Cross Sector Outlook

United States | Spring 2014

In this report

Executive summary

Multifamily

Hotels

Office 

10

Industrial 

13

Retail

16

Consolidated property forecast summary

19

Transformations exposed for

the real estate investor

2 | JLL | Cross Sector Outlook | United States | Spring 2014

Executive summary

In this report we seek to expose transformations that are currently

taking place across real estate property sectors, and aim to identify
the next best investment opportunity within each segment. In doing so,
we hope to answer some of the questions that inquiring minds want to
know in regard to shifts or changes that are taking place now, as well as
address some of the risks or opportunities that should be on the radar for
investors when making real estate investment decisions.

along the risk spectrum. The influx of foreign capital is partly driving
this compression, spurring a shift from primary to secondary markets,
primary CBD to transit-oriented suburban markets and core to value-add
acquisition strategies. Value-add asset sales are providing opportunities
for higher risk investors to acquire and reposition - rather than buildClass A and Class B assets, targeting traditional office tenants and
creative economy firms.

What you need to know:

The industrial sector is also seeing its share of increased secondary

market activity, with many markets transforming into first class
destinations. Investor demand for modern, bulk distribution facilities
exceeds available supply by up to 6 to 1 in primary markets. Accordingly,
the search is on for product in secondary markets with notable
warehouse stocks, legacy rents that are under market value and even
where major population centers are within a one-day drive time. Such
secondary notable markets include Minneapolis, St. Louis, Indianapolis
and Columbus.

Within the multifamily sector, it is the transformation of the emergence

of condo demand and the resulting conversion of multifamily assets to
condominiums that is expected to ease some concerns of multifamily
oversupply over the long term. While condo conversion activity is flat,
condo development activity has emerged in many select metros; the
gateways of New York, San Francisco, Boston and Washington, DC
as well as outlier demand in Miami (fueled primarily by Latin American
cash buyers) have seen the greatest activity. Multifamily investors and
developers are preparing for increased condo demand, and potential
conversion, by designing assets with hotel-like luxury amenities and
high-end upgrades that appeal to renters by choice or lifestyle renters
who generally have the means to purchase. In addition, it is estimated
that the two millennials and empty nester age cohorts will contribute
to an increased need to purchase 6.2 million homes or condominiums
over the next 10 years. As a result, a shift back toward condominium
conversion in the near future seems highly plausible.
For the hotel sector, asset conversions are also beneficial to the
developer, and are less costly than building from the ground up.
However, for the investor within this property segment, the resort
sector is the one to watch. Resorts are again posting higher levels of
profitability, with much of this growth tied to an increasing mix of leisure
and group business travelers. The proportion of resort transaction
volume has more than doubled over the past year. Tourism is faring well
as an export, a trend that is particularly prevalent in resort destinations
such as Orlando, Las Vegas and Hawaii where 10 percent or more of
hotel room nights are occupied by international guests.
Yield compression is impacting the office sector and is pushing investors
to alter investment strategies, representing a steady shift farther

3 | JLL | Cross Sector Outlook | United States | Spring 2014

While one-day drive time is also an appealing factor to the e-tailer

wanting to provide next-day delivery, these players within the retail
sector are also snapping up physical space to additionally allow
consumers to touch and test product, and offer a personal experience
that cannot be delivered via online channels. Having also a physical
store presence is a way to boost online sales. Sunbelt markets with
growing populations such as Orlando, Raleigh and Charlotte are
benefitting from this transformation.

Multifamily: Condo conversions anticipating

the cycle
How far are we from conversion, what is different this time around
and what will the impact be on the multifamily sector?
A core trait that divides multifamily investment from other property
types, and eases multifamily owners long-term concerns of oversupply,
is the viable option of condominium conversion. While to some it may
seem too early in the cycle, or even unimaginable given the recent
housing implosion, to discuss condo-oriented exit strategies, our findings
conclude that conversions are on the horizon and it is indeed time to
open the dialogue.
Effective rent growth:
2013: 3.5% | 2014E: 2.7%
Occupancy change:
2013: 95.9% (50 bps) | 2014E: 95.9% (bps)
Inventory:
2013: 1.3% | 2014E: 1.5%
Investment sales volume:
2013: $101B ( 23.0%) | 2014E: $97B (4.0%)
Even as the battle scars of the housing market collapse have yet to fade,
it is becoming increasingly evident that the for-sale housing market has
moved past recovery and, in many locales, the limited supply of houses
on the market has even created a competitive environment for home
buyers. Condominiums, in particular, have seen values rise 18.0 percent
since 2011 and are back to 2004 levels. Across U.S. metros, condo
values are still 16.7 percent below peak 2007 prices; however, markets
that did not experience a drastic shift following the housing crisis (such
as Boston, New Orleans, Houston and Dallas-Fort Worth) are seeing
condo sale prices reach record setting levels. Meanwhile, average sale
prices in the hardest hit housing markets, primarily in the Sunbelt, are still
more than 40.0 percent below peak but recent gains are hefty, averaging
24.0 percent in 2013. While condo development activity is emerging
in many metros, select gateway markets (such as New York, San
Francisco, Boston and Washington, DC) are seeing relatively high levels
of condo development. Miami is the nations outlier in that heavy demand
from foreign (primary Latin American) cash buyers has fueled a condo
development boom in the metro.

4 | JLL | Cross Sector Outlook | United States | Spring 2014

Even with a recent rise in condo developments, historically strong

multifamily fundaments are keeping conversions at bay; however,
segments of the multifamily community are gearing up to fill an expected
rise in condo demand. In a recent survey of JLL multifamily investment
professionals from across the country, more than 67.0 percent of
respondents indicated that multifamily investors are discussing condo
exit strategies. Additionally, 64.0 percent noted that developers are
strategically building communities today in preparation for a future
condo exit or sale to a converter. Preparations include hotel-like luxury
amenities and high-end finishes that would typically be found in an upper
tier condo unit. Fortunately for developers these high-end upgrades
appeal to a large percentage of todays renter segments; categorized
as renters by choice or lifestyle renters, as opposed to renters by
necessity. The terms Renters by choice and lifestyle renters typically
refer to households with significant income levels that are well above the
median. Generally speaking, these renter types would make for ideal
apartment/condo purchasers as they likely have the financial means
and favorable lending options available to them should a shift in market
dynamics occur.
The easy lending environment of the recent past, which heavily
supported the last condo boom, continues to hamper home buying and
U.S. population mobility rates today. While lending restrictions have
loosened in recent months, requirements remain tight and are restrictive
for home buyers with lower credit scores and/or high levels of debt; this
is particularly restrictive for the first-time homebuyer population that is
widely reported to be saddled with heavy student loan debt. Additionally,
market conditions are impacting a segment of the retiring baby boomer
population that is stuck in underwater mortgages and unable to
liquidate their residences in order make a typical lifestyle change, such
as a downsize or relocation. This trend is evidenced by the latest U.S.
Census Bureau Mobility Rate data which showed that the number of
Americans on the move is at a 12-year low and is 2.5 million movers (1.6
percent) below the 2000-2010 average.
While home loan options for subprime borrowers (scores below 620)
are limited, for the non-subprime borrower with stable credit and a
solid financial history, credit options are available and interest rates
are enticingly low. According to the Wall Street Journal, the average
borrowers credit score in Q4 2013 was 762. First-time homebuyers,
who accounted for 38.0 percent of homebuyers in 2013 according to the
National Association of Realtors, can obtain favorable financing through
FHA with a 3.5 percent down payment. Additionally, all mortgage lending
options (even ARMs) are now fluid for jumbo loans (defined today as a
loan above $417,000 in the contiguous United States). While restrictions
are tight for a large percentage of the U.S. population, it is our view
that mortgage requirements will continue to loosen in order to meet the
housing needs of the growing population, most notably the first-time
(millennial) homebuyers and retiring baby boomers.

5 | JLL | Cross Sector Outlook | United States | Spring 2014

While we do not anticipate a reoccurrence of the last housing boom,

we do find that even with renter demand sustained at its current levels,
millennials and empty nesters, just by their sheer population size, will
contribute to strong for-sale housing demand over the next 10 years. We
estimate that these two age cohorts alone will contribute to an increased
need to purchase approximately 6.2 million homes or condominiums.
This leads us to the conclusion that a shift back toward condominium
conversion in the near future seems highly plausible. While 93.0 percent
of our survey respondents indicated that no conversion activity is taking
place in their markets today, 46.0 percent responded that they felt
conversions would be likely in the next 1-2 years, 25.0 percent indicated
that conversions would be plausible in the next 3-5 years and 21.0
percent indicated that conversions are viable in their markets today.

Outlook
Risks:
1. Potential over building could drive down rents as new product
competes to fill vacancy.
2. High-end multifamily developments targeting renters by choice
and lifestyle renters could continue to drive unsustainable rent
growth beyond wage growth.
3. Weaker than anticipated home buyer demand can cause an oversupply of condominiums and result in less expensive shadowrental-inventory that also diminishes area rents.
Opportunities:
1. Increased homeowner demand and resulting condo conversions
can balance supply concerns over the long term.
2. Owners of multifamily assets located in areas with a high
concentration of retirees, most notably in the Sunbelt, could
benefit from future condo conversion as the retiring baby boomer
population will organically contribute to an estimated demand of
approximately 6 million additional home purchases into 2024.
3. Four metros within our survey noted that condo conversions are
viable in their metros today. Those metros are Nashville, New
York City, Miami and San Francisco.

Significant multifamily sales transactions

Sale of West End Village for $51.2M in

January of 2014

Sale of Reading Commons for $63.1M

in December of 2013

Sale of Coronado Bay Club for $161.5M

in November of 2013

Transaction summary

Transaction summary

Transaction summary

JLL facilitated the Residential Groups

sale of 244 units, located in Nashville, TN.
LaSalle Investment Management was
the buyer.

JLL facilitated Henderson Global Investors

sale of 204 units located in Reading, MA.
JP Morgan was the buyer.

JLL facilitated LaSalle Investment

Managements sale of 549 units located in
Coronado, CA. Alliance Residential was
the buyer.

6 | JLL | Cross Sector Outlook | United States | Spring 2014

Hotels: the resort sector is one to watch

Where are we in the recovery cycle; which demand segments have

come back and how do market fundamentals translate into
prospects for resorts?
Driving the profitability of any sector in the lodging industry is the health
of demand fundaments of the guest segments that comprise the bulk of
room nights at the hotel. The onset of the recovery in the lodging industry
has varied by segment. Urban hotels which rely largely on corporate
demand rose into recovery mode first. Resorts, on the other hand, have
a higher mix of leisure travelers and group businessdemand segments
which take longer to recover.
This is now changing and resorts are again posting higher levels of
profitability. Investors are taking note: Following an initial focus on urban
markets, resorts proportion of overall transaction activity more than
doubled in 2013. With the lodging recovery more widespread and even,
the resort segment has become an area to watch.
RevPAR change:
2013: 5.6% | 2014E: 5.5%
Occupancy change:
2013: 62.3% (100 bps) | 2014E: 63.2% (90 bps)
Construction: new room additions
2013: 0.7% | 2014E: 1.0%
Investment sales volume:
2013: $22B (35.0%) | 2014E: $25B (15.0%)
A number of factors will keep investors engaged in resorts in 2014:
More consumer spending: With the consumer confidence index
making gains, and the metrics correlation with hotel occupancy, the
resort sector stands to gain from pent-up demand both from individual
travelers and groups. Having more of a base of occupancy, resorts are
increasingly boosting average daily rates. Typically, over 85 percent of
the incremental increase in average rates flows to the bottom line, and
thus has a significant impact on the assets profitability.

7 | JLL | Cross Sector Outlook | United States | Spring 2014

Tourism as an export: Tourism is faring well as an export, and

international inbound travelers to the U.S. are growing by 6.0 percent
annually. This growth rate is well above the nations long-term demand
growth, and international demand from emerging economies represents
incremental new room nights. This is particularly prevalent in resort
destinations such as Orlando, Las Vegas and Hawaii where 10.0 percent
or more of hotel room nights are occupied by international guests.
Little new competition: Resorts under construction make up just 1.0
percent of the supply of resort hotels in the U.S. When counting all hotels
under construction, they make up a greater 1.6 percent of the existing
supply. The resort sector will thus be disproportionately spared from
new competition.

Outlook

In addition to the resort sector, which is yielding a significant amount

of interest, there are several risks and opportunities impacting the
lodging market as a whole:
Risks:
1. The prevalence of third-party opaque booking channels
continues to impact hotels ability to sell rooms through their
brand channels.
2. The growing popularity of person-to-person community hosting
portals has potential of adding pressure on certain market
segments in major markets.
3. With rebounding hotel performance, expenses and brandmandated service initiatives are creeping up.
Opportunities:
1. Debt capital for hotels is at the highest level since the downturn.
2. Asset conversions are increasing as the transactions market has
picked up; investors all-in basis in a conversion from non-hotel
use can be 50.0 percent lower than building a hotel from the
group up.
3. Select service is the new full service: Select service hotel
portfolios are aggressively being pursued by institutional capital
given the scale they offer.

8 | JLL | Cross Sector Outlook | United States | Spring 2014

Significant resort transactions

St. Regis Bal Harbour

Hawks Cay Resort Duck Key

La Posada de Santa Fe Resort and Spa

Location: Miami, FL

Location: Duck Key, FL

Location: Santa Fe, NM

Sale date: January 2014

Sale date: October 2013

Sale date: November 2013

Rooms: 207

Rooms: 474

Rooms: 158

Price / Price per room: $213M

($1.03M/room)

Price / Price per room: $133.8M

($282,300/room)

Price / Price per room: Undisclosed

Buyer: Al Rayyan Tourism Investment

Company

Buyer: Carey Watermark Investors, Inc.

Seller: Starwood Hotels & Resorts

Worldwide, Inc.
Notes: The property will continue to be
managed under a long-term agreement by
Starwood and continue to fly the
St. Regis flag.

9 | JLL | Cross Sector Outlook | United States | Spring 2014

Seller: Behringer Harvard

Notes: Buyers total investment is
approximately$149.4 million, including
a$133.8 millionpurchase price and$15.6
millionof planned capital improvements.

Buyer: PCCP, LLC

Seller: Undisclosed
Notes: JLL advised the seller in the feesimple sale of the resort. The property
was sold unencumbered by brand and
management which boosted the universe
of interested buyers.

Office: market tightening and core yield

compression encourage value-add
investment strategies
With broad-based tightening, modest office deliveries and core cap
rate compression, how are investment strategies shifting to achieve
desired returns?
While diversified office tightening spurs absorption gains across leasing
markets nationally, expanding demand and controlled speculative
development are limiting availabilities for mid- and large-sized users
in leading submarkets. As a deepening buyer pool focuses on highly
occupied, core product in primary markets, yield compression is pushing
investors to alter investment strategies, representing a steady shift along
the risk spectrum toward the acquisition and repositioning of value-add,
Class A and B office assets.
Asking rent growth:
2013: 3.5% | 2014E: 4.5%
Occupancy change:
2013: 83.4% (40 bps) | 2014E: 83.9% (50 bps)
Inventory growth:
2013: 0.6% | 2014E: 0.4%
Investment sales volume:
2013: $99B (28.0%) | 2014E: $121B (22.0%)
The broadening of market tightening from geography- and industryspecific markets to a diversified market expansion in 2013 spurred
nearly 40.0 million square feet of positive net absorption at year-end,
driving vacancy to its lowest rate in five years at 16.6 percent. As a
result, decreasing availabilities are increasingly encouraging landlord
confidence across markets, driving up net effective deal terms and
creating an environment increasingly conducive to new supply.
Despite positive momentum, leasing fundamentals are lagging capital
markets pricing appreciation in core markets, a trend impacting
investment strategies.
A rapidly evolving technological environment, competitive economy and
constant hunt for talent are increasingly driving office users to create
dynamic, evolving strategies in the pursuit of innovationa trend which
impacts building selections and subsequent workplace design strategies.
Average utilization trends have decreased nearly 34.0 percent since

10 | JLL | Cross Sector Outlook | United States | Spring 2014

2009, favoring properties with efficient, flexible floor plates and presentday development standards. However, while rent growth is bringing new
speculative space to select markets, deliveries still fall well below historic
norms, leaving large and mid-sized tenants void of quality options. The
year of 2013 saw 22.8 million square feet of completions, nearly onethird of 2008 peak delivery levels.
Amidst strong Class A absorption, rent growth and moderate deliveries,
the influx of foreign capital is driving yield compression, pushing
domestic investors to adjust acquisition strategies. This notably has
spurred a market shift from primary to secondary markets, primary
CBD to transit-oriented suburban submarkets and core to value-add
acquisition strategies. As low risk international and domestic institutional
groups focus on highly occupied, core product, value-add asset sales
are providing opportunities for higher-risk investors to acquire and
repositionrather than buildClass A and B assets, targeting traditional
office tenants and creative economy firms.
Market supply-demand dynamics, property conditions, asset pricing and
capital requirements aligned with tenant leasing trends make or break
these deals. Functionally obsolete office assets may not coincide with
tenant planning standards, and competitive pricing could push project
costs to require unachievable rental rates in peaking submarkets.
However, with leasing markets tightening, buyer pools deepening, yields
compressing and real estate investment allocations expanding, growing
national liquidity will steadily shift investor groups farther along the risk
spectrum to adopt new investment strategies.

11 | JLL | Cross Sector Outlook | United States | Spring 2014

Outlook
Risks:
1. Competitive pricing could push project costs to require
unachievable rental rates in peaking submarkets.
2. As distressed opportunities decline, the prevalence of REIT- and
locally owned assets are preventing value-add opportunities.
3. Increased completionsdelivering by early 2016 in advanced
marketswill slow pace of market tightening.
Opportunities:
1. Quality urban options for mid- and large-sized users.
2. Underperforming assets with efficient floor plates for tenants
seeking open, loft-style spaces in live-work-play ecosystems.
3. Investor risk appetite shifting across asset profiles and
geographies due to yield compression for core assets in
primary markets.

Significant value-add office sales transactions

Sale of 555 12th Street, NW for $496.5M

($635 p.s.f.) in January of 2014

Sale of Block on Congress for $87.3M

($254 p.s.f.) in December of 2013

Sale of 237 Park Avenue for $810.0M

($675 p.s.f.) in October of 2013

Transaction summary

Transaction summary

Transaction summary

Arnold & Porter will be vacating 440,000

square feet in the Fall of 2015 for
Boston Properties new development at
601 Massachusetts Avenue, NW. New
owners MetLife and Norges Bank will
have the opportunity to reposition the
781,423-square-foot Trophy asset in the
East End submarket of Washington, DC
to attract future tenancy in the late 2016,
early 2017 time frame.

Related Beal acquired Fidelity

Investments headquarters building at
82 Devonshire Street and four adjoining
Fidelity buildings in the heart of Bostons
Financial District. New ownership is
planning an overarching repositioning of
the assets, which total 343,879 square
feet, with a 38,000-square-foot retail
component, transforming an entire city
block.Fidelity Investments will likely fully
vacate the buildings by 2015, moving into
its 245 Summer Street location.

RXR Realty acquired 237 Park Avenue

a 22-story, 1.2 million-square-foot, Class
A office buildingin October 2013. RXR
plans to upgrade the asset to emphasize
its Park Avenue presence through a multimillion dollar upgrade of the pedestrian
plaza. The property sits on a 1.5 acre
city block in the coveted Grand Central
submarket of New York.

12 | JLL | Cross Sector Outlook | United States | Spring 2014

Industrial: secondary markets are first

class destinations
How are todays investors charting their go-forward plans as the
national industrial vacancy rate tightens and rents increase?
Firms are shifting their investment strategies as the stock of Class A
product within primary logistics corridors dwindles and risk appetite
grows. Slowing cap rate compression has turned investors focus to
core and value-add opportunities in spill over markets, build-to-core
construction (where there is excess tenant demand) and rent growth to
increase NOI and drive value. Overall, industrial real estate fundamentals
are strong and the sector is becoming increasingly well-capitalized as
tenant requirements rise.
Asking warehouse rent growth:
2013: 3.6% | 2014E: 3.0%
Vacancy:
2013: 7.9% (80 bps) | 2014E: 7.5% (40 bps)
Construction:
2013: 112 m.s.f. | 2014E: 145 m.s.f.
Cap rates:
2013: 7.2% (75 bps) | 2014E: 7.0% (30 bps)
In 2013 demand firmed and was spread across nearly all size segments,
new completions were few, available Class A space became increasingly
rare, activity spilled over into secondary markets and warehouse rent
gains were pronounced. Coming off the heels of 15 quarters of positive
net absorption, the national vacancy rate neared a previous cyclical
low momentum that can be linked to progressive upticks in tenant
requirements and minimal new speculative deliveries.
Construction totaled 111.5 million square feet, up 88.0 percent from
2012. Nearly half of this was speculative product that, by 2013s close,
was largely concentrated in major hub and port markets. Yet, totals
are braced to increase in secondary markets such as Central Valley
(California), Phoenix, Indianapolis and Columbus. All four are a sampling
of markets where entitled land is available; rents are more competitive
than primary, in-fill corridors; and major population centers are within
a one-day drive time. This is appealing to both users and investors.
Investment sales volumes in Chicagos secondary/extension markets

13 | JLL | Cross Sector Outlook | United States | Spring 2014

(namely Minneapolis, Kansas City, St. Louis, Indianapolis, Cincinnati and

Columbus), for instance, increased by 32.3 percent from 2012 to 2013.

Outlook

Investor demand for modern, bulk distribution facilities exceeds available

supply, by up to 6 to 1 in primary markets. Also rare are fully stabilized
Class A assets leased to trophy tenants with an average term length
in excess of five years. Investors, as a workaround, are reassessing
their wants by searching for product in secondary markets with notable
warehouse stocks, or are targeting properties with legacy rents under
market value. They are also taking an active interest in speculative
development, and understand the risk-adjusted return is worth more
than competing aggressively for fully stabilized assets. This build-tocore strategy will represent a high portion of speculative construction in
markets where demand outstrips supply: Buyers are confident projects
will find tenants prior to delivery.

Risks:

Cap rates compressed an average of 75 basis points since the beginning

of 2012, and this trend has largely run its course in primary markets.
Investors, searching for higher yields, will look elsewhere to markets
not fully priced yet, where marginal rate compression will occur. The
outlook calls for generally flat cap rates, meaning investors will turn to
rent growth and increasing NOI to drive value and shareholder returns.
Rent growth, after gaining momentum in the past 12 months, will likely
be 1.5x to 2.0x the rate of inflation for the first time since 2006, as pricing
continues to recover.

1. Class B facilities will appeal to investors, especially as the credit

markets continue to thaw. Borrowing costs are low relative to
historical levels.

14 | JLL | Cross Sector Outlook | United States | Spring 2014

1. Build-to-suits are not going away anytime soon; tenant move-outs

will temporarily increase Class B vacancies.
2. Speculative development may get ahead of user requirements in
a handful of markets.
3. External factors such as quickly rising interest rates pose a threat
to industrial real estate investment, at this point in the cycle.
Opportunities:

2. Tenant requirements will spill over into secondary markets such

as St. Louis and Phoenix; investors will follow suit.
3. Markets with intermodal capabilities, such as Charlotte and also
Memphis, are garnering attention.

Significant industrial sales transactions

Sale of Cabot Ind Value Fund III for

$1.5B ($64 p.s.f.) in October of 2013

Sale of a bulk portfolio for $550.0M

($57 p.s.f.) in February of 2014

Sale of a bulk portfolio for $319.0M

($46 p.s.f.) in December of 2013

Transaction summary

Transaction summary

Transaction summary

Liberty Property Trust acquired 23 million

square feet, spread across 177 properties
in 24 markets, from Cabot Properties.
Fifty-eight percent of the portfolio is
located in existing Liberty markets such
as Chicago and South Florida. The
properties were 92.8 percent leased at
the time of sale, and were primarily Class
B warehouses, ranging from 75,000 to
200,000 square feet.

IndCor Properties purchased 9.6 million

square feet, comprised of 82 properties,
from General Electric Capital. The sale
encompassed six markets, including
Austin, Dallas, San Antonio, Portland, Los
Angeles and Denver, with an average
building size of 168,000 square feet. Most
of the properties are Class B assets and
were fully leased at the time of sale. The
portfolio traded at a 7.0 percent cap.

In another move, IndCor acquired 7.0

million square feet, spread across 28
properties, from Pacific Life Insurance
Company. Twenty-four of the facilities
were based in Reno and Las Vegas;
markets that, although improving, lag the
nation in their recovery. The portfolio had a
collective occupancy of 82.0 percent, was
generally comprised of B-grade inventory,
had an average building size of 249,000
square feet and traded at a 6.2
percent cap.

15 | JLL | Cross Sector Outlook | United States | Spring 2014

Retail: why e-commerce does not signal the

death of retail
What is the biggest impact?
The fact that a seamless, omnichannel experience plays such a critical
role in retail will mean big changes for retail real estate. Redevelopment
will necessarily focus on outfitting centers with the technological
infrastructure they need to engage consumers on multiple levels.
We expect to see an increase in the creative use of common space,
shrinking stores and a more modular, flexible layout with nontraditional
anchors such as fitness centers and upscale groceries.
Asking rent growth:
2013: 1.1% | 2014E: 2.7%
Vacancy change:
2013: 6.6% (40 bps) | 2014E: 6.3% (30 bps)
Inventory:
2013: 0.3% | 2014E: 0.5%
Investment sales volume:
2013: $61B (8.0%) | 2014E: $67B (10.0%)
For the past several years, e-commerce has been a hot topic. Its
growth rate has been tremendous and the headlines have been filled
with mass store closures of big retailers that have been decimated by
advancements in technology. First, digital music killed CD stores like
f.y.e, then Netflix and instant streaming videos killed Blockbuster; finally,
e-books killed Borders and is causing Barnes & Noble to close hundreds
of stores within the next decade. Furthermore, the rise of Amazon, and
similar sites, has caused many in the retail world to feel threatened, as
consumers whip out their phones to compare prices, sometimes buying
online. Many self-appointed pundits claim retail, as we know, it is dead.
But, what is the truth?
First, the fact is e-commerce and m-commerce are climbing faster
than total retail sales growth. This should come as no surprise given
especially in the case of mobile commerce we are dealing with
relatively nascent technology where growth rates are initially going to
be high.

16 | JLL | Cross Sector Outlook | United States | Spring 2014

Second, despite e-commerces leaps and bounds in the last few years,
it still represents a relatively small percentage of total retail sales 6.0
percent to be exact. What is happening is that e-commerce, as one of
the vehicles of non-store sales, is taking over a position long held by
catalog sales. The medium has simply moved from phone-on or mailorder catalog sales to web sales.
Moreover, many bricks-and-mortar retailers themselves are promoting
online sales of their own merchandise via their own websites. Online
sales growth with these retailers is much higher than store sales growth
and, in fact, is contributing to the tremendous growth we are seeing in
total e-commerce.
Finally, even as bricks-and-mortar retailers are beefing up sales with their
web and mobile sites, e-tailers are snapping up physical space. There
are several benefits to physical space, including:
Consumers get to touch and test product
Retailers can build brand awareness

enough to justify construction, and where there are few barriers to new
development (such as in Orlando).
We are seeing continued high demand for core product with little supply
in the market and when core does come to market, there is a feeding
frenzy. Sales of significant retail properties totaled more than $60.8 billion
in 2013, up 8.0 percent from 2012. Sales of strip centers and singletenant properties did particularly well, jumping 26.0 percent, year-overyear. Portfolio transactions totaled $15 billion for the year just under
one-quarter of total volume for the year. Average cap rates compressed
by approximately 20 basis points in 2013. Price appreciation in 2013
was outstanding; the Moodys/RCA CPPI for retail is expected to post a
23 percent increase for the year well above any other property type.
The two most desired asset types by investors are high-quality grocery
anchored centers and trophy malls. There is also high demand for credit
single-tenant transactions. Top opportunities for investment markets are
Washington DC, New York City, Boston, Chicago, Atlanta, Miami, Dallas,
Los Angeles, San Francisco and Seattle. The markets to watch are all
second-tier cities, like Phoenix, around the U.S. as retail comes back
into favor.

Retailers can offer a unique, personal experience that cannot be

delivered online
E-tailers can even boost online sales by opening physical stores
Warby Parker, for instance, boosted its online sales by 10.0 percent and
improved customer retention when it expanded to physical space.

Outlook

In terms of fundamentals, national rents inched up 1.1 percent in 2013.

Most metros are now definitively back in the black, signifying that
the market as a whole is in a healthier state than at any point since
the recession. Rent growth should increase to 2.7 percent this year.
Notwithstanding rents are much, much lower than prerecession levels
and will only begin to approach 2008 peak rates by the end of the
forecast, making it a lost decade for most landlords.

1. Slow workout of distressed assets, particularly by CMBS.

Net absorption totaled approximately 83.2 million square feet in 2013.

This is an improvement over 2012, where total net absorption was 58.8
million square feet. The increase in demand means that landlords are
now starting to exert some power in tenant selection and lease terms.
Vacancy is expected to compress another 30 basis points this year as
net absorption grows.
Construction growth will remain marginal in the next year. Current
construction, where it occurs, is focused on single-tenant big-box
or discount/wholesale space. Those multitenant projects under way
are largely in urban cores or peripheral outlet centers. We should
also eventually see an uptick in construction where tenants demand
new space because supply is so constrained, where rents are high

17 | JLL | Cross Sector Outlook | United States | Spring 2014

Risks:

2. If development accelerates faster than anticipated, it may hold

back rent recovery and occupancies.
3. Rising interest rates.
Opportunities:
1. Urban retail will be driven by more consumers moving to cities
and demanding a live-work-play environment.
2. Sunbelt markets like Orlando, Raleigh and Charlotte should
benefit from higher-than-average population growth.
3. Credit single-tenant retail will continue to be in demand.

Significant retail sales transactions

Sale of 10 Madison Square West for

$60M in February of 2014

Sale of Broadway Mall for $94M in

February of 2014

Sale of Rafael Town Center for $50M in

February of 2014

Transaction summary

Transaction summary

Transaction summary

Savanna purchased 10 Madison Square

West located in New York for $60 million
(or $2,902 p.s.f.). The property includes
urban, storefront retail and condos.

KKR/Pacific Retail Capital Partners bought

Broadway Mall located in New York for
$89 per square foot. It boasts 93.0 percent
occupancy and is anchored by a Macys,
Ikea and Target.

Matteson Cos. purchased Rafael Town

Center located in San Rafael, CA from
Stockbridge Guardian Life Insurance Co
for $339 per square foot. The mixed-use
center is 92.0 percent occupied and
includes office and residential space.

18 | JLL | Cross Sector Outlook | United States | Spring 2014

Consolidated property forecast summary

Relative sector rent growth during recovery

Industrial

Hotel

Q1 2010
Q2 2010
Q3 2010
Q4 2010
Q1 2011
Q2 2011
Q3 2011
Q4 2011
Q1 2012
Q2 2012
Q3 2012
Q4 2012
Q1 2013
Q2 2013
Q3 2013
Q4 2013

2016 (f)

2015 (f)
Retail

Multifamily

Office

2016 (f)

Office

forecast

135
130
125
120
115
110
105
100
95
90

2015 (f)

Multifamily

2014 (f)

Index Q1 2010 = 100 rent level

forecast

2014 (f)

105
100
95
90
85
80
75
70
65
60
55
50
45
Q1 2010
Q2 2010
Q3 2010
Q4 2010
Q1 2011
Q2 2011
Q3 2011
Q4 2011
Q1 2012
Q2 2012
Q3 2012
Q4 2012
Q1 2013
Q2 2013
Q3 2013
Q4 2013

Index Q1 2010 = 100 vacancy percentage

Relative sector vacancy declines during recovery

Industrial

Retail

Hotel

Source: JLL Research, Smith Travel Research, REIS, CoStar

Source: JLL Research, Smith Travel Research, REIS, CoStar

Based on percentage change in quarterly vacancy (inversed occupancy for hotel) rate percentage
(12-mo. moving average for hotel data)

Based on quarterly percentage change in average national rental rate (four-qtr. moving average for
hotel data)

Multifamilys vast outperformance in proportional vacancy declines

is quickly coming to an end as the vacancy rate for the sector has
essentially bottomed out for this cycle given the strong increase in
supply. Perhaps increased homeowner demand and resulting condo
conversions discussed can balance supply concerns over the long term.
The fastest relative decline in vacancies has now shifted to the industrial
sector, with absorption being driven by ecommerce and major port and
inland hubs, with relatively low levels of overall new supply and quite
low levels of new speculative supply over the near term. In the hotel
sector, the pace of occupancy rate increases is quickly slowing with the
maturing part of the cycle the property type is entering, as owners shift
focus to pushing Average Daily Rates steadily higher. As the overall hotel
sector recovery becomes more widespread and even, the resort segment
has become an area to watch.

19 | JLL | Cross Sector Outlook | United States | Spring 2014

The hotel, multifamily and office sectors have each seen solid rent
growth rates in recent quarters, and since the recovery began have
been well ahead of the industrial and retail sectors in rent uplift. As far
as proportional growth over the coming three-year period, the office and
hotel sectors will stand out in their relative rent growth trajectories, as
both reap the benefits of faster economic and employment growth as
well as business confidence, prior to the arrival of the bulk of supply
additions for this cycle. In the meantime, industrial rents will grow
steadily, while retail rent growth will be, at last, much improved over the
next couple years.

For more information, please contact:

Benjamin Breslau
Director-Americas research
+ 1 617 531 4233
ben.breslau@am.jll.com

Aaron Ahlburn
Director-Industrial research
+ 1 310 940 8026
aaron.ahlburn@am.jll.com

Lauro Ferroni
Vice President-Hotel research
+ 1 312 228 2566
lauro.ferroni@am.jll.com

Clarke Montross
Analyst Capital Markets
Industrial research
+ 1 773 458 1409
clarke.montross@am.jll.com

Marisha Clinton
Director-Capital Markets research
+ 1 212 812 6488
marisha.clinton@am.jll.com

John Sikaitis
Director-Office research
+ 1 202 719 5839
john.sikaitis@am.jll.com

Sean Coghlan
Manager - Capital Markets
Office research
+ 1 215 988 5556
sean.coghlan@am.jll.com

Keisha McDonnough
Senior Analyst Retail research
+ 1 954 990 0844
keisha.mcdonnough@am.jll.com

Josh Gelormini
Director-Economy research
+ 1 312 228 2060
josh.gelormini@am.jll.com

Brady Titcomb
Director Capital Markets
Multifamily research
+ 1 954 653 8222
brady.titcomb@am.jll.com

Dain Fedora
Manager-Industrial research
+ 1 213 239 6262
dain.fedora@am.jll.com

About JLL
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