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Competition Soars as Investors Seek to Dominate the Skyline

Investors From Around the World Are Gobbling Up America's Iconic Skyline; Vacancy Rates Are Falling and Rents Are Rising; Bottom Line: It's a Good Time to Be a Landlord

CHICAGO, IL -- (Marketwired) -- 07/16/14 -- JLL (NYSE: JLL) -- David Werner's pending $900 million+ purchase of the trophy Mobil building in New York. Sumitomo's acquisition of 203 North LaSalle in the Windy City. Panoramic Interests newly secured $50M in financing for 160-unit micro apartment complex in San Francisco.

It's "game on" in the intense competition for the U.S. skyline, as both local and international investors try to lock down the trophy skyscrapers that tower over American cities.

"Investors across the spectrum continue to narrow their focus to the skylines of markets -- bidding for the top-tier, trophy assets," said Steve Collins, international director at JLL.

Demand for these top-line office buildings is high and available space is scarce, but that's only part of the story. The surge in interest from capital-rich investors is propelling rents even more than the rising demand among tenants, according to JLL's U.S. Skyline Review.

More capital, higher demand and limited space puts landlords in the catbird seat, giving them confidence to raise rents and offer even fewer concessions. "Landlords are advising tenants, especially large users, to lock in leases now, rather than waiting for the tides to change," says Gregory Green, International Director at JLL and head of the firm's Agency Leasing. "Rents in the skyline will rise even higher over the next 24 months."

Overall, rents for skyline properties in 2013 broke the $40 per square foot mark for the first time, up $6 per square foot from the dark days of 2010, JLL found.

JLL tracked skyline investment in 43 city centers across the nation. Interest comes from so-called "high net worth investors" in local U.S. markets to global investment from international sovereign wealth funds. Canada and China lead the global investors, followed by Chile, Korea, Qatar and Norway. Foreign investment reached $5.2 billion last year, accounting for slightly more than half of all buying activity in the primary markets.

Last year's sales activity in those cities, such New York, Los Angeles and Chicago, is up 43 percent, on a square footage basis, over 2012. Investment in the Manhattan skyline hit 5.1 million square feet of transactions in 2013, including the sale of 350 Madison Avenue by JLL in March. In Los Angeles, Toronto-based Brookfield Office Properties acquired the 4.9 million square feet MPG Office Trust, whose properties include the gleaming 52-foot Gas Company Tower, the city's fourth largest building, and the distinctive reddish-brown Wells Fargo Center.

But the nation's biggest cities aren't the only beneficiaries of this surge in capital -- and competition. Investment activity in the secondary markets -- think Raleigh, Miami and Philadelphia -- was up 20 percent. And low vacancy rates in these cities are feeding price increases that exceed even those in the primary markets. Ten skyline markets examined by JLL had vacancy rates below 10 percent.

And there's more coming. Thanks to demographic shifts and urban re-migration, population growth in skyline centers is nearly triple the rate of cities overall. In the next three to five years, look to Downtown Atlanta, South Park Los Angeles and the Dallas Arts District, among others, to lead the way with new trophy office towers, residential housing and lively retail centers.

Inside the office, workplace strategies are evolving, as organizations move away from larger personal workspace to a more collaborative and open work environment. While companies continue to seek cost savings, planners are looking more toward retaining valued employees by improving workplace culture and environment.

Major Market Highlights

  • New York: As stock market indices reached new highs in 2013, demand for top-tier office space in Manhattan's Trophy market drove both asking and taking rents to levels not approached since 2008.
  • San Francisco: The San Francisco Skyline continues evolving with more than 1.6 million square feet planned in 2014 and 2015, further shifting the heart of the business district to the South Financial District (SFD) and reestablishing the relevance of the high-rise building among creative companies. View San Francisco's Skyline video.
  • Washington, D.C.: Despite restrained levels of tenant demand in 2013, Trophy fundamentals remained solid and vacancy rates fell to 9.9 percent, the lowest level since 2010. That's due to tenants migrating from second-generation core to new and efficient product on the outer core. View Washington, D.C.'s video.
  • Chicago: After remaining flat in 2012, the Chicago skyline asking rents increased by $0.47 to $36.94 per square foot in 2013 and surpassed the high-water mark set in 2008, a clear indicator that rents have recovered from the recession. View Chicago's video.
  • Houston: Entering 2014, Houston's overall office market continues to benefit from the overall robust STEM-powered economy. Growth amongst energy and energy service companies combined with compressed vacancy rates pushed skyline owners rates upward by 5.0 percent year-over-year to their current average of $44.50 per square foot full service gross. View Houston's video.

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