Insights + Trends + Opportunities 1Q14

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Information about Insights + Trends + Opportunities 1Q14
Real Estate

Published on February 26, 2014




"Insights + Trends + Opportunities" is a quarterly publication by Transwestern. Each edition features a review of the economic impact on commercial real estate, as well as valuable information for commercial property owners, investors, tenants and developers.


IN THIS ISSUE... ECONOMIC OPTIMISM Increasing Certainty, Economic Growth and Rising Interest Rates EXIT STRATEGY Negotiate an Exit When Entering a Lease Agreement HEALTHY ASSETS Affordable Care Act’s Impact on Medical Office Buildings SPOTLIGHT ON DEVELOPMENT BHP Billiton Tower – Houston, Texas

ECONOMIC OPTIMISM Increasing Certainty, Economic Growth and Rising Interest Rates ƒƒ Uncertainty was a theme for 2013, but signs are looking up as Congress was finally able to reach a budget agreement at the end of the year ƒƒ Recent polling data reflects the optimism that began to bubble in 2H13 ƒƒ Since March 2012, there has been an upward trend of those who believe the economy has begun to recover versus those who believe it has not begun to recover ƒƒ Optimistic responses reached its peak in mid-December 2013, around the time that Congress passed the two-year budget deal, at 59% believing the economy had begun to recover ƒƒ Many indicators point to stronger conditions for both consumers and businesses in 2014: ƒƒ Record corporate profits, soaring stock prices, sturdy job gains, robust housing market growth, rising consumer confidence and spending | @Transwestern 1Q2014 INSIGHTS + TRENDS + OPPORTUNITIES

NATIONAL ECONOMIC RECOVERY POLL HAS THE ECONOMY BEGUN TO RECOVER? 70% Share of Respondents 65% 59% 60% 55% Has Has Not 50% Note: Totals may not equal 100% due to ‘No opinion’ responses. 45% Source: ABC News/Washington Post Polls, Delta Associates; February 2014. 40% | @Transwestern May ‘13 Mar ‘13 Dec ‘12 Mar ‘12 Jan ‘12 Nov ‘11 Jun ‘11 Mar ‘11 Dec ‘10 Oct ‘10 Feb ‘10 Dec ‘09 30% Nov ‘09 35% 1Q2014 Dec ‘13 39% INSIGHTS + TRENDS + OPPORTUNITIES

BUSINESS OWNERS’ OUTLOOK ON THE NATIONAL ECONOMY 100% 90% Share of Respondents 80% 4% 2% 4% 7% 37% 29% 38% 53% 70% Optimistic 60% Moderately Optimistic 50% Pessimistic 40% Source: PNC, Delta Associates; February 2014. Note: Totals may not add to 100% due to rounding. 58% 68% 57% 39% October 2010 30% October 2011 October 2012 October 2013 20% 10% 0% | @Transwestern 1Q2014 INSIGHTS + TRENDS + OPPORTUNITIES

RATE OF INCREASE HOW ARE INCREASING INTEREST RATES EXPECTED TO IMPACT THE REAL ESTATE MARKET? ƒƒ Increase in long-term interest rates will gradually – but meaningfully – affect investors’ decision-making in 2014 ƒƒ With the national economy showing signs of more significant traction during 2H13 and the Fed making it clear that tapering will continue in 2014, long-term interest rates are likely to continue their ascent ƒƒ J.P. Morgan forecasts 10-year Treasury yields stabilizing at 4.5 to 5.0% in 2018, with a 200 to 300 bps spread for core real estate ƒƒ Commercial mortgage rates of perhaps 7.25% in 2018 The key question is when will rate increases accelerate to the point that access to financing becomes materially more expensive and changes the decision calculus for investors? ƒƒ It is likely that cap rates will edge up in 2014, with investors demanding higher initial returns on investment ƒƒ While fundamentals generally improved in 2013, there are still significant factors working against the real estate market, most notably office tenants’ reduction in square feet leased per worker | @Transwestern 1Q2014 INSIGHTS + TRENDS + OPPORTUNITIES

10-YEAR TREASURY YIELD 3.50% 3.25% 3.00% 2.75% 2.50% 2.25% 2.00% 1.75% 1.50% 1.25% 1.00% Jan ‘14 Dec ‘13 Nov ‘13 Oct ‘13 Sep ‘13 Aug ‘13 Jul ‘13 Jun ‘13 May ‘13 Apr ‘13 Mar ‘13 Feb ‘13 2.67% Jan ‘13 Percentage Yield on 10-Year Note JANUARY 2013 THROUGH JANUARY 2014 Note: As of each month’s end. Source: U.S. Department of the Treasury, Delta Associates; February 2014. | @Transwestern 1Q2014 INSIGHTS + TRENDS + OPPORTUNITIES

EXIT STRATEGY Negotiate an Exit When Entering a Lease Agreement ƒƒ Many companies fail to plan for possible shifts in their real estate requirements ƒƒ Negotiating an exit strategy is insurance against an unforeseeable future ƒƒ Tenants need lease protection in case changes occur in the economy, their company or the industry in which they operate ƒƒ For example, a client occupied 17,000 square feet in Dallas and needed another 5,500 square feet. The company next door was marketing 9,000 square feet for sublease, but the client could not take any of it because the sublease contract prevented leasing to an existing tenant in the building ƒƒ Specifically, the language concerning “use,” “parking” and “assignment and subletting” is extremely important to keep as many options as possible open | @Transwestern 1Q2014 INSIGHTS + TRENDS + OPPORTUNITIES

SUBLEASE-RELATED TIPS MAY SEEM LIKE REAL ESTATE 101, BUT NEGLECTING THESE COULD BE COSTLY ƒƒ The most likely sublease candidate is the tenant next door or one that’s nearby in the building ƒƒ A good sublease candidate might have toured the building recently but did not find the space it needed ƒƒ Secure as many rights as possible to pass along on the sublease, such as those connected to building signage and advertising sublease space Business shifts are often unimaginable to the tenant at the beginning of a lease term, but planning for them is as important as negotiating any other element in the agreement. ƒƒ Strive for a landlord consent time of seven to 10 days ƒƒ Subleases historically bring in lower than current market rates, but companies cannot charge less than market rent without specifying that in the original lease ƒƒ In the rare case that a company can secure above-market rent, it’s advisable for the firm to request expenses, commissions and tenant improvements be covered first as part of a profitsharing agreement with the building owner | @Transwestern 1Q2014 INSIGHTS + TRENDS + OPPORTUNITIES

HEALTHY ASSETS Affordable Care Act’s (ACA) Impact on Medical Office Buildings ƒƒ More physicians are relying on hospital systems for financial stability in today’s changing healthcare sector ƒƒ Hospitals are preserving their admission revenue by acquiring physician practice groups ƒƒ Physicians are able to spend more time practicing medicine by joining hospital systems, which are better suited financially to spend capital on new medical equipment and electronic records required by the ACA ƒƒ Hospitals can create efficiencies and lower real esate costs by consolidating physicians into larger multi-specialty groups ƒƒ Contrary to public perception, this paradigm shift evoked by the ACA will have an overall positive effect on medical office buildings and healthcare facilities over time | @Transwestern 1Q2014 INSIGHTS + TRENDS + OPPORTUNITIES

IMPACT ON OWNERS OF MEDICAL OFFICE BUILDINGS ƒƒ Owners of medical office buildings (MOBs) are benefitting from this integration by executing larger leases as hospitals combine multiple doctor practices ƒƒ Average tenant increasing in size from 2,500 to 7,500 square feet ƒƒ Grouping physicians has also fostered an environment for crosspatient referrals and synergies, promoting tenant retention and mitigating risk All types of investors that previously may not have considered medical real estate as a stable asset class are responding to [the sector’s] improved credit ƒƒ This is also generating leasing velocity from prospects beyond the MOBs traditional sphere of influence ƒƒ Historically, the lack of credit behind medical leases was a major obstacle in attracting institutional investment in the healthcare sector, but this shift has improved the credit profile of many MOBs ƒƒ Sales volume as increased and cap rates have lowered in the healthcare sector, and institutional investment in the healthcare sector has increased 12% since the ACA | @Transwestern 1Q2014 INSIGHTS + TRENDS + OPPORTUNITIES

SPOTLIGHT ON DEVELOPMENT BHP Billiton Tower – Houston, Texas ƒƒ Owners and developers are raising the bar for the latest generation of premier office space ƒƒ BHP Billiton Tower, a Class AA project under development, showcases the higher standard of workplaces of the future ƒƒ The project will total 600,000 square feet and is situated within Four Oaks Place, a fourbuilding, 1.7 million-square-foot complex owned by TIAA-CREF, a New York-based financial services firm ƒƒ BHP Billiton, a global natural resources company, has leased the entire project under construction ƒƒ The 30-story structure is designed to meet LEED® Gold certification ƒƒ Pickard Chilton Associates designed the project to both complement the existing campus as well as stand out from the remaining inventory in Houston’s Galleria/Uptown submarket | @Transwestern 1Q2014 INSIGHTS + TRENDS + OPPORTUNITIES

DISTINGUISHING FEATURES BHP BILLITON WAS ABLE TO TAKE PART IN THE DESIGN PROCESS ƒƒ A glass skybridge will connect BHP Billiton Tower with one of the existing Four Oaks Place buildings in which BHP Billiton currently leases space ƒƒ The bridge was widened to accommodate tables and chairs where employees can eat and congregate Even before its completion, this landmark represents the future development direction for topquality office space in the United States. ƒƒ Design modifications were made to support the weight and mitigate heat loads ƒƒ Includes a dedicated dining area that can be used for more formal occasions ƒƒ Floor-to-ceiling glass curtain wall system ƒƒ Expansive 30-foot lobby ƒƒ Stand-alone conference center ƒƒ State-of-the-art fitness facility ƒƒ Functional green roof | @Transwestern 1Q2014 INSIGHTS + TRENDS + OPPORTUNITIES

CONVERSATION READ THE FULL VERSION INSIGHTS + TRENDS + OPPORTUNITIES 1Q 2014 JOIN THE CONVERSATION Transwestern is a privately held real estate firm specializing in agency leasing, property and facilities management, tenant advisory, capital markets, research and sustainability. The fully integrated global enterprise leverages competencies in office, industrial, retail, multifamily and healthcare properties to add value for investors, owners and occupiers of real estate. As a member of the Transwestern family of companies, the firm capitalizes on market insights and operational expertise of independent affiliates specializing in development, real estate investment management and research. Transwestern has 34 U.S. offices and assists clients through more than 181 offices in 40 countries as part of a strategic alliance with Paris-based BNP Paribas Real Estate. For more information, please visit and follow us on Twitter: @Transwestern. © 2014 TRANSWESTERN

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