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G REATER C INCINNATI Q316 | O FFICE M ARKET R EPORT The greater Cincinnati office market posted over 620,000 square feet of positive net absorption in the third quarter; with over 490,000 square feet occurring in Class A office product alone. Although the Class A office market has been showing steady growth in absorption every quarter, with a year-over-year change from 15,000 square feet in third quarter 2015 to the current 490,000, this recent surge of activity is due, in large part, to the 338,000 square-foot delivery of the new GE building at The Banks. Vacancy rates for the greater Cincinnati office market continue to decline, ending the third quarter at 17%, down nearly 3% from this same time last year. Average lease rates in the Cincinnati office market continue to climb, ending the quarter just shy of $19.00/SF Full Service Gross*, a 3.4% year-over-year increase from the $18.14 FSG reported in the third quarter of 2015. Third quarter also brought a strong and sustained appetite for higher-yielding investment opportunities outside primary markets. The pricing gap between primary and secondary office markets remains at an all-time high. The average cap rate for primary markets is 4.1%, while the average cap rate for secondary markets is 5.2%. Cap rates continue to compress, but at a moderate pace. More than two-thirds of the 32 largest office markets are seeing year-over-year cap rate compression. Job growth in the Cincinnati MSA has been steady since 2011, and unemployment rates have consistently been lower than those recorded for Ohio overall. Moreover, the Cincinnati MSA exhibits both a higher GDP growth rate, and a higher GDP per capita than Ohio. These trends demonstrate the strength and resilience of the commercial real estate market, and serve as positive economic indicators of recovery. Source: 1. Xceligent® 2. 2016 Reis Inc.; 3. Integra Realty Resources *Average Weighted Asking Rates $18.75/SF FSG O FFICE M ARKET VACANCY RATES NET ABSORPTION AT - A -G LANCE CONSTRUCTION LEASE RATES SVN |RICORE I N VE S T M E N T M A N A G E M E N T , I N C . | 11500 N O RT H L A K E D R . | S U IT E 100 | C IN CIN N A T I , OH 45249 | 513 -272-680 0 M A IN US E CONOMY AT - A -G LANCE | O FFICE S ECTOR S ET TO O VER P ERFORM As the U.S. economy maintains steady, yet relatively tepid growth, the office sector appears to be one of the fastest growing, on a relative basis. On the national level, office-using employment has been growing, on average, over 2.4% per year, compared to just 1.7% for all non-farm employment. Within the office sector, Professional & Business Services, and Financial Activities have been the fastest growing sectors growing at an average of 2.8% and 2.0% respectively (versus 0.7%). Overall, Cincinnati is experiencing similar trends, with the local year-over-year growth in all non-farm employment at 1.6%. Financial Activities has been the fastest growing local sector at 4.9%, Information Services has outperformed the national rate at 1.5% growth, and Professional & Business Services lags at a negative -0.6% rate. The continued growth and performance of the office sectors should result in continued positive net absorption for greater Cincinnati, resulting in continual improvement in rental and occupancy rates. Further, the differential performance of Class A properties versus Class B & C could grow wider as older space is more likely to suffer from functional obsolescence. The net result is that landlords owning desirable space should see improving net operating incomes and values for the near term and beyond. It’s important to note that many firmsRleasing office space today have higher parking) and employee density O HIO U NEMPLOYMENT ATES (C INCINNATI , C OLUMBUS , D AYTON requirements; thus, strong job growth in today’s market doesn’t always equally equate to growth in the leasing market. Overall, office fundamentals are strong, perhaps the best of any core commercial sector. Investors should experience positive results, at least with respect to market fundamentals, near and long term. Pricing risks lie in increasingly certain interest rates moves and global macroeconomic uncertainty. In short, cap rates are more likely to move up than down given today’s low rates and historical trends. Shocks to the overall system could easily disrupt corporate profits which have been relatively flat and even down in 2016; which, in turn, could reduce hiring and subsequent demand for office space. Still, the risk of recession appears relatively low in the near term and many of these risks are not forecast to come to fruition. Source: Joshua A. Harris, Ph. D., CRE, CAIA | Managing Partner | Lakemont Group Commercial real estate investors, including those with interests in the Cincinnati market, are not likely to experience any immediate affect from a rate rise, as fundamentals remain relatively solid. - Joshua Harris, Managing Partner at Lakemont Group C INCINNATI MSA | T OTAL E MPLOYMENT 1.09 Total Employed (Millions) 1.07 1.05 1.03 1.01 0.99 0.97 0.95 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 C INCINNATI MSA E MPLOYMENT | Y EAR -O VER -Y EAR G ROWTH 3% 2% 1% 0% -1% -2% -3% -4% -5% -6% '07 '08 '09 '10 '11 '12 '13 '14 SVN |RICORE I N VE S T M E N T M A N A G E M E N T , I N C . | 11500 N O RT H L A K E D R . | S U IT E 100 | C IN CIN N A T I , OH 45249 | 513 -272-680 0 M A IN '15 C INCINNATI O FFICE S UBMARKET O VERVIEW SUBMARKET/CLASS # OF BUILDINGS TOTAL SF CBD Class A Class B Class C CBD Peripheral Class A Class B Class C Midtown Class A Class B Class C Kenwood Class A Class B Blue Ash/Montgomery Class A Class B Class C Tri County Class A Class B Class C West Chester Class A Class B Fields Ertel/Mason Class A Class B VACANT SF VACANCY RATE QTRLY ABSORPTION (SF) 71 13,219,845 2,210,454 16.7% 332,720 14 6,905,746 994,319 14.4% 358,607 37 5,361,120 1,027,011 19.2% -18,436 20 952,979 189,124 19.8% -7,451 27 2,104,828 537,529 25.5% 9,460 5 789,967 316,567 40.1% 7,135 12 757,194 176,224 23.3% 3,171 10 557,667 44,738 8.0% -846 39 3,021,950 268,743 8.9% 57,477 12 1,404,545 155,450 11.1% 386 16 1,045,934 45,608 4.4% 57,091 11 571,471 67,685 11.8% 21 1,451,516 131,973 9.1% 12,168 6 996,823 93,694 9.4% 5,381 15 454,693 38,279 8.4% 6,787 80 5,035,457 519,723 10.3% 26,908 21 2,546,643 99,379 3.9% 4,355 56 2,415,011 377,603 15.6% 22,553 3 73,803 42,741 57.9% S UBMARKET V ACANCY R ATES (C LASS A, B & C): 46 3,560,077 862,818 24.2% -1,035 7 1,001,196 126,758 12.7% 3,199 32 2,175,710 648,399 29.8% -4,234 7 383,171 87,661 22.9% 21 1,616,789 287,454 17.8% 21,417 12 1,404,626 248,743 17.7% 16,573 9 212,163 38,711 18.2% 4,844 41 3,091,574 664,092 21.5% 89,446 12 1,630,862 178,552 10.9% 79,419 26 1,069,291 214,677 20.1% 10,027 YTD ABSORPTION (SF) 487,271 409,933 33,312 44,026 -54,457 -86,952 7,088 25,407 459,668 408,584 48,304 2,780 101,777 96,943 4,834 59,515 19,277 35,288 4,950 112,651 13,543 108,355 -9,247 -57,732 -56,216 -1,516 149,315 133,281 16,127 Class A: Premier office users. Above market rents. High quality finishes. State-of-the-art systems. Exceptional accessibility. Strong market presence. Class B: Wide range of office users. Average rents. Standard finishes. Does not compete with class A product. Class C: Users requiring functional office space at market or below market rents. SVN |RICORE I N VE S T M E N T M A N A G E M E N T , I N C . | 11500 N O RT H L A K E D R . | S U IT E 100 | C IN CIN N A T I , OH 45249 | 513 -272-680 0 M A IN VACANCY R ATE BY S UBMARKET 31.3% 25.5% 16.7% 16.7% 8.9% 21.5% 9.1% 10.3% AVERAGE W EIGHTED A SKING R ATES BY MIDTOWN NKY RIVERFRONT NORTHERN KENTUCKY H ISTORICAL N ET A BSORPTION (SF) 17.8% 13.6% 17.3% S UBMARKET (FSG) CBD CBD PERIPHERAL 24.2% BY $19.81 $18.11 P RODUCT T YPE$20.78 $20.96 $19.61 $26.86 KENWOOD $18.16 $17.24 BLUE ASH/MONTGOMERY FIELDS ERTEL/MASON TRI COUNTY $14.26 $22.30 WEST CHESTER EAST WEST $17.06 $17.26 I continue to be amazed at how tenacious our advisors have been in filling the last remaining vacancies in our leased and managed office product. Our investors could not be happier with their cash flow. - John Rickert, Executive Managing Director at SVN | RICORE C ONSTRUCTION A CTIVITY 260,500 SF BY S UBMARKET (T OTAL SF) 236,000 SF BLUE ASH/MONTGOMERY EAST MIDTOWN C HANGES SUBMARKET 80,000 SF 58,878 SF 42,000 SF IN 47,000 SF NORTHERN KENTUCKY TRI COUNTY WARREN COUNTY A BSORPTION | S ELECT T RANSACTIONS PROPERTY NAME | ADDRESS SF OCCUPIED/VACATED TENANT BUILDING CLASS CBD GE Building @ The Banks 338,533 General Electric (GE) Class A Fields Ertel/Mason London Computer Systems 77,624 London Computer Systems Class A Central Parke Office Building II 39,400 - Confidential - Class B Dolwick Business Center 39,354 St Elizabeth Healthcare Class B CBD Peripheral Flatiron Building (6,800) Hollywood Casino Class B CBD Peripheral The Baldwin Offices (11,865) Travelers Insurance Class A Blue Ash/Montgomery Redhill Office Park I (19,000) Goettsch, Inc. Class B Omnicare Center (29,610) Omnicare Class A Midtown Northern Kentucky CBD SUBMARKET PROPERTY | ADDRESS SALE PRICE SF SOLD BUYER SELLER BUILDING CLASS CBD URS Center $8,000,000 197,302 36 E Seventh LLC JPMCC 2004 CIB Class B CBD Former Terrace Plaza $7,000,000 221,695 Cincinnati Terrace Plaza LLC Prodigy Properties Class B Northern Kentucky 601 Centre View Blvd $4,500,000 28,294 Saint Elizabeth Medical Inc. NKY Cancer Center Class A West Chester 8945 Brookside Ave $2,350,000 10,280 MWM Properties LLC Meade Development Class B Northern Kentucky 8780 US Highway 42 $2,000,000 18,537 GT Enterprise LLC Julian Mackenzie III Class B Fields Ertel/Mason Deerfield Urgent Care $1,400,000 5,734 Mason Exchange LLC 996 Escort Drive LLC Class B SVN |RICORE I N VE S T M E N T M A N A G E M E N T , I N C . | 11500 N O RT H L A K E D R . | S U IT E 100 | C IN CIN N A T I , OH 45249 | 513 -272-680 0 M A IN