U.S. Regional Economic Overview: A More Balanced Recovery

Cushman & Wakefeld, Inc.
1290 Avenue of the Americas

New York, NY 10104
www.cushmanwakefeld.com
FOR MORE INFORMATION, CONTACT:
Ken McCarthy
Senior Managing Director
Economic Analysis and Forecasting
(212) 698 2502
ken.mccarthy@cushwake.com
The market terms and defnitions in this report are based on
NAIOP standards. No warranty or representation, express
or implied, is made to the accuracy or completeness of the
information contained herein, and same is submitted subject to
errors, omissions, change of price, rental or other conditions,
withdrawal without notice, and to any special listing conditions
imposed by our principals. 2014 Cushman & Wakefeld, Inc.
All rights reserved.
A Cushman & Wakefield Research Publication
SUMMARY AND CONCLUSIONS
Some of the best opportunities in commercial real estate over
the next year or two are most likely to be in secondary markets
- the cities that were worst hit by the recession and have been
slower to recover.
The economic recovery has been sluggish and centered on a few
metropolitan areas and regions. That pattern is now changing and
is gradually returning to long term trends.
The economies of many markets, such as Atlanta and San Diego,
are now accelerating along with the U.S. economy as a whole
and, in some cases, overtaking the coastal markets that have
dominated this recovery.
The U.S. economy has accelerated in 2014 as years of uncer-
tainty have been replaced by rising confdence and an increasing
readiness to take risk.
U.S. REGIONAL ECONOMIC OVERVIEW: A MORE BALANCED RECOVERY
This acceleration will lead to stronger growth in more metropol-
itan areas, creating opportunities in commercial real estate.
About a year ago, the U.S. economy accelerated to a stronger growth
trajectory. However, this acceleration wasnt immediately evident
because of continuing confrontations in Washington, conficting
economic readings and the severe 2014 winter. The recent revisions
to U.S. gross domestic product (GDP) make clear that the economy
began to grow at a stronger pace in the third quarter of 2013. U.S.
GDP has grown at annual rates of 3.5% or more in three of the last
four quarters, with the only exception being the weather-affected
contraction recorded in the frst quarter of 2014.
This acceleration can also be seen in employment data. In the latest
12 months (through August 2014), U.S. payroll employment increased
an average of 206,000 jobs per month, up from 198,000 in the pre-
ceding 12 months and 183,000 in the 12 months prior. In the latest
six months from February through August, job growth
has averaged more than 226,000 per month, despite the
winter economic slowdown.
183.1
197.9
206.8
226.2
150
160
170
180
190
200
210
220
230
Aug-12 Aug-13 Aug-14 Feb-Aug-2014
Latest six months
Source: U.S. Bureau of Labor Statistics
JOB GROWTH IS ACCELERATING
(Average monthly emloyment change, preceding 12 months)
U.S. REGIONAL ECONOMIC
OVERVIEW: A MORE
BALANCED RECOVERY
MONTHLY ECONOMIC UPDATE
SEPTEMBER 2014
U.S. GDP has grown at annual
rates of 3.5% or more in three
of the last four quarters
We expect the U.S. economy to remain on this stronger growth
trajectory for at least another year, and probably longer. For more
on our current outlook for the national economy, please see our
report U.S. Economy: Finally Running on All Cylinders published in
July 2014. http://www.cushmanwakefeld.com/en/research-and-in-
sight/2014/fnallyrunning-on-all-cylinders/
REGIONAL VARIATIONS
The U.S. Bureau of Labor Statistics publishes employment data on
metropolitan statistical areas (MSAs) across the country. For this
report, we have analyzed the data for 39 MSAs that are the largest
offce real estate markets in the nation. Payroll employment in these
39 MSAs accounts for 51% of all the jobs in the U.S. These MSAs
have added jobs at a higher rate than the U.S. as a whole during
the current economic expansion. Since U.S. employment reached
bottom in February 2010, the number of jobs in these 39 MSAs has
increased 8.9%, somewhat faster than the 7.2% gain for the U.S. as
Ken McCarthy
(212) 698 2502
RESEARCH REPORT
As the recovery has been
led by rising output in the
technology sector and the
boom in domestic energy
production, many of the
best performing MSAs have
signifcant concentrations of
employment in these sectors.
New York, NY 10104
SEPTEMBER 2014
a whole. We divide the MSAs into four major regions: Northeast/
Mid-Atlantic (6 cities), Southeast (12 cities), Midwest/Southwest (12
cities) and West (9 cities).
During the recovery, economic growth has varied greatly across
these U.S. metropolitan areas. Some recovered quickly and con-
tinued to grow at a strong pace while many others lagged behind.
As the recovery has been led by rising output in the technology
sector and the boom in domestic energy production, many of the
best performing MSAs have signifcant concentrations of employ-
ment in these sectors. This is still the case today, as the energy and
technology sectors remain strong. But as the national economy has
accelerated in the last year, a new set of MSAs has begun to grow
more rapidly.
The following table identifes the 15 metropolitan areas of the 39
we are analyzing in this report that have experienced the strongest
job growth in the frst three and a half years of the current recovery.
Only fve of the top 15
markets that showed the
largest decline in available
space in the latest 12 months
were on the list for the
previous three year period.
SEPTEMBER 2014
Ken McCarthy
(212) 698 2502
RESEARCH REPORT
New York, NY 10104
Top 15 Metropolitan Areas for Job Growth
February 2010 through July 2013
Annual Job Growth
MSA 2/10 to 7/13
Austin 3.9%
San Jose 3.5%
Nashville 3.3%
Houston 3.2%
San Francisco 2.8%
Charlotte 2.7%
Raleigh 2.6%
Denver 2.6%
Dallas 2.6%
Orlando 2.4%
Detroit 2.4%
San Antonio 2.3%
Seattle 2.3%
New York City 2.3%
Miami 2.2%
The list is geographically diverse with every region represented:
Northeast/Mid-Atlantic (1), Southeast (5), Midwest/Southwest (6)
and the West (3). Only four MSAs recorded average annual job
growth of 3.0% or more, a testament to the slow overall pace of
recovery.
One big surprise on this list is Detroit, where the strong recovery
of the auto industry caused employment to jump in the frst two
years of the recovery. While the two-year surge was enough to
put Detroit on the list, it has more recently fallen to the bottom
of the growth list. However, most of the MSAs on this list are not
surprises. Most of the MSAs with the strongest job growth have a
signifcant employment base in one or both of the technology and
energy sectors, including Dallas, San Francisco, Houston, San Jose
and Austin.
This list has changed since the economy began to accelerate about
a year ago.
Ken McCarthy
(212) 698 2502
RESEARCH REPORT
New York, NY 10104
Top 15 Metropolitan Areas for Job Growth
July 2013 through July 2014
MSA Job Growth 7/13-7/14
Raleigh 4.8%
Houston 3.8%
Dallas 3.7%
Austin 3.6%
Denver 3.1%
Orlando 3.0%
Inland Empire 3.0%
Miami 3.0%
Jacksonville 2.9%
San Francisco 2.9%
Charlotte 2.8%
San Diego 2.7%
Portland 2.6%
Atlanta 2.6%
Nashville 2.4%
The acceleration in job growth across the nation is evident, with the
overall pace of growth in the top 15 cities now stronger. In the 12
months to July 2014, the top 15 MSAs averaged a 3.1% increase in
employment, compared with 2.7% per year in the February 2010 to
July 2013 period. In addition, the number of MSAs with employment
growth of more than 3.0% has doubled to eight.
The composition has also changed, with one third of the top15
turning over. New York, San Antonio, Detroit, Seattle and San Jose
have been replaced by Atlanta, San Diego, Portland, Jacksonville and
the Inland Empire.
Among the biggest surprises is the decline in ranking of San Jose.
San Joses job growth is still decent at 2.3% over the latest 12
months but not as strong as it was earlier in the recovery. San
Francisco may be benefting at the expense of San Jose. Employment
growth in San Francisco has accelerated slightly in the latest 12
months and was faster than that in San Jose. In the frst three and
a half years of recovery, San Jose outpaced San Francisco by a
considerable margin (3.5% vs. 2.8%).
SEPTEMBER 2014
The broader changes are a result of a shift in regional growth to the
Southeast (7 MSAs), followed by the Midwest/Southwest (4) and the
West (4). The Northeast/Mid-Atlantic region has lagged in the last
12 months. This distribution of growth is more in line with historical
patterns. From 1990 to 2008, the fastest growing region of the
country was the Southeast with seven MSAs in the top 15 followed
by the Midwest/Southwest with six and the West with two.
RETURN TO TREND?
Between 1990 and 2008, the strongest employment growth in the
U.S. included such rapidly growing MSAs as Atlanta, Austin, Dallas,
Houston and Miami. In the recession, several of these cities were
especially hard hit. In Atlanta, for example, employment dropped
by 8.4% compared with 6.3% for the U.S. as a whole. There were
sharp employment declines in the manufacturing, retail and fnancial
sectors. These sectors account for approximately 25% of all jobs
in Atlanta. MSAs like Atlanta, Phoenix and Miami also experienced
steep job declines in the construction industry, which had been
an important contributor to growth during the housing boom.
Nationally, the decline in construction employment accounted for
22% of all the jobs lost in the recession. In Phoenix it accounted
for 35%!
From 1990 to 2008, the
fastest growing region of the
country was the Southeast,
with seven MSAs in the top
15, followed by the Midwest/
Southwest with six and the
West with two.
If the recovery continues to
accelerate as we anticipate,
a more rapid recovery
should occur in markets in
the Southeast in particular.
Ken McCarthy
(212) 698 2502
RESEARCH REPORT
New York, NY 10104
SEPTEMBER 2014
Now these MSAs are coming back. Compared with the frst
three and a half years of recovery, job growth in the last year has
accelerated by nearly 40% in Atlanta and is up 45% in Miami.
The list of the top 15 MSAs in the latest year is now very close
to that of the 1990 to 2008 period. In fact, 13 of the top 15 MSAs
in the last year were also in the top 15 for the 18-year period
from 1990 to 2008. It does appear that as the job recovery has
accelerated over the last year it has also broadened into more
industries. As of July, manufacturing production was within 0.1% of
the all-time high reached in 2007 just before the recession began. In
addition, other segments of the economy, like construction and local
government, are growing and hiring more aggressively.
This has led to a geographic growth pattern more consistent with
historical trends than what we saw early in the recovery when
a couple of strong sectors dominated the expansion. This return
to historical growth patterns has important implications for the
outlook for commercial offce markets across the U.S.
COMMERCIAL REAL ESTATE IMPLICATIONS
We compared the change in the amount of available space on the
market during the frst three years of the recovery through the
second quarter of 2013 in major U.S. metropolitan areas (central
business district and suburban markets combined) with the change
in the most recent 12 months through the second quarter of 2014.
Markets with the largest decline in available space
2Q-2010 to 2Q-2013
Change in Available
Space Per Year
2Q-10 to 2Q-13
Market (MSF)
Dallas -2.77
Boston -2.41
Houston -1.86
Orange County -1.78
San Francisco -1.55
Denver -1.24
Chicago -1.09
Silicon Valley -1.00
San Diego -0.83
Portland -0.66
Orlando -0.60
Atlanta -0.58
Phoenix -0.57
Midtown NY -0.56
Miami -0.46
In the frst three years of the recovery, commercial real estate
markets mirrored national employment trends with the bulk of
the improvement taking place in cities with heavy technology and
energy components. Among the markets that showed the largest
decline in available space were Houston, Dallas, San Francisco
and Boston.
This combination of stronger
overall growth and spreading
recovery means that we
are likely to see more
improvement in terms of
declining vacancy rates and
upward trending rents in
more markets across the U.S.
during the coming year.
Ken McCarthy
(212) 698 2502
RESEARCH REPORT
New York, NY 10104
SEPTEMBER 2014
Markets with the largest decline in available space
2Q-2013 to 2Q-2014
Change in Available
Space Per Year
2Q-13 to 2Q-14
Market (MSF)
Chicago -3.07
Atlanta -2.90
Central New Jersey -2.04
Los Angeles Metro -1.72
Downtown NY -1.28
Denver -1.18
Miami -0.89
Phoenix -0.86
Ft. Lauderdale -0.73
Philadelphia -0.66
Fairfeld County -0.62
Jacksonville -0.58
San Francisco Peninsula -0.36
Palm Beach -0.35
Inland Empire -0.31
As the recovery has diversifed, different markets have begun to
show signifcant improvement and move up the list. These include
Los Angeles, Atlanta, New Jersey and Miami. Only fve of the top
15 markets that showed the largest decline in available space in
the latest 12 months were on the list for the previous three year
period. In fact, in the past year, four of the top 15 best performing
metropolitan areas were in Florida, which was far less represented
in the previous three years of recovery. If the economy continues to
accelerate as we anticipate, a more rapid recovery should occur in
markets in the Southeast in particular.
OUTLOOK
The U.S. economy has entered a period of strong, sustained growth
that will likely last for the next year or two. In this new phase, the
recovery is broadening into more metropolitan areas across the
country. This can be seen in the shifts in job growth away from
almost exclusively energy and technology driven markets to a much
broader group. This is not to say that technology and energy MSAs
are weakeningfar from it. They will likely remain an important
contributor to growth in the U.S. economy for several more years.
Today, markets that had languished during the early years of the
recovery are among the strongest markets. As the recovery has
spread and deepened, growth today is closer to the trends we saw
before the recession with many cities in the South and the West
among the strongest.
For the commercial real estate industry, this combination of
stronger overall growth and spreading recovery means that we are
likely to see improvement in terms of declining vacancy rates and
upward trending rents in more markets across the U.S. during the
coming year.
This suggests that some of the best opportunities in commercial
real estate over the next year or two are likely to be in
metropolitan areas where economic performance has lagged. The
markets that were slowest to recover have some off the best upside
potential now.

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Cushman & Wakefeld, Inc.

1290 Avenue of the Americas

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