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SOUTHEAST U.S.

CBRE Research

T H I S I S A N I N T E R A C T I V E R E P O R T .

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ALSOUTHEAST

T A B L E O F C O N T E N T S

FOREWORD

CBRE RESEARCHSOUTHEAST U.S. REAL ESTATE MARKET OUTLOOK 2016

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Welcome to the inaugural edition of CBRE’s Southeast U.S. Real Estate Market Outlook, a thoughtful and succinct analysis on where commercial real estate market conditions are headed in the coming year – and beyond. CBRE has reinvested significantly in its research and platform in recent years, both in terms of people, technology and resources in order to provide our clients with a world-class level of insight into commercial property markets around the globe. The Southeast Office Outlook leverages these research investments and places powerful information at your fingertips.

Information and analysis have never been more valuable than in today’s environment, regardless of which side of the negotiating table you’re sitting on. Economic growth and new investment activity, while positive for our region, has led to rapidly changing market characteristics.

Imagine occupying 25,000 sq. ft. of office space in a tightening market like Buckhead in Atlanta or Nashville’s downtown and being faced with the today’s renewal terms - office rent growth in some areas of Atlanta exceeds 20% in just the last 3 years for some buildings. Being on the forefront of these trends, with a deep understanding of how to navigate through them, allows CBRE to provide a high level of expertise in a rapidly changing market.

We hope you will find the information contained herein insightful and encourage you to visit CBRE’s Global Research Gateway for a more in-depth analysis of each Southeast market.

John FergusonPresidentSoutheast RegionCBRE

© 2015 CBRE, Inc.

http://www.cbre.com/research-and-reports

EXECUTIVE SUMMARY


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Economy

Commercial real estate fundamentals remain strong across the Southeast and within all property types, a testament to the region’s expanding economic base and overall desirability. Both owners and occupiers of real estate will find the Southeast to be a rapidly growing, yet affordable region with unsurpassed amenities and quality of life characteristics.

No other region in America can claim such a unique array of market characteristics driving expansion—from the world’s busiest airport, to the top two fastest growing ports in North America in Savannah and Charleston, to markets that provide both a high level of affordability and growth. The Southeastern United States possesses a rock solid foundation that supports and begets continued expansion.

C L I C K T O R E A D M O R E

Port Report

Commercial real estate is benefiting from a lengthy and steady economic recovery, now entering its seventh year. Regional economic indicators suggest the Southeast is poised to further benefit from consistent population and private sector job growth, industry relocation and broad-based expansion within residential markets.

The growth has benefited large markets such as Atlanta, Nashville and Charlotte, which have succeeded in attracting Technology, Advertising, Media and Information (TAMI) sector industries to their CBD’s and developing tech submarkets, while smaller markets like Greenville-Spartanburg, Charleston and Savannah have experienced tremendous industrial expansion as port capacities grow in response to strengthening consumer demand both domestically and in international markets.


Tech-30 Report

NO OTHER REGION IN AMERICA CAN CL AIM SUCH A UNIQUE ARR AY OF MARKET CHAR ACTERISTICS DRIV ING EXPANSION.

© 2015 CBRE, Inc.

http://www.cbre.us/research/2015-US-Reports/Pages/2015-North-America-Ports-Logistics-Annual-Report.aspx

http://www.cbre.us/research/2015-US-Reports/Pages/Tech-Thirty-2015.aspx

EXECUTIVE SUMMARY


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While the growth statistics vary in each individual property market, the Southeast as a whole continues to outpace much of the country in terms of its economic strength and growth trajectory. The combined metros of Atlanta, Charlotte and Nashville, for example, have attracted more than 300,000 new residents in the last five years, outpacing the New York Metropolitan area by nearly 100,000 residents during the same period. Additionally, Moody’s Analytics predicts Atlanta will rank 2nd in the nation among all Metropolitan Statistical Areas in absolute population growth over the next five years. All other factors aside, the entire region’s population growth alone should underpin demand for commercial real estate as we look forward to 2016 and 2017.

Demographics

It is impossible to have a discussion about commercial real estate without considering the implications of

shifts in demographics. It is difficult to understate the importance of shifting demographics on any market, and those in the Southeast are no different.

While the emergence of the Millennial generation gets the majority of the press, the retirement of the Baby Boomer generation is arguably more important to broader economic trends. It is true that there are more Millennials than Baby Boomers, but the retirement of the Baby Boomer generation is going to result in workforce growth rates that are significantly less than the historic trend. This will present a challenge to businesses as the labor pool becomes more shallow.

In most markets in the Southeast, asking rates are hitting historic highs while vacancies are declining. Office tenants, in a cold war for talent, are eagerly paying top-of-the-market rents to secure space that is more effective at attracting and retaining talent. Unfortunately, this war for talent will be sustained for

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Source: CBRE Global Research, Department of Labor, WSJ.com

Figure 1: 2025 Projected Workforce Composition

Source: CBRE Workplace Strategy, Q3 2015.

© 2015 CBRE, Inc.

© 2015 CBRE, Inc. CBRE RESEARCHSOUTHEAST U.S. REAL ESTATE MARKET OUTLOOK 2016

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EXECUTIVE SUMMARY

at least the next fifteen years when the tide of retiring Baby Boomers slows. In-migration of labor from other areas of the country will boost the economies of most markets in the Southeast.


Scoring Tech Talent

Office

Low overall vacancies, restrained development activity and tenant expansion and relocation activity are leading most Southeastern markets into expansion mode. The average drop in vacancy across Southeast markets since 2010 has been 400 basis points. This has forced occupiers and real estate professionals to realign their rental rate expectations in submarkets throughout the region. The evidence suggests tenants are willing to pay more in order to secure space and the general lack of new product in the pipeline in most markets indicates that rents should see more increases in the coming years.

Industrial

While 2015 witnessed accelerating industrial market activity in most markets in the Southeast, there is a significant tailwind and headwind with respect to international trade. On one hand, the global economy appears to be cooling as China downshifts to a more moderate pace of growth. On the other hand, the widening of the Panama Canal is expected to help drive distribution activity related to the Ports of Charleston and Savannah. In the face of rising activity levels in 2015 and long-term prospects for growth in the region, multiple markets are hitting record levels of construction. While this implies that there is a risk of overbuilding, the bulk of the development activity is build-to-suit and in fact, developers in several markets are struggling to keep pace with demand.


Residential and Industrial Connection

LOW OVER ALL VACANCIES, RESTR AINED DEVELOPMENT ACTIVITY AND TENANT MOVEMENT ARE LEADING MOST OF THE SOUTHEAST INTO EXPANSION MODE.

http://www.cbre.us/research/2015-US-Reports/Pages/2015-Tech-Talent.aspx

http://www.cbre.us/research/2015-US-Reports/Pages/Rebounding-housing-sector-providing-tailwind-for-US-industrial-market.aspx


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Retail

Retail markets in the Southeast are evolving. Success for retail investors is not clearly defined in an economy where e-commerce is disrupting conventional retail and growth in urban living has shifted consumer spending patterns. In some Southeastern markets, we are beginning to see new suburban retail development, but with smaller footprints and a stronger emphasis on restaurant retail. Market vacancies are trending in the right direction, but unlike other sectors, the current level of activity is not comparable to those experienced prior to the recession.

Multifamily

It is impossible to discuss the explosion of the multifamily sector without a discussion of demographics. Like most of the country, the Southeast is experiencing an unprecedented amount of multifamily residential growth, largely driven by preferences for more urban housing by both those entering the labor force and those who are transitioning out. The Southeast, in particular, is seeing an increasing investor appetite for product, as

it leads all other competing U.S. geographic regions of the country in a total investment volume of over $220 billion in 2015. Demand for product is near an all-time high, driven by the lure of continually rising rents and lower vacancy rates. In several Southeastern markets, the current rate of investment sales growth is not likely to be sustained over the next five years, but is expected to remain robust until vacancy rates start to rise. Despite a growing number of new development projects aimed at satisfying the incredible demand for multifamily, a fundamental shift in the preference for attached units bodes extremely well for investors.

EXECUTIVE SUMMARY

THE SOUTHEAST IS EXPERIENCING AN UNPRECEDENTED AMOUNT OF MULTIFAMILY RESIDENTIAL GROW TH


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EXECUTIVE SUMMARY

Figure 2: Interactive Statistics

ATLANTA

ATLANTA


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Office Sector

Atlanta office market conditions have remained positive for the past several years as vacant space has been absorbed and landlords are lifting asking rates in response. Looking forward, the market is expected to continue experiencing consistent positive absorption, constricting options for prospective tenants.

Historically, Class A product has achieved higher absorption totals than the rest of the market. Recently, however, Class B absorption levels have begun to rise as tenants struggle to find Class A product in the most desirable locations. With nearly two-thirds of the Atlanta inventory consisting of Class A space, Class B gains will have a diminished impact on overall market health, but this is a trend that may continue in the absence of new product deliveries.

This continued demand for Class A space, combined with the lowest vacancy rate in Atlanta in 14 years, has resulted in dramatic rental rate increases of almost 6% in the last year, now at their highest levels in history. Going forward, rates are expected to rise further until

new development can alleviate the pent-up demand for space in the market.

While a lack of significant new development has allowed for market fundamentals to strengthen during this cycle, several developers now have the confidence needed to justify construction costs for new office development. While less than one million sq. ft. of speculative space is under development today, more than 5.5 million square feet is planned. Put into perspective, the last time vacancy clocked in below 18%, construction activity totalled more than 4.2 million sq. ft.

While a few new office developments are expected to deliver in late 2016, the bulk of new office space is slated to come online in 2017. Until these new Class A projects deliver, the leasing activity for Class B space is expected to remain elevated. As such, vacancy is expected to drop, while asking rental rates continue their rise.

Strengthening leasing fundamentals and the prospect of value creation are pushing more investment into

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Figure 3: Atlanta Office Overall Asking Rent and Overall Vacancy

Source: CBRE Research, Q3 2015.

© 2015 CBRE, Inc.

ATLANTA


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the Atlanta office sector. From 2013 to 2015, more than 45 million sq. ft. of office space has traded hands, or roughly the equivalent of the size of the market’s entire CBD inventory. With such high transaction volume taking place in a short period of time, CBRE professionals expect sales velocity to slow slightly in 2016, although the thirst for investment product remains high.


Cap Rate Survey

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MSFFigure 4: Atlanta Office Overall Net Absorption and SF Under Construction


GOING FORWARD, R ATES ARE EXPECTED TO RISE FURTHER UNTIL NEW DEVELOPMENT ALLEVIATE THE PENT UP DEMAND FOR SPACE IN THE MARKET.

© 2015 CBRE, Inc.

http://www.cbre.us/research/2015-US-Reports/Pages/US-Cap-Rate-Survey0311-6651.aspx

ATLANTA


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With the advent of significantly rising rents over the past year, the historic spread between national and local cap rates has narrowed. The Atlanta market has typically exhibited a spread of 100 basis points over the U.S. average, indicating office investments were perceived as riskier than similar product in other markets. Things are changing though as we now see cap rates trends narrow to the point where there is little distinction between local and national cap rates.

With its robust rent growth potential, the Atlanta office market is attracting an inordinate amount of attention from global investors. From 2012 to 2014 there was minimal purchase activity from international investors. Cross-border investment is a new phenomenon hitting the Atlanta office market. The most significant international investment into Atlanta real estate has been the joint-venture between Abu Dhabi-based ADIC and Building & Land Technology, which purchased Concourse Center for over $460 million. More cross-border capital movement is expected in the near-term as international investors seek the stability of U.S. commercial real estate.

The trends exhibited in the Atlanta office market are similar to those experienced throughout the United States: rapidly rising asking rents, vacancy rates that are dropping, especially in more densely developed areas, and increased capital investment. As a large market in the United States, coupled with a strong long-term growth outlook, Atlanta is poised to see more investment activity in the next two years.


Asian Investment in US CRE

Industrial Sector

The Atlanta market is home to over 5 million people and half of the United State’s population within one day’s drive. It is the attraction of these consumer bases that helps drive the industrial market in the region. With high rates of growth and a strong rebound after the recession, the industrial market is incredibly active.

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Figure 5: Atlanta Industrial Overall Asking Rent and Overall Vacancy


© 2015 CBRE, Inc.

http://www.cbre.us/research/2015-US-Reports/Pages/Trans-Pacific-Capital-Flows-Asia-rises-as-major-source-of-cross-border-capital-for-US-real-estate-investment.aspx

ATLANTA


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For the past four years, net absorption in Atlanta has averaged 10 million sq. ft. annually and is showing no signs of slowing. Driving the high absorption levels has been an unprecedented demand for big block space in the Atlanta market. Developers have been responding to this need by constructing large speculative and build-to-suit facilities that average approximately 500,000 sq. ft. In previous development cycles, newly constructed buildings averaged less than half of that size.

While large capacity structures are in demand right now, these increased footprints are reducing the number of viable development sites, which could limit development options in the future. An estimated 7 million sq. ft. of speculative product will deliver over the next two years, which is likely to push vacancy slightly higher and increase the supply of much needed space to the market. Another component to the demand for big block space has been large build-to-suit development, which has accounted for the vast majority of deliveries over the past two years, helping to drive the decline in vacancy.

Market conditions and investor demand have pushed new development to its highest level in the last twenty years. Much of this new development consists of big block space–500,000 sq. ft. or greater–often leased to a single tenant for lease terms often exceeding 5 years. Given the long-term growth expectations for Atlanta and its status as a distribution hub for the Southeast, these are viewed as very attractive to investors.

These types of low-risk investment transactions have allowed Atlanta to eliminate the spread between the cap rates at the local and national levels, which has historically averaged about 50 to 100 basis points. With the high level of activity in the Atlanta market and its status as the Southeast’s primary distribution hub, it is easy to envision a scenario in which cap rates drop below the national trend, especially after considering current market fundamentals.


Cap Rate Survey

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Figure 6: Atlanta Industrial Overall Net Absorption and SF Under Construction


© 2015 CBRE, Inc.



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Demand for industrial space in Atlanta is such that much of the speculatively constructed product will be successfully leased prior to completion. This trend is expected to continue through 2017. Going forward, net absorption in 2016 should remain consistent with 2014 and 2015’s strong growth, while the rate of occupancy gains in 2017 is expected to slow slightly. Rental rates are expected to rise steadily in 2016 while new development attempts to meet tenant demand, but rent growth will begin slowing as new completions hit the market later in the year and into 2017.

Retail Sector

As the national economy has strengthened since the 2008 recession, Atlanta’s retail sector has made corresponding positive strides. Retail sales are rising throughout the market, as are rents and occupancy levels. Centers that had been experiencing significant vacancy five years ago have now rebounded into a position of long-term sustainability. Additionally, improvement in the single and multifamily residential markets should help solidify demand for space in the retail sector.

The Atlanta market is home to over five million people with a diverse set of interests and market demands. Generally speaking, the retail market can be carved into two key areas: the urban core and its surrounding suburbs, each experiencing the post-recession recovery in different ways.

The outlying perimeter has historically been driven by big box retailers serving growing communities causing other businesses such as grocers, retailers and others to follow. The urban core, however, is going through an unprecedented change involving the redeveloping and re-purposing of existing infrastructure and the addition of high-end retail.

Ponce City Market is an incredible redevelopment located on Atlanta’s Beltline that has transformed the historic district of Old Fourth Ward. A one-time Sears and Roebuck warehouse has now been re-purposed into a mixed use development home to over 330,000 sq. ft. of retail space. The success of this project has ushered in more proposals to the Atlanta Beltline, such as a $298 million mixed-use project including 220,000 sq. ft. of retail. Still in its early phases, Buckhead Atlanta is another mixed-use urban project quickly

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Figure 7: Atlanta Retail Overall Asking Rent



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filling its 85,000 sq. ft. of retail space with high-end retailers. Its success is bringing in more mixed-use proposals nearby, including a new project by Mill Creek and Oliver McMillan Inc., which consists of approximately 100,000 sq. ft. of retail.

All of these urban developments are being driven by a series of retail-oriented pressures that are not unique to the Atlanta market: the preference for urban living among Millennials and Baby Boomers as well as growth of the CBD office sector, which aids growth of high-end retail, particularly restaurant retail, in urban locations.

Although these recent developments represent trends in the core of Atlanta, activity in the suburbs is beginning to accelerate as well. Residential growth, both urban and suburban, is accelerating. Driven by this growth, more retail development is occurring throughout the market. While the amount of construction is the highest it’s been since the recession, it is still below the historic trend.

The most prominent of these new developments is SunTrust Park, the future home of the Atlanta Braves.

Despite its suburban location, it is a mixed-use project expected to usher in 400,000 sq. ft. of retail space. Although it is expected to be completed in time for the 2017 baseball season, its appeal will not be limited to baseball fans.

The success of urban and suburban retail centers is attracting new investors to the market, which is helping to compress cap rates closer to national averages. Interestingly, urban locations appear to be garnering interest from investors on a level typically seen in markets with more established urban cores.Investment volumes are still low when compared to record levels experienced in 2007, but are at the highest levels since the recession.

An examination of investment trends shows that while volumes are rising, the typical investor is changing as well. Increasingly, the Atlanta market is hitting the radar of international investment firms looking for stable commercial real estate assets. Many of those firms are considering Atlanta as an attractive market to hold assets for the long term. A recent example of this includes Germany-based GLL RE Partners, $162 million acquisition of the Town Brookhaven development.

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Figure 8: Atlanta Retail SF Under Construction



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Investor interest and the demonstrated success of urban retail is raising the perception of Atlanta as a strong market for retail investment and development. Eventually, construction will fall from its 2016 peak, but still remain elevated relative to recent history as new opportunities unfold to developers. As such, we anticipate the future to be bright for both the suburban and urban core markets.

Multifamily Sector

Multifamily fundamentals are very strong in Atlanta and throughout the Southeast, highlighted by rising rents, elevated occupancy and increased development activity. Fueled by Millennial and Baby Boomer preferences for more urban living, and coupled with accelerating population and job growth, the underlying drivers supporting appetite for multifamily are strong and are expected to remain so over for the foreseeable future. Consequently, cap rates in the market are dropping as the perceived risk of the Atlanta multifamily sector is waylaid by strong market fundamentals.


Cap Rate Survey

The job growth rate in Atlanta is about 60% faster than that at the national level. This growth in new jobs is helping to promote multifamily living while simultaneously giving investors and developers a higher level of confidence in the market. In 2009, market vacancy peaked at 11%, since then vacancy has been cut in half. Rent appreciation in Atlanta extends broadly to all submarkets–increasing 7.3% year-over-year.

In response, new development is occurring throughout the market. Over the last 20 years, the Atlanta market has averaged 6,600 housing units. In 2015, over 7,200 multifamily housing units are expected to be completed. While this represents a 9% increase over the historic average, it is not as much as was constructed during the early 2000s, when several years achieved over 10,000 housing units built in a single calendar year.

ATLANTA

MULTIFAMILY FUNDAMENTALS ARE VERY STRONG IN ATL ANTA HIGHLIGHTED BY R IS ING RENTS, ELEVATED OCCUPANCY AND INCREASED DEVELOPMENT ACTIVITY.



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ATLANTA

Consequently, Atlanta’s attractive multifamily market fundamentals are garnering more investment interest among capital sources now than in past cycles. Domestic buyers still represent the majority of purchasers, but foreign capital is gaining ground. Atlanta saw more deals and sales volume generated by foreign capital in 2015 than in the past three years combined. Buyers’ confidence in Atlanta properties has been rewarded, with the market achieving the highest overall return among the major apartment markets in Q2 2015 posting an annualized 20.5% total return or nearly 900 basis points above the U.S. average, according to NCREIF returns data.

The current trend towards urbanization and higher density living in Atlanta will likely remain a fixture for the foreseeable future. Businesses and residents alike are showing a greater interest in locating near public transportation. In Atlanta, the Metropolitan Atlanta Regional Transportation Authority (MARTA) is a sought-after amenity. Mercedes-Benz, Kaiser Permanente and State Farm cited proximity to public transit as being important factors in their recent site selection decisions.

Assuming new construction activity remains within a healthy range and oversupply is avoided, the Atlanta market will see continued rental rate appreciation and below-trend vacancy rates in the near term.

Atlanta Market Reports

http://www.cbre.us/o/atlanta/Pages/market-reports.aspx

BIRMINGHAM

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Office Sector

Like many markets in the country, Birmingham is experiencing its fair share of urban-oriented development. Downtown Birmingham continues its revitalization with a number of new projects in the pipeline.

A significant anchor of this new development trend is the local minor league baseball team, the Birmingham Barons. In 2013, the team relocated from a suburban location to Regions Field, a ballpark that sits right outside of Birmingham’s urban core. The ballpark is injecting new life and attracting office, apartment, and retail developments that will continue to transform Downtown Birmingham into a true pedestrian area able to keep and attract young talent.

Among the biggest of these office projects is the $66 million adaptive reuse project underway at the historic Pizitz building, less than a mile away from Regions Ballpark. The redeveloped landmark is slated to have 143 apartment units plus ground floor retail and new office space. Also delivering is the Stockyard at Railroad Park, a 15,000 sq. ft. adaptive reuse office

space developed by Birmingham real estate firm Shannon Waltchack. A number of new restaurants and boutique retail locations are on the way as well.

While much of the other new development in downtown Birmingham is retail and apartment space, the effect of the workforce’s movement into the city on the office market is already being felt. For example, Infinity Property & Casualty Corp will relocate their corporate headquarters into the former Birmingham News building, closer towards the core of the city.

The Birmingham office market has seen mild activity over the past two years. Vacancy dipped a percentage point to 13.5% at the end of 2014, but since then has experienced a slight uptick. As the downtown core becomes a more vibrant place to live and do business, it is anticipated that the growing Millennial workforce will gravitate to aforementioned in-town redevelopments.

With 30 new multifamily developments in the pipeline, the downtown market will likely reap the benefits of an adjacent workforce. As such, we anticipate vacancy to level out over the short term and to begin to decline

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Figure 9: Birmingham Office Overall Asking Rent and Overall Vacancy


© 2015 CBRE, Inc.

BIRMINGHAM


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at a steady pace over the next two years. Absorption is expected to be positive, but consistent. Consequently rates, which have not seen dramatic movement, will increase as new product is delivered to the market. It is important to note that Birmingham is a small market, meaning that single tenant movements and developments can have a significant impact on market wide statistics.

Industrial Sector

Birmingham has a reputation as a market dominated by the steel industry. While the reputation is well-earned, the local economy is becoming more diverse, with growing finance, automotive and healthcare industries. On the industrial side, however, the emphasis on the steel industry is presenting challenges.

A significant driver of the local steel economy is the oil industry, which invests heavily in steel as a component of the drilling process. Oil prices remained depressed through the second half of 2015, significantly impacting Birmingham’s energy and manufacturing industries.


Oil Prices

US Steel Corporation is adapting to the market conditions through the implementation of a new furnace at their Fairfield steel plant. US Steel is investing over $200 million to allow for more efficient scalability that should allow them to weather market volatility more easily. In addition to challenges to steel manufacturers, the energy industry, tied closely to steel, is facing challenges as well–Birmingham-based Walter Energy is currently going through bankruptcy proceedings.

Despite the effect of oil prices on two of Birmingham’s major industrial sectors, the outlook for the Birmingham industrial market as a whole is strong. Over the past two years, the Birmingham industrial market has experienced consistent positive absorption. Consequently, vacancy has seen a corresponding steady decline. Birmingham maintains strong fundamentals that will support the future of the market, namely: a

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Figure 10: Birmingham Office Overall Net Absorption and SF Under Construction


© 2015 CBRE, Inc.

http://www.cbre.us/research/2015-US-Reports/Pages/Energy-2015-What-low-oil-prices-mean-for-commercial-real-estate-in-North-America.aspx

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central location within the state, a well-trained work force, and a favorable tax and economic environment.

The positive activity in Birmingham, even in the face of dramatically low oil prices, speaks to the increased economic diversity the area has been able to achieve. As such, we anticipate these trends will continue, and eventually constrict available space to the point where rents begin to rise by 2017. As vacancy falls

below 10%, there is hope for new development to help meet demand. With oil prices likely to be suppressed over the next 24 months, automotive and e-commerce distribution will likely be the most dynamic sectors in the Birmingham industrial market going forward.

Birmingham Market Reports

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Figure 11: Birmingham Industrial Overall Asking Rent and Overall Vacancy


Figure 12: Birmingham Industrial Overall Net Absorption and SF Under Construction


© 2015 CBRE, Inc.

http://www.cbre.us/o/birminghamal/Pages/market-reports.aspx

CHARLESTON

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Office Sector

The Charleston office market is weighed heavily in the favor of landlords, fueled by challenges for developers in getting new projects off the ground and the market’s rapid growth, driven largely by the ability of the market to attract a dynamic Millennial workforce. The prospects for the office market are very strong, with Charleston having one of the lowest vacancy rates and one of the highest asking rates in the Southeast.

The Charleston office market is largely divided into two distinct sectors: the Peninsula and the Suburbs. While both are experiencing the same market-wide phenomenon, their reaction to it, and outlook going forward, are significantly different.

The Peninsula possesses a perfect storm for attractive rising real estate values: increasing demand, constrained supply and an open willingness of tenants to pay ever-increasing asking rates. There are two significant challenges that prevent the market from exploding with outsider investment and interest: development constraints and the market’s small size.Development constraints limit the size of most new office development in the Peninsula submarket, where the market’s fundamentals are strongest. This limits the ability for developers and investors to receive a

return through economies of scale. Additionally the market’s small size present an exit risk to developers and investors in spite of its strong performance.

Cap rates for the market have traditionally been 50 to 150 basis points higher than the national average. With a disproportionately high population of Millennials in the market, the long-term growth could squeeze cap rates further in the coming years.

While development is easier to achieve off the Peninsula, it lacks the aforementioned submarket’s workforce appeal. The asking rate differential between the Peninsula and the Suburban markets is over 40%. That is expected to widen in the coming years. The wider the gap, the more attractive tenancy in the suburbs becomes.

Asking rates are rising rapidly on the Peninsula and some tenants are opting to move to the less expensive suburbs. Several developers are looking to capitalize on market conditions to construct speculative space. By the end of 2017, several projects are expected to be underway. The most likely scenario to help offset the increasing demand for office space is increased development on the west side of the Peninsula, where development restrictions are not quite as stringent. That is several years away, however.

THE OFFICE MARKET IS VERY STRONG, WITH CHARLESTON HAVING ONE OF THE LOWEST VACANCY R ATES AND ONE OF THE HIGHEST ASKING R ATES IN THE SOUTHEAST.

© 2015 CBRE, Inc.

CHARLESTON


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Figure 14: Charleston Office Overall Net Absorption and SF Under Construction


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Figure 13: Charleston Office Overall Asking Rent and Overall Vacancy


© 2015 CBRE, Inc.

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Industrial Sector

The Charleston industrial market is largely driven by port-related industrial activity, but in recent years has witnessed a significant increase in manufacturing activity. Manufacturers like Boeing, Daimler and Volvo have all recently started or announced major operations in the market. Multiple speculative developments are actively under construction.

The Port of Charleston has long been one of the most heavily trafficked ports on the East Coast. In 2014, the port enjoyed the distinction of being the fastest growing port in the North America. As such, the market is home to distribution operations established specifically to leverage port access.

In recent years though, manufacturing has grown in importance. Boeing opened their first facility in 2011 and has expanded operations consistently ever since. Daimler recently announced a major expansion. Last year Volvo announced their intention to construct their first North American manufacturing facility in the Charleston market.

It is worth noting that Volvo is electing to construct their facility in Ridgeville, which, up until now, has been considered the outskirts of the Charleston industrial market. We anticipate that this will push more industrial development further along the I-26 corridor, especially as automotive suppliers strategically position themselves around the new facility.


Auto Manufacturing Reshoring

The widening of the Panama Canal, which is expected to be complete in 2016, is expected to further increase traffic at the Port of Charleston. While it will take some time to realize the full impact, activity at the Port of Charleston is expected to increase significantly over the next five years. This will help drive distribution demand in the market. Not only is the Port of Charleston the fastest growing port in the country, but the Charleston industrial market is the fastest growing industrial market among those port cities. With several

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Figure 15: Charleston Industrial Overall Asking Rent and Overall Vacancy


© 2015 CBRE, Inc.

http://www.cbre.us/research/2015-US-Reports/Pages/Reshoring-of-auto-production-spurring-growth-in-US-and-Mexican-industrial-markets.aspx

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speculative projects in the pipeline, investors and developers are bullish on the Charleston industrial market.

The Charleston industrial market is small, but much of the new construction is speculatively built, indicating that investors and developers believe in the market fundamentals. Cap rates for investment grade product are typically 50 to 125 basis points higher than the national average. This higher cap rate is largely attributed to the risk associated with the market’s small size.


Port Report

The growth of the Charleston market and the increasing activity expected at the Port of Charleston related to the widening of the Panama Canal is expected to increase activity in the market for the foreseeable future. Over time, we expect Charleston to be viewed more attractively as an investment market as

investors seek higher returns in secondary and tertiary markets.


Chinese Impact on South Carolina CRE

Retail Sector

The Charleston market, with its rich cultural history, hosts over four million tourists each year. As such, it is the one market in South Carolina most likely to be familiar to those outside of the state. Classifying the retail market as being solely driven by tourism is misleading though, as the local economy is highly diverse and growing rapidly. This diversity is apparent when you examine the scenarios playing out in different submarkets.

On the Peninsula, the impact of high-end tourism on the retail market is readily apparent. Demand for retail space in downtown has never been higher and the list of tenants (Louis Vuitton, Michael Kors, Nine West) is

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Figure 16: Charleston Industrial Overall Net Absorption and SF Under Construction


© 2015 CBRE, Inc.


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CHARLESTON

very similar to a list of retailers found in some of the most expensive retail markets in the world. Asking rates, and more importantly, strike rates, have raised eyebrows throughout the market. Landlords along King Street are angling to secure tenants able to pay rents that are routinely double what existing tenants are paying. These elevated rates are increasing the pressure on stores to perform and resulting in many

local retailers being forced to close or relocate.

In suburban markets, there is a lot of activity that is a product of rapid population growth in the market. In the coming years, expect to see increased retail development along the I-26 corridor, as population growth increasingly extends to Summerville and beyond. Additional new development is expected in the


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Figure 17: Charleston Retail Overall Asking Rent


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Figure 18: Charleston Retail SF Under Construction



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CHARLESTON

Mount Pleasant and West Ashley areas as well.

From an investor’s perspective, the Charleston market has a lot to offer: rapid employment growth, home price appreciation and new development and retail asking rates that are climbing. This combination of retail drivers results in cap rates for investment-grade retail product being historically on par with national cap rates. One thing to keep in mind is that, despite the strength of the market and its overall attractiveness, it is a small market, indicating that there are limited opportunities for firms interested in making large investments in the market.

While asking rents as reported are high, the highest asking rents are reported on the Peninsula, where retail is typically a small component of a mixed-used project, meaning it lacks the economies of scale required for most major retail investors. As such, the market is largely dominated by local and regional investment groups.

The market is growing rapidly, but the amount of new development since the recession has remained tepid. Given the 8.4% growth expected in the next five years, we are expected to see a flurry of new development throughout the market in the next two years.

Capital Markets Multifamily

The Charleston market is enjoying a very high rate of growth. This is the result of the area being an attractive market to both Millennials and retiring Baby Boomers. Both age groups have a high propensity for renting apartments. In Charleston, a city that is highly walkable and development constrained, the multifamily sector is very attractive from an investment standpoint.

Demand for multifamily product is very high, especially on the Peninsula where asking rates for multifamily are higher than that for office space. Rental rates on a per unit basis have increased over 30% in the last five years. This rent growth is pushing investors to examine the market more closely as an investment market.

Due to the market’s strong employment growth and prominence as a tourist destination, the market enjoys a reception from investors that other markets its size do not. As such, the market is emerging as an attractive option for investors looking for a strong return.

DEMAND FOR MULTIFAMILY PRODUCT IS VERY HIGH, ESPECIALLY ON THE PENINSUL A WHERE ASKING R ATES FOR MULTIFAMILY ARE HIGHER THAN THOSE OF OFFICE SPACE.

Charleston Market Reports

http://www.cbre.us/o/charlestonsc/Pages/market-reports.aspx

CHARLOTTE

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Office Sector

With new construction failing to keep pace with high absorption levels, the Charlotte office market is entering expansion mode and experiencing declining vacancy rates and rising asking rates. This is being driven by the region’s rapid job creation, particularly from companies relocating to the area.

This new-to-market tenant demand has helped bring vacancy rates to pre-recession lows. Based on data pertaining to tenant activity, more than 30% of tenant demand is a result of in-migration from outside the Charlotte market area. Features such as low cost of living, an educated workforce, a business-friendly climate, and a presence of a hub airport should continue to draw companies from across the country to Charlotte.

While there are many positives in the market, the dwindling supply of available space is starting to suppress leasing activity. Larger tenants in need of contiguous blocks of space have few options. This is helping to push build-to-suit and speculative construction. We do expect tenant demand to keep vacancy below 10% through 2017.

Charlotte’s strong market conditions have produced increased investment sales activity - particularly in the SouthPark, CBD and Midtown submarkets. As competition for assets in primary markets gets hotter, some investors are seeking out assets in secondary markets like Charlotte where higher returns are possible. The influx of new ownership entities into the market helps provide proof-of-concept for investors that have not entered the market. Consequently, more capital will continue to flow into Charlotte, resulting in a larger and more diverse buyer pool.

More speculative office construction, outside of infill locations, is predicted to hit the market by the end of 2017. As this new construction delivers, rental rates will continue to rise, leading to an increase in potential asset values. This rent growth, which was initially focused on the CBD, will spread to suburban submarkets, making the Charlotte market even more attractive to potential investors. Cap rates for investment-grade office product are typically 50 to 150 basis points higher than the national average.

While lack of new product is a challenge for tenants in search of space, a substantial amount of space is under construction. We expect much of the speculative space

CHARLOTTE’S STRONG MARKET CONDITIONS HAVE PRODUCED INCREASED INVESTMENT SALES ACTIVITY IN THE PREMIER SUBMARKETS.

© 2015 CBRE, Inc.

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Figure 20: Charlotte Office Overall Net Absorption and SF Under Construction


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Figure 19: Charlotte Office Overall Asking Rent and Overall Vacancy


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to be successfully pre-leased. The high rates of job creation and attractiveness of the market to corporate users will keep activity high and fundamentals strong.

Industrial Sector

Approximately 50% of the U.S. population lives within a one day drive from Charlotte, making industrial space in the metro area desirable to large distributors. The expansion of the Norfolk Southern intermodal facility at the Charlotte Douglas International Airport should further benefit the industrial market by improving access to key ports such as Savannah and Charleston and by attracting tenants to the market that may not have considered Charlotte in the past. Additionally, with its immediate population base of over two million, there is a considerable consumer base for distribution focused on the final segment of the distribution chain.

Record market activity in recent years has vacancy poised to hit a record low. The lack of availability for tenants is allowing landlords more leverage at the negotiating table, pushing asking rates to a record

high, especially for those with Class A warehouse availabilities–modern facilities with in-demand amenities, the notable being 30-foot clear heights. We expect these rates to rise further in the next two years, although new construction may limit how aggressive landlords can be.

The two largest submarkets in the Charlotte market, the Southwest submarket and the Northwest submarket, will continue to be the most active submarkets in terms of construction and leasing activity. These submarkets encompass the state border with South Carolina and the airport, respectively, which are attractive for tenants due to the increased accessibility to the interstates and distribution channels in South Carolina as well as the intermodal facility at the Charlotte Douglas International airport.

Dwindling availability is resulting in new build-to-suit and speculative developments in the pipeline. Over two million sq. ft. will be added to the industrial market during 2015 with several more developments proposed and expected to be delivered during 2016 and 2017. Despite the new construction, vacancy rates are not

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Figure 21: Charlotte Industrial Overall Asking Rent and Overall Vacancy


© 2015 CBRE, Inc.

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expected to rise, due to the likelihood of pre-leasing for speculative construction.

The tightening fundamentals have also impacted the investment sales market, where scarcity of product and high demand have resulted in pricing increases, particularly for quality buildings with desirable features. The industrial market is very strong from a capital markets and leasing standpoint and the market is expected to sustain this momentum for the next two years. The majority of interest is coming from institutional investors, however, private and foreign buyers have also been active in the market. We expect conditions to stay steady in terms of capital flow and pricing. Cap rates will likely stay fairly stable, with not much movement over the next two years.

With Charlotte’s strategic location as a potential distribution hub with strong access for the entire Southeast, we will continue to see an increasing need for warehouse space. Consistently strong market fundamentals–low vacancy rates and rising asking rates–will keep investor interest high.

Retail Sector

Vibrant economic expansion, strong retail leasing dynamics and strong investment returns have combined to make Charlotte one of the most sought-after retail markets in the Southeast. Employment growth has outpaced that of the U.S. over the past five years and is accelerating as major employers are attracted by the area’s low cost of operations, first class airport and talent-rich pool of employees. Absorption of retail space is far exceeding new supply, allowing landlords to get aggressive and lift asking rates.

Development is occurring throughout the market, including both urban and suburban locations. The continued strength of the multifamily market has created new retail opportunities in multiple infill locations throughout the metro area. Multiple new projects such as Waverly Place, a suburban mixed-use development anchored by Whole Foods and infill projects such as Publix in Cotswold, will start in 2016 with deliveries expected at year-end 2016 and 2017. Grocery users are driving a lot of the new, larger projects, with the aforementioned Publix and Whole Foods, as well as Sprouts, being the most active.

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Figure 22: Charlotte Industrial Overall Net Absorption and SF Under Construction


© 2015 CBRE, Inc.


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Average retail asking lease rates for new construction are approaching $30 per sq. ft. on a triple net basis and are projected to surpass this figure over the next two years. Top retail submarkets in Charlotte include the CBD, Midtown, SouthPark and South Charlotte, where strong demographics are supporting retail sales growth. The presence of new high-end multifamily development in transitional areas like Southend, Plaza Midwood and Noda is creating new, unique opportunities for retailers in areas that were not typically considered in the past.

Retailers continue to focus on the Charlotte CBD based on the strong population growth in the city. The urban core is seeing some of the highest growth in the market with new retail conversions in office towers and residential properties.

Investment in infrastructure improvements such as the Lynx Light Rail Line has helped to connect submarkets from South Charlotte to the University of North Carolina at Charlotte, whose student population is expected to surpass 30,000 by 2017. This increased connectivity between shopping destinations

will continue to expand the location options and accessibility for Charlotte consumers and retailers alike.

Investment activity has hit pre-recession highs. Of particular appeal to institutional investors are grocery anchored neighborhood and community centers located in the mature infill neighborhoods of Charlotte inside I-485, or new growth markets south of Charlotte along the Union County line and north of the city along the Lake Norman / I-77 corridor. Cap rates for investment-grade retail product have come in-line with national averages, indicating the market’s attractiveness to investors. Cap rates for Class A neighborhood and power centers are expected to remain in their current record territory as investor appetite far outweighs supply. Additional pricing improvement in Class B properties can be expected as investors broaden their parameters outside of the thinly traded Class A market.

While the growth and fundamentals of Charlotte are mirrored in many markets in the Southeast,

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Figure 23: Charlotte Retail Overall Asking Rents



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Charlotte is able to mitigate investment risk due to its size. As a result, Charlotte not only exhibits strong market dynamics, but is also very attractive to most investment groups.

Capital Markets Multifamily

Charlotte has emerged as a thriving financial, energy and logistics center for the entire Southeast, making it a growth market highly sought after by multifamily investors. Year-over-year job growth hit 3.2% in Charlotte, well above the same rate at the national level. Job growth will remain strong through 2017, with over 50,000 new jobs expected to be added in the next two years. This makes Charlotte an attractive option for developers and investors alike.

Multifamily leasing fundamentals are strong in Charlotte, prompting developers to launch new construction projects. More than 12,000 units are currently under construction and another 13,500 units are proposed. The amount of development has not scared investors, as cap rates have been compressing in recent years. The rent growth and occupancy outlook is very positive due to the strong population and job

growth in the metro area. In the next two years, the total number of units absorbed will outpace the new supply.

Despite the new supply, rent growth has been rapid, with the average rent increasing by nearly 40% in the past five years with another 18% projected effective rent growth over the next five years. This is a very positive sign for owners and investors, as property values should continue to be boosted by the prospect of higher asking rents for newly delivered product. The Charlotte market is expected to continue to be an attractive option for investors looking for a strong return.

Charlotte Market Reports

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Figure 24: Charlotte Retail SF Under Construction


http://www.cbre.us/o/charlotte/Pages/market-reports.aspx

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Office Sector

The Columbia office market has shifted sharply into the landlord’s favor. Asking rental rates are increasing and concessions are dwindling. Gaining confidence, developers are building speculative office space for the first time since 2004. There is currently 195,000 sq. ft. of space under construction downtown, 125,000 sq. ft. of which is speculative.

Existing and new tenants are driving activity throughout the market. Active users include engineering and back-office operations. Engineering firms are expanding due to infrastructure work spurred by a recently passed penny sales tax. Columbia has also attracted attention from large scale back office operations but until now has had little available space to accommodate those users. Larger blocks of space have recently become available in the St. Andrews and Northeast Columbia submarkets indicating the market may see this type of growth in the future.

Upon completion of speculative office space in 2016, expect availability rates to initially rise before falling by 2017. It is important to note that Columbia is a

smaller market that is prone to significant swings in market-wide statistics based on the movement of single tenants. A number of properties, particularly in the St. Andrews submarket, have changed hands over the last two years, and many of the new landlords are counting on rent growth. Therefore the addition of new supply does not mean that existing buildings will lower their rates to compete as prices for new office space are higher than the asking rate of existing space.

Like other markets in South Carolina, Columbia is a tertiary market with a limited number of investment-grade office transactions. Like many small markets, cap rates for investment-grade office product are typically 150 to 250 basis points higher than the national average. As a state capital, Columbia features an office market that is stabilized by governmental presence, both in the form of governmental entities as tenants in the market as well as disproportionately large legal sector. While this limits market growth, it also acts as a large economic anchor, resulting in the office assets in the market being viewed as more stable than in other markets in the state.

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Figure 25: Columbia Office Overall Asking Rent and Overall Vacancy


© 2015 CBRE, Inc.

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In recent years, the trends that have played out nationally are being echoed in Columbia. The downtown market –which is a vibrant place to live, work and play –is being leveraged by tenants throughout the market to effectively attract and retain talent. As a result, the willingness of tenants to pay more for downtown space is pushing rent growth.

In the next two years we expect to see vacancies decline modestly while asking rates continue their ascent. It is important to note that Columbia is a small market, meaning that single tenant movements and developments can have a significant impact on market-wide statistics.

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GAINING CONFIDENCE, DEVELOPERS ARE BUILDING SPECUL ATIVE OFFICE SPACE FOR THE FIRST TIME S INCE 2004.

© 2015 CBRE, Inc.

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Industrial Sector

The Columbia industrial market is relatively small and unlike many markets in the Southeast, has not exhibited a large amount of industrial activity in the last couple of years. While vacancy rates are relatively low and asking rates are rising, the most important dynamic facing the market is the differences between disparate product types.

Existing industrial buildings in Columbia fall into two classes: properties with in-demand amenities and those without. Tenants are demonstrating a clear preference for sprinkler systems, functional clear heights, outside storage and a sufficient dock door ratio. These items are quickly pushing older buildings towards obsolescence. The quantity of older inventory is suppressing market-wide asking rates and will keep rent growth modest.

At current rates of absorption, higher quality industrial space will be difficult for new market entrants to locate. Conversely, buildings without in-demand amenities will be readily available. Recent speculative developments at Shop Grove Commerce Park and Saxe Gotha Industrial Park are occupied and a lack

of quality space will force new development. In a smaller industrial market like Columbia, we expect more new development to be built-to-suit. While some speculative development may occur, it will likely remain limited due to construction costs outpacing rental rate increases.

An additional challenge will be finding land suitable for industrial development. Much of the land in existing industrial parks has been developed, and other parcels require a zoning change or additional infrastructure. Addressing either of these adds considerable time and expense to new development. Tenants unwilling to wait may consider locating in other buildings or markets.

The sweet spot for industrial tenants in Columbia remains between 15,000 and 50,000 sq. ft. For that reason, marketing times for larger facilities such as the former 470,000 sq. ft. Bose plant in the Northeast Columbia submarket are expected to be considerably longer. While some larger facilities may be easily subdivided for multiple users, many large manufacturing properties function most efficiently when occupied by a single tenant.

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From an investment standpoint, the market’s small size mitigates investor interest and keeps cap rates 150 to 250 basis points higher than the national average.This also opens the door for investors comfortable with the market to experience success.

The basic fundamentals for the Columbia industrial market are solid, with increasing absorption levels and declining vacancy rates. Despite this, speculative development is difficult to justify, as the market does not have a documented track record of supporting it. Several industrial parks have experienced success catering to tenants interested in build-to-suit opportunities though.

Located in the growing Southeast, Columbia is well-positioned to see more activity in the coming years. The market provides a strategic location for tenants interested in mitigating port risk by having solid access to both the Ports of Charleston and Savannah, the two fastest growing ports in the country.


Port Report

Retail Sector

The Columbia market is driven by two primary economic drivers: government and the University of South Carolina. Governmental presence acts as an economic stabilizer while the presence of the largest university in the state offers the promise of higher growth. The market is still emerging from the recession, but retail expansion has begun with multiple projects under construction. Trends at the national level are echoing locally, with increased interest in downtown retail and cap rate compression across sectors.

While many real estate trends point to uncertainty about the future of retail stores, there is a trend in the development of new stores in that the most active retailers are those that have had minimal traction in an in-line setting: grocers, pet stores and restaurants.

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Figure 28: Columbia Industrial Overall Net Absorption and SF Under Construction


© 2015 CBRE, Inc.



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While e-commerce continues to grow, these sectors will perform better than most.

Urban and infill retail growth is accelerating in Columbia as developers redevelop areas within 15 minutes of downtown with neighborhood retail to serve nearby residents. The Golden Triangle–the area that connects Beltline Boulevard, Garners Ferry Road, Forest Drive and Interstate 77– is experiencing even more growth.

In the Southeast submarket, redevelopment of existing centers and new construction are occurring. A former Kmart is being redeveloped as Rosewood Crossing, a 98,000 sq. ft. center. Additionally, the 163,000 sq. ft. Landmark Square shopping center is undergoing redevelopment and Jackson Square, a 27,000 sq. ft. center is under construction as well. As is the case with most new retail, the majority of the space is pre-leased.

Other submarkets are receiving their fair share of activity as well as retail is following new residential construction. Killians Crossing, a mixed use development in the Northeast submarket, delayed by the recession, has begun construction. The grocery store sector is expected be active with a shopping center anchored by Fresh Market planned and multiple Walmart Neighborhood Markets are rolling out throughout the market. The biggest unknown in the Columbia retail market is the redevelopment of the Department of Mental Health Campus at Bull Street Common in the CBD submarket. Developers have discussed plans most recently for over 400,000 sq. ft. of retail to be completed by 2018., bringing a number of new tenants to the market.

In the two years, the Columbia market has witnessed rising asking rents, largely driven by new construction. Due to the fact that most newly constructed retail is build-to-suit rather than speculative, this rise in


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asking rents has been coupled with declines in vacancy as well. For the next two years, we expect the pace of development to accelerate slightly, with modest vacancy declines.

Columbia Multifamily

Home to the University of South Carolina, the largest university in the state, Columbia has a steady stream of demand for student housing that is becoming increasingly provided for by the private sector. The growth of demand for student housing is fueling development in the market, as is an increasingly vibrant downtown, which is echoing the national trend of consumer preferences for urban living.

While Columbia is a small market, which comes with an implied risk that is not prevalent in a large market like Atlanta, the presence of a large collegiate presence, coupled with steady governmental employment help to mitigate that risk. As a result, cap rates for Columbia multifamily product have ranged from 25 to 100 basis points above the national average.

Investors of Columbia multifamily are counting on not just the market’s stability, but rent growth as well. In the last two years, rents have increased 6%. Additionally, vacancy has remained stable despite the construction of over 3,000 new units in the last five years.

Columbia Market Reports

http://www.cbre.us/o/columbia/Pages/market-reports.aspx

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Office Sector

Since the recession, vacancy in the Greenville-Spartanburg office market has declined steadily. These declines in vacancy were the result of a lack of new product hitting in the market in the face of tepid absorption levels. Now that absorption levels are climbing, the availability of most attractive product is becoming scarce, resulting in rising asking rents and leverage shifting heavily towards landlords.

In the face of these rising rents and the lack of available product, the office market is shifting into expansion mode. Multiple projects have started construction, with more space on the way. While a majority of the space being delivered in the next 24 months is build-to-suit, tenants interested in new space are having difficulty finding suitable options. We anticipate additional build-to-suit projects through the end of 2017.

The last two years have ushered in unprecedented rent growth in the market. The growth in rents has attracted the attention of investors and developers, who are starting to expand their focus outside of primary markets as they search for assets with a

greater return. Given the amount of interest in the market, the rising asking rents and more importantly, tenants’ willingness to pay those rents, we anticipate the announcement of speculative office space by the end of 2017.

Given its identity as a tertiary market, there are only a certain number of investment grade assets in the market and they do not trade hands on a routine basis. As such, clearly documenting trends can be challenging. In recent years however, the Greenville-Spartanburg market has witnessed a considerable increase in out-of-market interest.


Chinese Impact on South Carolina CRE

This out-of-market interest is being lured by a market that has exhibited significant rent growth in the last four years. This rent growth, which was initially focused on the CBD, has now spread to suburban markets.

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Figure 31: Greenville-Spartanburg Office Overall Asking Rent and Overall Vacancy


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Cap rates for investment-grade office product have traditionally been 100 to 200 basis points higher than that of the national average. This is to be expected, given the perceived risk associated with investing in a tertiary market. The recent increase in activity in downtown Greenville has increased expectations for the product.

Declines in vacancy are expected to be held in check

by more than one vacancy of more than 50,000 sq. ft. expected to become available in the next two years, but given recent market history of absorbing similarly large vacancies, the expectations of investors are high. Given the market’s small size of 11 million sq. ft., a single large tenant movement, either positive or negative, can have a drastic impact on market statistics.

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Figure 32: Greenville-Spartanburg Office Overall Net Absorption and SF Under Construction


GIVEN THE MARKET’S SMALL S IZE OF 11 MILLION SQ. FT., A S INGLE L ARGE TENANT MOVEMENT CAN HAVE A DR ASTIC IMPACT ON MARKET STATISTICS.

© 2015 CBRE, Inc.



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Industrial Sector

A list of recent market achievements reads like a checklist for historic market expansion: record low vacancy rates, record high asking rates and record amounts of construction. There is no debate, the Greenville-Spartanburg industrial market is in the midst of a strong level of market growth driven by the growth of manufacturing and activity related to the South Carolina Inland Port (SCIP).

Coming out of the recession, market absorption has outpaced deliveries by a significant margin. High levels of absorption and deliveries are expected for the next two years as manufacturing and warehouse facilities alike are built. Major manufacturers are in the midst of new construction projects, including BMW, First Quality Tissue and Techtronic Industries. The heavy presence of manufacturing places a greater reliance on international trade than most industrial markets.

The Greenville-Spartanburg market is among the forty largest markets in the country and its high presence of owner-occupied manufacturing facilities render it a

secondary industrial market for investment purposes. Given compressing cap rates in major markets, the Greenville-Spartanburg market is increasingly hitting the radar of investors looking for return.


Auto Manufacturing Reshoring

While the market has a large manufacturing presence, the recent development of the SCIP has helped push the evolution of the market towards more distribution. The increased diversity of potential tenants, as well as record low vacancy rates has driven investor and developer interest to the market.

Cap rates for industrial product in Greenville-Spartanburg have traditionally been about 100 to 150 basis points higher than that of the national average. As the market becomes more diverse and attracts more large format distribution users, it is possible to envision further compression in the coming years.

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© 2015 CBRE, Inc.

http://www.cbre.us/research/2015-US-Reports/Pages/Reshoring-of-auto-production-spurring-growth-in-US-and-Mexican-industrial-markets.aspx



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Rates of growth in the market, coupled with the completion of the SCIP, have resulted in multiple speculative developments getting underway. Unlike previous cycles of market speculation, speculation is now being driven by developers based outside of Greenville-Spartanburg, indicating the relative importance of the market from a developer and investor point of view.

These developers and investors are driven to the market for three primary reasons: large manufacturing base, lack of existing Class A warehouse product and long-term growth potential. This potential will be driven by the market’s location on the rapidly growing I-85 corridor and increasing activity related to the Port of Charleston and the expansion of the Panama Canal.

Greenville-Spartanburg is first and foremost an industrial market, with over 160 million sq. ft. of manufacturing, warehouse and flex space. Since the recession, market absorption has been consistently positive and vacancy rates have declined. While the outlook is positive for the next 24 months, vacancy expectations are moderating due to the amount of speculative development in the pipeline and uncertainty related to growth in international markets.

Retail Sector

Of the three primary commercial real estate sectors—office, industrial and retail—retail is the one that has been the slowest to recover from the recession. Absorption levels have remained modest, driven by low levels of new construction. There is good news on the horizon though, as the two drivers of retail activity: job growth and housing values, have reached pre-recession levels.

For the first time in over a decade, there are no shopping centers greater than 500,000 sq. ft. in size still looking for tenancy. This should indicate that new development is right around the corner, however given a new retail climate where tenants and landlords alike are trying to assess trends in e-commerce and the post-recession consumer, securing tenancy for major development is challenging.

While there is still a high level of uncertainty in terms of what the future of retail looks like, there are some trends emerging. With Fresh Market, Harris Teeter, Lowes Food, Lidl and Walmart Neighborhood Market all active, grocery-anchored retail is doing relatively well. Additionally, one of the few sectors active in

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Figure 34: Greenville-Spartanburg Industrial Overall Net Absorption and SF Under Construction


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market is restaurant retail. There has been a high level of success in securing tenancy for smaller spaces as a result.

Unlike other sectors, large scale retail is determined by tenants, in particular, tenants larger than 40,000 sq. ft. While the last few years have seen a number of new

Walmart stores, development outside of that has been somewhat muted. There are expectations of seeing a new grocer infiltrate the market, but outside of a new Fresh Market, there has been little impact.

With a regional population of over one million people, the Greenville-Spartanburg market is a tertiary market


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Figure 36: Greenville-Spartanburg Retail SF Under Construction


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Asking Rent ($ PSF, NNN)Figure 35: Greenville-Spartanburg Retail Overall Asking Rent



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from an investment standpoint. Cap rates have historically been about 50 to 100 basis points higher than similarly situated product at the national level.

The most recent major acquisition involved the sale of the most prominent recent shopping center development in the market: Magnolia Park Town Center. The property sold for $176 per sq. ft. This figure pales in comparison to the sales figures in other large shopping centers throughout the state, which may help explain the lack of major retail center construction in market, outside of a select number of grocery-anchored centers and ancillary strip space.

In spite of this investors have reasons to be bullish. The lack of new product means vacancy rates will decline and rent growth is likely. Employment levels and housing growth are strong positive indicators of a healthy outlook for the retail sector and we expect to see increased development in the next two years. The unresolved question is where this retail development will occur. Unprecedented residential development in downtown Greenville should make retail development more feasible. Additionally, new retail growth in the Woodruff and Pelham submarkets are likely, as well.

Multifamily Sector

In 2007, McBee Station was developed: the first considerable multifamily development in downtown Greenville in over twenty years. Its success, demonstrated by non-existent vacancy and rapidly increasing rents has inspired an unprecedented amount of multifamily development in downtown Greenville. In the last two years, over 1,800 new units have been constructed in downtown and another 1,800 units are planned. Even more units are in the pipeline in the suburban markets.

The amount of development has not frightened investors, as cap rates have been compressing in recent years. Historically, multifamily cap rates have ranged from 50 to 150 basis points higher than the national average.

One of the reasons for this bullish outlook by investors is documented rent growth. Since the recession, market-wide multifamily rents have climbed by 33%. Much like national trends, Greenville-Spartanburg is seeing a resurgence of multifamily rental activity.


IN THE L AST T WO YEARS, OVER 1,800 NEW UNITS HAVE BEEN CONSTRUCTED IN DOWNTOWN.

Greenville-Spartanburg Market Reports

http://www.cbre.us/o/greenville/Pages/market-reports-test.aspx

NASHVILLE

NASHVILLE


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Office Sector

It is difficult to imagine a more vibrant scenario in the Nashville office market than the current conditions. Vacancy is at a record low, asking rates are at a record high and a large amount of new construction is expected to hit the market in the next two years. All of this is being driven by five years of economic expansion.

Diverse tenant demand strengthened Nashville’s office market in 2015, pushing asking rents to a record high and vacancy to a record low. The most active sectors for leasing activity in 2015 were financial services, technology, creative industries and healthcare. The outlook for all four job sectors is very strong, which bodes well for the office market. Nashville provides high growth, affordability and a business-friendly environment; a combination that is accelerating economies through the Southeast.

Forecast

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Figure 37: Nashville Office Overall Asking Rent and Overall Vacancy


DIVERSE TENANT DEMAND STRENGTHENED NASHVILLE’S MARKET IN 2015, PUSHING ASKING RENTS TO A RECORD HIGH AND VACANCY TO A RECORD LOW.

© 2015 CBRE, Inc.

NASHVILLE


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Tech-30 Report

With this new growth comes new construction. By the end of 2017, we expect over five million sq. ft. of office space to be delivered. The majority of this new construction will be pre-leased, limiting the upward pressure on vacancy. Major downtown projects now underway include Bridgestone’s 514,000 sq. ft. headquarters, Eakin’s 292,000 sq. ft. spec office building in the Gulch and HCA’s 500,000 sq. ft. project.

Nashville is poised to see additional investment in office product, as investors migrate from primary to secondary markets in search of yield. According to a CBRE investor survey, Nashville was tied at the 9th best metro in the U.S. for investing in 2015, a big jump from ranking 17th in the U.S. in 2014. Accordingly, large institutional buyers have entered the downtown market. Examples include the CIM Group purchasing the L&C Complex, CA Ventures acquiring Palmer Plaza,

Continental Capital Partners purchasing Lingerfelt’s Airport North Portfolio and LBA acquiring One Dell Parkway. Of those sales, the average price per sq. ft. was $144 with a 7% average cap rate.


Investor Intentions Survey

Historically, cap rates have trended about 100 to 150 basis points higher than the national average. Strong fundamentals will keep cap rates from rising and could result in further compression in some sectors, especially as asking rates continue their rise.

In 2015, Nashville’s office market hit a record low vacancy, a tightening trend that’s expected to continue throughout 2016 and 2017. While new development will prevent vacancy from getting much more narrow, it is expected to remain below 8% in the next two years.

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© 2015 CBRE, Inc.

http://www.cbre.us/research/2015-US-Reports/Pages/Tech-Thirty-2015.aspx

http://www.cbre.us/research/2015-US-Reports/Pages/North-America-Investor-Intentions-Survey-2015.aspx

NASHVILLE


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Industrial Sector

Coming out of the recession, Nashville’s industrial market has fared well. In the last five years, vacancy has declined considerably to hit a record low, prompting rising rental rates and significant new construction. Additionally, unlike many markets, the manufacturing and distribution employment sectors experienced growth, a noticeable outlier in the shift towards modern manufacturing and warehouse, which typically requires fewer people.

E-commerce activity is notable in the market, as Under Armour started their new one million sq. ft. distribution center in the market. We expect e-commerce growth to continue in the next two years due to Nashville’s centralized location and low costs.

Demand by distribution and manufacturing users has pushed Nashville’s vacancy to a record low and demand trends indicate vacancy could decline further in the next two years. In addition, with new build-to-suit facilities hitting the market, we expect net absorption to exceed 6 million sq. ft. over the next two years.

Major industrial projects now underway include Beretta USA’s 158,000 sq. ft. facility and SouthPark 24, a 174,000 sq. ft. project off Almaville Road. Several build-to-suit projects are also in the pipeline with plans to break ground throughout 2016. Despite Nashville’s industrial construction announcements, newly delivered inventory is not expected to cause vacancy to rise significantly due to high levels of pre-leased space.

The Nashville industrial market is on its way to record an all-time high in terms of sales volume and sales price per sq. ft. in 2015. Nearly $399 million traded hands for both investment and owner-user purposes as of Q3 2015. Cap rates in Nashville are typically 100 to 150 basis points higher than the national average. Cap rates will likely remain fairly stable, with not much movement over the next two years. A notable transaction during 2015 was the investment sale of 648 Couchville Pike in Wilson County, which was a fully leased warehouse-distribution property that sold for $27.9 million or $50.13 per sq. ft.

High demand for quality space and limited vacancy have applied pressure to industrial lease rates. While the average asking rental rate is currently $4.10 per sq.

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Figure 39: Nashville Industrial Overall Asking Rent and Overall Vacancy


© 2015 CBRE, Inc.

NASHVILLE


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ft. on a triple net basis, rates are expected to increase in the next two years. New speculative construction activity will apply upward pressure to rental rates in the coming year as these new buildings deliver.

Nashville’s centralized location in the state is well-suited for affordable transportation costs, making the market an active hub for the distribution industry. Nashville is the home to many major logistic and

distribution providers including Nissan, Macy’s and Tractor Supply Company. The introduction of new space into the market will provide adequate options for new and relocating distribution and supply related tenants, keeping Nashville competitive with regional peers such as Memphis, Indianapolis, Charlotte, Greenville-Spartanburg and Atlanta.

Retail Sector

(5)

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Figure 40: Nashville Industrial Overall Net Absorption and SF Under Construction


NASHVILLE’S LOCATION IS WELL-SUITED FOR AFFORDABLE TR ANSPORTATION COSTS, MAKING THE MARKET AN ACTIVE HUB FOR THE DISTRIBUTION INDUSTRY.

© 2015 CBRE, Inc.


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Nashville’s economic resurgence is rapid and broad. The office and industrial sectors are expanding and the retail sector is benefitting as well. Vacancy is declining and asking rates are rising in all submarkets. This is prompting accelerations in investment and development throughout the market, although infill and urban locations are outperforming expectations.Nashville’s retail market saw healthy growth in 2015 as several new national retailers moved into the market and numerous new restaurants opened in Nashville’s bustling neighborhoods. A strong local economy, high employment growth, increasing personal income and a thriving residential market are all factors that fueled Nashville’s strengthening retail sector. Davidson County is now among the top ten U.S. counties with the fastest Millennial population growth, and the growth is expected to continue. Nashville is expected to gain an average of 17,900 new residents each year for the next five years, establishing future demand for retail product.

Nashville’s current construction boom is enabling greater walkability in the CBD, drawing retailers to street level retail in office and mixed-use developments.

Suburban Nashville and the urban core are now places where people can go to live, work and play. As a result, retail construction is predicted to rise in the coming years. Retail growth is most prominent in Nashville’s urban core, where retail growth is occurring in pockets such as the Gulch and Charlotte Avenue.

Retail investment is gaining momentum due to the market’s expanding economy, burgeoning Millennial population and strong retail leasing fundamentals. The metro’s diverse and recession-resistant industries-healthcare and education-make it a hotbed for institutional investors. In addition, over the last five years, total employment in the Nashville area outpaced the national average. Retail sales growth, an indication of consumer strength, has risen at an annual average of 5.5% over the last five years, providing further support for retail market growth.

Low interest rates and a strong economic outlook have attracted out-of-state investors to the market as they acquire assets for higher cap rates in the Southeast creating an overall greater return on their investment. Grocery-anchored neighborhood and community centers located in Nashville’s premium submarkets

NASHVILLE

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Figure 41: Nashville Retail Overall Asking Rent



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such as Cool Springs, Brentwood and Green Hills will continue to appeal to institutional investors throughout the upcoming year. With stable grocers such as Publix and Kroger acquiring more of their own real estate, grocery anchored assets are becoming increasingly more rare and thus more appealing to investors.

Nashville’s urban areas such as SoBro and the Gulch have been experiencing a high level of sales activity. One notable retail sale was the acquisition of Encore, a highly successful urban retail asset in the heart of downtown Nashville. Crow Holdings purchased the asset with over 19,000 sq. ft. of retail and restaurant space from Jamestown, L.P. for $11.5 million. With the popularity and demand of mixed-use construction within the CBD, more of these types of assets may trade in the future.

More expansion lies ahead for the Nashville retail sector, asking lease rates are anticipated to rise for the next two years. Tenant demand should place upward pressure on rents, which could approach the $30 per sq. ft. on a triple net basis by year-end 2017 in Nashville’s urban core and premium submarkets.

Nashville Multifamily

Nashville’s status as one of the country’s hottest markets for apartment investment is being maintained. As a top ten market for Millennial growth, young professionals are flocking to the city, driving strong rental demand and fueling a cultural and entertainment scene that’s nationally recognized.

Led by world-class healthcare, educational employers and a burgeoning tech scene, the market is projected to create approximately 25,000 new jobs in 2015, on top of the nearly 100,000 jobs that have been created the past three years. With a fast growing economy and attractive demographics, the Nashville apartment market has had little trouble absorbing new supply, keeping apartment fundamentals in great shape.

The multifamily development pipeline continues to fire on all cylinders, as job and population growth is fueling construction activity across all sectors. Apartment construction activity appears to be peaking, with approximately 14,000 units under construction across all 10 submarkets. The hotspots for new supply

NASHVILLE

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Figure 42: Nashville Retail SF Under Construction



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NASHVILLE

continue to be focused on the infill neighborhoods of West End, Germantown and Music Row where walkability and access to nearby amenities is the key factor. The heaviest concentration of suburban development is concentrated in Williamson & Wilson Counties. We expect 6,000 units will be delivered in 2015, compared to 3,300 in 2014. Projections for 2016 are in the 8,500 range. The number of planned projects has slowed to only 6,000 units, indicating a slowdown in the pace of new deliveries due to scarcity of sites and rising costs.

Rental market fundamentals continue their climb reaching record levels. Despite the new supply, rents have continued to increase, rising by an average of nearly 30% over the past five years. Average rent is predicted to grow at an annual rate of 3.2% over the next five years. Nashville’s multifamily vacancy rate is expected to decline modestly over the next five years, a positive sign for owners and investors of multifamily.

Nashville Market Reports

http://www.cbre.us/o/nashville/Pages/market-reports.aspx

SAVANNAH

SAVANNAH


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Office Sector

The Savannah office market is small, and largely dominated by local and regional owners and developers. From a tenant-mix standpoint, the office market has several industrial tenants related to activity at the Port of Savannah, the second fastest growing port in the country. From an analysis perspective, single properties and tenant movements can result in significant changes to observed trends.

Office related job growth in Savannah is currently experiencing an upward trend. The professional and business services sector grew at a rate of 12.3% in 2015 and is its fastest growing jobs sector. Many of these jobs are a result of the increased activity from the Port of Savannah, which saw a 15.8% increase in shipments over 2014.

The absorption experienced in the past two years from the addition of office-using jobs, combined with little construction activity, has caused vacancy to drop below 7%. Absorption will continue to remain steady, causing vacancy to constrict even further. Low vacancy rates will mitigate absorption potential, but the market is

expected to tighten further.

In a small market with tightening availability, it is not uncommon for average asking rates to exhibit a downward trend. This is counter-intuitive, but makes sense as tenants are absorbing better spaces, resulting in asking rates being drawn down by less desirable space, which remain available. As new space is delivered in the next few years, expect asking rates to climb accordingly. Counter-intuitively, this will also result in a rise in vacancy.

Due to the market’s small size, the market is not likely to absorb significant amounts of speculative construction, due to the fact that developers and investors are not willing to tolerate the risk associated with a small market the size of Savannah. However, there will be opportunities for local and regional developers who are familiar with the market’s dynamics.

The most recent example of this kind of development includes a pair of suburban office buildings constructed in 2012, which brought with it 220,000 sq. ft. of space to be occupied by tenants. New office

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© 2015 CBRE, Inc.

SAVANNAH


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development during the next cycle may be shifting towards Savannah’s downtown, as Millennials–and their documented preference for urban living –will make up one- third of the metro area’s population by 2020. This trend is already evident with the ongoing redevelopment of Savannah’s historic downtown core by Ben Carter Enterprises, who recently renovated office buildings in the downtown area, coupled with adjacent newly-available apartments and updated retail space. These developments are also commanding

office rents 25% higher than the average for downtown Savannah.

As the number of jobs in the professional and business service sector increases, along with the younger labor force to fill them, the expectations for Savannah’s office market bodes well through 2017 and into the future. Small market dynamics will mitigate wide-scale development from institutional developers and investors.

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SAVANNAH OFFERS OPPORTUNITIES TO LOCAL AND REGIONAL DEVELOPERS WHO ARE COMFORTABLE WITH THE MARKET’S DYNAMICS.

© 2015 CBRE, Inc.

SAVANNAH


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Figure 45: Savannah Industrial Overall Asking Rent and Overall Vacancy


Industrial Sector

The Savannah industrial market is fueled by an efficient, modern port that is the second fastest growing port and the fourth busiest port based on container volumes. The long-term growth trajectory of the port, and by extension the industrial market, is very strong. The Port of Savannah is the port of choice for the Atlanta market, and benefits from being the staging area for products bound for the region’s five million consumers. Additionally, Atlanta serves as a major logistics hub for the east coast, resulting in even more industrial demand for modern distribution space in the Savannah market.


Logistics Hubs

All of this activity, coupled with a lack of older industrial facilities that occupy many other markets in the Southeast, has resulted in an industrial vacancy rate dropping from 20% in near 2% in the last three years.

This is pushing rent growth for the small amount of space that is available and a significant amount of speculative construction. There is currently 1.65 million sq. ft. of spec product underway. Two of the biggest developments: the 475,000 sq. ft. Northport II building and the 316,000 sq. ft. CenterPoint building, are due to deliver in early 2016. As more product is completed and tenanted, more projects will likely begin construction. However, developers will keep close tabs on available inventory to avoid overbuilding. The long-term outlook for the Savannah industrial market is strong, based largely on infrastructure investments and the widening of the Panama Canal. The Port of Savannah is investing $700 million to help make the port more accessible to larger post-Panamax ships. In conjunction, recent labor disputes on the West Coast have resulted in supply chain disruptions for industrial users, many of whom are now looking to establish distribution operations on the East Coast to mitigate future risk. With its high traffic volume, Savannah is poised to benefit. The full ramifications of the widening of the Panama Canal will not be fully realized for another five to ten years.

© 2015 CBRE, Inc.

http://www.cbre.com/research-and-reports/global-emerging-logistics-hubs-2015


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SAVANNAH


Port Report

The Savannah industrial market is expected to enjoy a continued resurgence. Unprecedented growth with its port, a record low vacancy rate, an abundance of available land within close proximity to the port, and the soon-to-be completion of the Panama Canal expansion all point to more growth in the future.

Savannah Market Reports

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Figure 46: Savannah Industrial Overall Net Absorption and SF Under Construction



http://www.cbre.us/o/savannah/Pages/market-information.aspx

ABOUT CBRE RESEARCH


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CBRE Research provides thoughtful, forward-looking insight into real estate trends, strategies and opportunities around the world to guide our clients in achieving distinctive and substantial performance.

CBRE Research is an integrated community of preeminent researchers who provide real estate market research, econometric forecasting and corporate- and public-sector strategies to investors and occupiers around the globe.

Our rigorous approach to modeling and forecasting, combined with the transactional knowledge and local market expertise of local research professionals, underscores an unmatched research platform for providing directional advice, insightful decision-making and, ultimately, better client outcomes. CBRE Econometric Advisors’ flagship Outlook product provides a consistent modeling approach for forecasting key market variables at the submarket level for both space and capital markets fundamentals.

Econometric Advisors

CBRE’s independent subsidiary, Econometric Advisors (EA), leverages its tracking and forecasting expertise across global markets in all property types and across debt, equity, private and public sectors. Using highly sophisticated forecasting models and proven analytical expertise, EA offers real estate investors portfolio advisement, debt risk management and outlook tools to accurately gauge the market from both historical and forecasted bases.

Global Research

We have over 520 researchers in over 60 countries, investing over $50 million annually in this division. Such investments equip the firm’s clients and professionals with the most current and accurate market information throughout the world’s marketplaces. CBRE’s research/data gathering operation is the largest and most comprehensive of its kind in the industry. Brokers have access to the most current listings, transaction terms, comparables and property details, as well as valuable historical data and trends. The group’s comprehensive data covers leasing, investment sales, valuation, taxes and operating expenses.

Global Research Gateway

CBRE Research publicly releases some of its analytical work, through the Global Research Gatewway, to assist the industry in understanding the global market trends and conditions that are shaping our economies and business strategies. The Global Research Gateway brings together CBRE’s collective global research intelligence onto a single platform, providing you with easy access to our most current thought leadership and insights across all geographies and sectors.

Our global research expertise extends to a number of regions, including the Americas, Asia Pacific, and EMEA.

Global Research Gateway

© 2015 CBRE, Inc.

http://www.cbre.com/research-and-reports

© 2015 CBRE, Inc.

CBRE RESEARCHThis report was prepared by CBRE Research—a network of preeminent researchers who collaborate to provide real estate market research and econometric forecasting to real estate investors and occupiers around the globe. All materials presented in this report, unless specifically indicated otherwise, is under copyright and proprietary to CBRE. Information contained herein, including projections, has been obtained from materials and sources believed to be reliable at the date of publication. While we do not doubt its accuracy, we have not verified it and make no guarantee, warranty or representation about it. Readers are responsible for independently assessing the relevance, accuracy, completeness and currency of the information of this publication. This report is presented for information purposes only exclusively for CBRE clients and professionals, and is not to be used or considered as an offer or the solicitation of an offer to sell or buy or subscribe for securities or other financial instruments. All rights to the material are reserved and none of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party without prior express written permission of CBRE. Any unauthorized publication or redistribution of CBRE research reports is prohibited. CBRE will not be liable for any loss, damage, cost or expense incurred or arising by reason of any person using or relying on information in this publication.

For more information about this regional report, please contact:

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