533 Barrington Street Suite 300 Halifax, NS B3J 1Z4 T 902.442.4050

U.S. Offices

Toronto (HQ) 18 York Street Suite 400, Mailbox #4 Toronto, ON M5J 2T8 T 416.955.0000 Calgary 401 - 9th Avenue SW Suite 309 Calgary AB T2P 3C5 T 403.262.3082

Lethbridge 515 7th Street South Suite 300 Lethbridge, AB T1J 2G8 T 403.330.3338 Mississauga 77 City Centre Drive Suite 301 Mississauga, ON L5B 1M5 T 905.712.2100 Montreal 2000 McGill College Avenue Suite 1950 Montreal, QC H3A 3H3 T 514.940.5330

Houston 2800 Post Oak Boulevard Suite 1950 Houston, TX 77056 T 713.993.7700 Irvine 2030 Main Street Suite 1300 Irvine, CA 92614 T 949.757.1190

Atlanta 30 Ivan Allen Jr. Boulevard, NW Suite 900 Atlanta, GA 30308-3035 T 404.865.3663

Las Vegas 3993 Howard Hughes Parkway Suite 350 Las Vegas, NV 89169 T 702.472.7979

Bethesda 6430 Rockledge Drive Suite 400 Bethesda, MD 20817 T 301.657.8386

Los Angeles (Downtown) 555 S. Flower Street Suite 3200 Los Angeles, CA 90071 T 213.935.7430

Boston 200 State Street 7th Floor Boston, MA 02129 T 617.250.7600 Charlotte 2200 Floral Avenue Charlotte, NC 28203 T 980.225.5994

Ottawa 155 Queen Street Suite 1301 Ottawa, ON K1P 6L1 T 613.567.2680

Chicago (Downtown) 120 North LaSalle Street Suite 3300 Chicago, IL 60602 T 312.957.7600

Quebec City 1300 Sainte-Anne Boulevard Quebec, QC G1E 3M5 T 418.694.3330

Chicago (Suburban) 9700 West Higgins Road Suite 500 Rosemont, IL 60018 T 847.881.2045

Los Angeles (Santa Monica) 301 Arizona Avenue Suite 303 Santa Monica, CA 90401 T 310.899.1800 Los Angeles (North) 6711 Forest Lawn Drive Los Angeles, CA 90068 T 323.851.6666 Los Angeles (West) 10940 Wilshire Boulevard Suite 2100 Los Angeles, CA 90024 T 424.265.9200

Raleigh-Durham 1511 Sunday Drive Suite 200 Raleigh, NC 27607 T 919.785.3434 Raleigh-Durham (Chapel Hill) 100 Europa Drive Chapel Hill, NC 27517 T 919.968.4017 Reno 6151 Lakeside Drive Suite 1000 Reno, NV 89511 T 775.332.2800 Sacramento Park Tower 980 9th Street Suite 350 Sacramento, CA 95814 T 916.426.3773 San Diego 4225 Executive Square Suite 600 San Diego, CA 92037 T 858.201.7070 San Francisco 601 California Street Fifth Floor San Francisco, CA 94108 T 415.322.5050

South Carolina (Charleston) 550 Long Point Road Mt. Pleasant, SC 29464 T 843.725.7200 South Carolina (Columbia) 717 Lady Street Suite C Columbia, SC 29201 T 803.298.3010 South Florida (Boca Raton) 1875 NW Corporate Boulevard Suite 280 Boca Raton, FL 33431 T 954.903.1800 South Florida (Fort Lauderdale) 515 E Las Olas Boulevard Suite 400 Fort Lauderdale, FL 33301 T 954.903.1800 South Florida (Miami) 2525 Ponce De Leon Boulevard 3rd Floor Coral Gables, FL 33134 T 305.504.2045 South Florida (West Palm Beach) 250 South Australian Avenue Suite 1100 West Palm Beach, FL 33401 T 561.721.7000 Tysons Corner 8484 Westpark Drive Suite 150 McLean, VA 22102 T 703.288.2700 Washington, DC 1999 K Street NW Suite 650 Washington, DC 20006 T 202.644.8700

San Mateo T 650.740.1666

Mid-Year 2013 Canada, U.S. Office Market Report

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