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Q2 2016 Edition

Anticipating What Comes Next
Mark Doran

Slow Start in 2016 but the Outlook is Positive
David Versel and Jonathan Chambers

Quantify Tenants' Workplace Healthiness with WELL Building Standard®
Dave Hubka

Developing for Baby Boomers
Mark Culwell

Net Your Maximum ROI by Implementing Popular Property Improvements
Reed Christianson and Erin Wendorf


Transwestern is a privately held real estate firm of collaborative entrepreneurs who deliver a higher level of personalized service – the Transwestern Experience. Specializing in Agency Leasing, Management, Tenant Advisory, Capital Markets, Research and Sustainability services, our fully integrated global enterprise adds value for investors, owners and occupiers of all commercial property types. We leverage market insights and operational expertise from members of the Transwestern family of companies specializing in development, real estate investment management and research. Transwestern has 34 U.S. offices and assists clients through more than 180 offices in 37 countries as part of a strategic alliance with BNP Paribas Real Estate. Experience Extraordinary and @Transwestern.

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Anticipating What Comes Next

A Message from Mark Doran

Looking ahead. It’s what all organizations must do to push the industry forward and exceed the expectations of team members, partners and clients. In this latest edition of Insights, we share some examples of how Transwestern is anticipating what comes next and how we advise clients to capitalize on these trends. Articles explore capital improvements that lead to outstanding return on investment, the new WELL Building Standard®, and a notable demographic trend emerging in multifamily.

In 2015, Transwestern marked the strongest performance in its 38-year history. In addition to strong financial performance, we celebrated recognition for our corporate culture, client solutions and achievements in sustainability. This momentum carried us into 2016, as we continue to execute a number of initiatives to promote innovation across our family of companies and further enhance our client service. In short, we want to ensure in every interaction we live up to our promise of Experience Extraordinary – for our team members and for our clients.

“We want to ensure in every interaction we live up to our promise of Experience Extraordinary – for our team members and for our clients.”

One initiative we are especially proud of is our new national partnership with Make-A-Wish®, which grants wishes for children with life-threatening medical conditions. Make-A-Wish was selected as our philanthropic partner because its values so closely match those of Transwestern: to create extraordinary experiences for those it serves. No matter how much we grow, we’ll never lose sight of the importance of giving back to the communities we serve; this is a common goal that unites us as team members and partners.


Mark Doran
Chief Operating Officer
David Versel
Senior Vice President
Delta Associates
Jonathan Chambers
Delta Associates
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In spite of feeble gross domestic product growth in the U.S. economy during the first quarter, continued strong job growth and a healthy housing market have allayed concerns of a potential downturn.

Gross Domestic Product (GDP)

Real GDP growth for 2015 was 2.4 percent, according to the Bureau of Economic Analysis. GDP growth was driven primarily by personal consumption expenditures, which was partially offset by negative contributions from net exports and inventory investment. GDP expansion was uneven during the year, though, with sub-1 percent growth in the first and fourth quarters but stronger growth during the middle of the year. Moving forward, negative net exports will continue to be a significant drag on the U.S. economy as a strong U.S. dollar and weak Chinese economy hamper the trade balance. The most recent report from the Federal Reserve Bank of Philadelphia’s Survey of Professional Forecasters projects real GDP growth to be 2.6 percent in 2016, 2.5 percent in 2017 and 2.8 percent in 2018.

Looking ahead, Delta Associates expects GDP growth to improve from the marginal level in the first quarter to more substantial levels in the remaining quarters of 2016. Consumer spending will continue to propel the economic expansion, with high construction expenditures and a robust housing market also providing significant positive contributions. Oil prices have bounced back from their lows, which should provide a desperately needed boost to the energy sector. The widening trade deficit resulting from a strong U.S. dollar and weak demand overseas will continue to dampen economic growth in the period ahead. The Federal Reserve Bank of Philadelphia’s Survey of Professional Forecasters projects real GDP growth to be 2.6% in 2016, 2.5% in 2017 and 2.8% in 2018.

Job Growth

Job growth remained strong through first-quarter 2016 with the national economy adding 2.78 million new payroll jobs during the 12 months ending March 2016. Month-to-month seasonally adjusted gains during the period averaged a healthy 231,500 jobs per month. Leading all sectors in net job additions were the Education/Health and Professional/Business Services sectors, which together accounted for just under half of total job growth. The Education/Health sector will become increasingly important to U.S. economic growth as the populace gets older and demands more healthcare services. Manufacturing was the only sector to experience a net loss in jobs during the 12 months ending March 2016. Weak demand overseas has hampered growth in the sector and will likely continue to do so in the immediate future.

Payroll Job Growth
“The Education/Health sector will become increasingly important to U.S. economic growth.”
Payroll Job Growth

While the private sector continues to account for the vast majority of new hires, the public sector has gained a steadily increasing share of job growth. State and local governments account for the bulk of public sector growth as local tax revenues swell, while federal job growth has been subdued. Federal job growth will likely be more substantial in 2017, after agencies have shaken off the effects of budget austerity as well as the uncertainty surrounding the presidential election.


Initial Unemployment Claims

Initial unemployment claims have decreased 61% from a peak of 659,250 in March 2009 to 258,000 in March 2016. The seasonally adjusted unemployment rate stood at 5.0% as of March 2016, down 50 basis points from a year prior and up 10 basis points from February 2016 as the labor force expanded. The level of unemployment is currently at what most economists consider to be full employment (i.e., cyclical unemployment is 0%). Unemployment will likely decrease marginally, then remain relatively flat through the remainder of 2016 as labor market slack diminishes.

Payroll Job Growth

Wage Growth

The average hourly wage increased 2.3% between March 2015 and March 2016, a slight improvement from prior years but still well below the 3 to 4% annual increases experienced during the last expansion period.

Payroll Job Growth
“The strong job growth in higher-paying job sectors should place upward pressure on wages moving forward.”

More troubling is that wage growth has been weakest for lower-skilled occupations, which has increased the wage gap between higher- and lower-paying jobs. This is a pressing issue for many aspects of the economy, including price levels and consumption patterns. The strong job growth in higher-paying job sectors should place upward pressure on wages moving forward. Delta expects wage growth to slowly increase by approximately 50 basis points through the remainder of the year.

Corporate Profits

U.S. corporate profits dipped to $1.89 trillion during 2015, the lowest level since 2011 and down from the 2014 total of $2.07 trillion. Profits in the energy sector have been hit by low oil prices, and weak exports have cut earnings for several other sectors of the economy. Despite the decline in profits, companies remain optimistic in their outlooks and continue to hire workers. Strong consumer demand domestically will have a buoyant effect on corporate earnings. Companies are continuing to weigh options on how to best deploy earnings and profits and, in many cases, are showing a preference for mergers and acquisitions over riskier, capital-intensive projects that could rock the boat for shareholders.

U.S. Corporate Pre-Tax Profits

Housing Market

Home prices in the 20 major metro areas covered by S&P/Case-Shiller increased 5.4% during the 12 months ending February 2016, the most recent data available. This is down from the January 2016 figure of 5.7% and well below the heated 10 to 15% rates of appreciation seen in 2013 and early 2014. Price growth has cooled off some as inventories have begun to catch up with demand, which remains strong across most of the nation. According to the National Association of Realtors, the annualized pace of existing home sales increased to 5.3 million in March 2016, unchanged from 5.3 million in March 2015. The current sales pace is the fastest seen since before the national housing crash in 2007. The December 2015 increase in the federal funds rate resulted in minor increases in lending rates for 15- and 30-year mortgages, though rates have begun to decline again in the early months of 2016. An improving economy has also resulted in loosened restrictions on credit, broadening the pool of prospective homebuyers.

Annual Change in Existing Home Sale Prices
“The current sales pace is the fastest seen since before the national housing crash in 2007.”
Existing Home Sales vs. Sales Prices

Inflation and Interest Rates

Robust job growth and sustained GDP growth during 2015 prompted the Federal Open Market Committee to implement a moderate 0.25% increase in the federal funds rate target at its December 2015 meeting. The rate hike is the first since the recession and in nearly a decade. In addition to the December 2015 interest rate increase, the Federal Reserve has signaled that it intends to continue to increase rates modestly in 2016 but declined to make another increase at its March 2016 meeting. However, another increase is expected in June 2016. Still, interest rates have been at historically low levels, so the expected increases will keep long-term interest rates relatively low. Rates for 10-year Treasury notes are expected to remain below 2% at least until the latter half of the year.

“Delta expects a modest increase in GDP during 2016 driven largely by consumer spending and hiring.”

One interesting trend overseas is the increasingly common implementation of negative interest rates. The European Central Bank first employed the strategy in 2014, and the Bank of Japan adopted the policy in January of 2016. The rationale behind the lowering of interest rates below zero is that banks will be less likely to hoard cash and increase lending at lower costs to borrowers. The unorthodox tool is meant to combat deflation and heightened risk aversion, but there is widespread concern over the potential negative effects and backlash resulting from the usage of sub-zero rates.

Inflation and Personal Consumption

Consumer prices ticked up 0.9% during the 12 months ending March 2016. The personal consumption expenditure price index (PCEPI), which takes into account changes in consumption habits as people substitute some goods and services for others, rose 0.8% during the 12 months ending March 2016. For perspective, CPI and PCEPI increased 0.7% and 0.2%, respectively, in 2015. Delta expects economic expansion to drive prices closer to the Fed’s target rate of 2.0% in the next year or so, dependent on the actual frequency and magnitude of rate increases.


More than five years after the end of the Great Recession, the national economy is on a trajectory of slow, but sustained, economic expansion. Looking forward, Delta expects a modest increase in GDP during 2016 driven largely by consumer spending and hiring. Most major industry sectors should experience job growth during the year, led by the Education/Health and Professional/Business Services sectors. The Manufacturing sector will likely continue to struggle for the balance of the year, barring any significant improvement in foreign markets. The energy industry will enter a slow recovery period as crude oil prices bottomed out at the beginning of the year and have gradually risen from their floor. With national unemployment at 5%, there is little slack left in the labor market, which should begin to drive stronger wage growth.

12-Month Payroll Employment Change

The Fed is poised to raise the federal funds rate another 0.25% this summer as stability returns to capital markets and inflation rises. However, the effect of an increase will have a limited effect on long-term debt. There doesn’t appear to be a major rebound on the horizon for U.S. exports, as demand abroad remains weak. The already strong value of the dollar relative to foreign currencies, and the prospect of future rate increases, have only exacerbated the problem.

David Weisel
David Weisel

Jonathan Chambers
Jonathan Chambers

Delta Associates

This article is based on economic data available as of May 5, 2016

Dave Hubka
Director — Commissioning

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Workplaces that promote health and well-being are important to corporate real estate users seeking to improve employee productivity and compete for the most talented workers. Various programs exist to achieve office-related wellness efforts, but until recently, no method was available to measure their effectiveness.

Acting as a strategic complement to LEED®, the nascent WELL Building Standard® focuses on the health of people similar to the way LEED addresses energy efficiency of buildings. The International WELL Building Institute™ introduced the performance-based system last year for measuring, certifying and monitoring how the built environment impacts health through air, water, nourishment, light, fitness, comfort and mind.

A café with healthy food options is a great feature suggested by WELL

Designed by leading physicians, scientists and industry professionals, the WELL Building Standard identifies 100 performance metrics, design strategies and policies that improve productivity and health. For instance, medical studies show that giving employees the freedom to sit in different places from day to day allows them to be more creative and productive. Resulting from humans’ innate tendency to connect to nature, organizers say workers are positively impacted by lighting, artwork, paint and carpet that reflect the outdoors. WELL suggests placing artwork or an outdoor view at the end of every long hallway to capitalize on this attraction to nature. Other recommended features include:

  • Café with healthy food options
  • Fitness center in the building or nearby
  • Increased lighting and music in transient spaces, such as stairwells
  • Daycare on-site

The WELL Building Standard was pioneered by Delos and is managed and administered by the International WELL Building Institute. Thus far in the ambitious undertaking, the Institute has created the WELL standard, assessment process, and curriculum for a WELL Accredited Professional designation. For WELL v1, there are three project typologies: New and Existing Buildings, New and Existing Interiors, and Core and Shell. A map at shows locations of more than 120 projects consisting of 25 million square feet worldwide that have registered through WELL, with a handful having been certified as part of a pilot program. The WELL AP program is so new that the first applicants just received their examination results in April, making them the inaugural group of WELL APs.

“Medical studies show that giving employees the freedom to sit in different places from day to day allows them to be more creative and productive.”

Outdoor views capitalize on our attraction to nature

WELL’s start-up phase resembles that of the U.S. Green Building Council’s LEED certification, whose pilot program launched in 1998 to measure energy efficiency in buildings. LEED was an unknown concept for many years before growing into the well-respected certification it is today.

When should an organization invest in WELL certification? There are many factors to consider, and each company must weigh the costs and benefits to determine if early adoption is warranted. Transwestern provides comprehensive WELL consulting services, in addition to WELL assessments to determine the score a building or tenant space could earn if certification was the goal. The assessment process, on its own, is a constructive undertaking. Whether or not an occupier’s space obtains certification, adopting certain recommended improvements could achieve the desired outcome. Also, Transwestern assists professionals preparing to take the WELL AP exam, which our firm was privileged to help formulate.

The commercial real estate industry likely will see increased emphasis on a built environment that promotes health and well-being. Understanding the factors that come into play, how they are measured and where improvements can be made will benefit owners, tenants and service providers alike.

Dave Hubka
Dave Hubka

Mark Culwell
Managing Director
Transwestern Development Co.

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Astute developers are targeting a rental demographic that is emerging in this multifamily cycle – Baby Boomers. And the resulting communities are as different from traditional multifamily assets as Baby Boomers are from conventional renters.

Transwestern Development Co. is breaking ground in second-quarter 2016 on The Laurel, a community that reimagines rental units for tenants approaching retirement age. Along with investment partner JPMorgan, Transwestern will add 159 cutting-edge units to an area of Dallas with high barriers to entry, also an important differentiator in the current development cycle. The site is located where Dallas’ prestigious Preston Hollow neighborhood meets Highland Park and University Park – municipalities collectively known as Park Cities.

The Laurel redefines unit sizes, floor plans, amenities and services to meet the specific needs of Baby Boomers, whose large homes are filled with valuable furniture and mementos from years spent raising a family. Empty-nesters are not likely to downsize into smaller, existing multifamily units even though lifestyle changes and leisure pursuits make rentals appealing. The solution? The Laurel’s units range from 1,100 to 2,310 square feet and average 1,400 square feet, far surpassing the Dallas average of 825 to 1,000 square feet. The community also consists of more two- and three-bedroom units than most properties.

“The Laurel redefines unit sizes, floor plans, amenities and services to meet the specific needs of Baby Boomers.”

Baby Boomers are expected to do more in-home entertaining than their rental counterparts, so units include defined dining spaces and kitchens with extra cabinets and counter space for food preparation. Units are spacious throughout, with large walk-in closets and laundry rooms separated from the main living area. Some units include a powder room and secondary space for an office or den.

The Laurel : Dallas, TX
Distinctive properties in high-demand areas are positioned for successful outcomes

And in a nod to these residents’ refined tastes, interior finishes rival that of custom homes, with wood floors, quartz countertops, designer appliances and lighting, upgraded plumbing fixtures and luxurious master baths containing freestanding showers and soaking tubs.

The Laurel’s common areas are also uncommon, providing solitude in the heart of the city. Two quiet courtyards feature fountains while a peaceful pool has several intimate gathering areas. The property will have a fitness center, formal dining room with catering kitchen and conference space for board meetings and business functions. The underground parking garage, which includes 20 private garages, offers convenience and additional security for a lock-and-leave lifestyle. And on-site services comparable to those at high-end hotels are designed to appeal to Baby Boomers.

“The Laurel will allow downsizing neighbors to remain in their trade area.”

The Laurel’s architectural style is compatible with the adjacent Preston Hollow neighborhood, where many of the stately homes are Spanish Colonials with red-tiled roofs, ornamental iron work and enclosed courtyards. Transwestern Development Co. worked closely with neighbors on the final design, limiting building heights to three and four stories as well as creating a pocket park at the adjoining property line for joint use with Preston Hollow residents. The Laurel will allow downsizing neighbors to remain in their trade area, which includes the city’s highest-end retail destinations – comprised of upscale shops, restaurants and employment centers – and has access to key highways and both major airports.

Regardless of the stage of the multifamily cycle, developers that create distinctive properties in high-demand areas are positioned for successful outcomes. There’s a long-held theory that high-quality, well-designed projects will always rise to the top and outperform the market. We believe that will be the case in summer 2017 when the first units deliver at The Laurel.

Mark Culwell
Mark Culwell

Reed Christianson
Agency Leasing
Erin Wendorf
Vice President
Agency Leasing
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Real estate investors that stay abreast of emerging trends in the modern workplace achieve the highest return on investment. Knowing, for instance, that many of today’s corporate real estate users want office environments to feel as inviting as their homes could boost occupancy and fiscal performance. Identifying the most valuable capital improvements, understanding the impetus behind design shifts and investing in the relevant upgrades can position owners and asset managers to meet or exceed financial projections.

Occupiers are increasingly drawn to commercial property that reflects their brand and culture, sometimes called “statement space,” as well as amenities that help to attract and retain talent. Organizations that see real estate as a strategic investment for their business seek the sort of cutting-edge environments that sway employment decisions across generations, and particularly for Millennials, which last year became the largest segment of the workforce and will represent 75 percent of the labor pool by 2030, according to the U.S. Bureau of Labor Statistics. While 2016 data on workplace effectiveness from research firm Leesman reports consistent workplace priorities across generations, it is generally accepted that Millennials are driving new approaches to collaboration space, building amenities, workplace flexibility and location vibrancy, as well as reaffirming the importance of workplace sustainability and wellness. As a result, many companies are willing to pay significantly more for a “cool” atmosphere that maximizes the tenant experience, fosters collaboration and inspires productivity and loyalty in employees.

For example, Shorenstein Properties is outperforming expectations after launching a $20 million capital improvement program at Washington Square – a 1.2 million-square-foot, three-building project in downtown Minneapolis.

“Many companies are willing to pay significantly more for a ‘cool’ atmosphere that maximizes the tenant experience, fosters collaboration and inspires productivity and loyalty in employees.”

Washington Square : Minneapolis, MN
1.2 MSF, three building complex $20 million capital improvement program

At the 22-story 100 Washington Square, an LED-backlit staircase leads to a widened main entrance and new coffee shop, creating a pedestrian-friendly street-level presence. A modern, grand staircase leads to the second-story, main lobby level that connects to an eight-mile skyway system linking buildings throughout downtown Minneapolis. Several indoor and outdoor shared amenity spaces provide additional common areas for tenants that are leasing less square footage per person than in years past.

On the fourth-level amenity floor, the ceiling was removed to create a 14-foot high space with exposed ductwork and updated décor that includes stylish lighting fixtures, comfortable furniture and walls of reclaimed wood. An indoor collaborative lounge provides space for employees to work individually or in groups, relax and play pool or ping pong. An uninviting café that had long rows of sterile, white tables was transformed into a more functional space with a variety of seating options to support a greater range of activity, from the formal to informal.

Outdoors, an under-utilized plaza was converted into a multi-purpose space with a club lounge, lawn space, coffee shop, bocce court and Zen garden with water feature, rock garden and bike parking. Extensive landscaping, LED lighting, Wi-Fi and electrical outlets throughout make the plaza both a “third workplace” and a relaxation space. Extensive upgrades also were made to the fitness center to boost the health and well-being of employees, a top priority of corporate America. A comparable, comprehensive transformation also is underway at 111 Washington Square, which was vacant before the work began.

Have the renovations paid off? Converting the older property into an urban campus environment has struck a chord with occupiers, especially those in technology, finance, advertising and consulting. During the first 16 months of renovation, Transwestern has leased more than 345,000 square feet of vacant space, boosting occupancy from 81 to 93 percent at 100 Washington Square and from zero to 65 percent at 111 Washington Square. Net rental rates have increased from $11.25 to $16.25 per square foot – 30 percent above pro forma. And while this return isn’t guaranteed for every modernization program, investors that offer a product addressing the latest needs and desires of today’s tenants are more likely to meet or exceed performance objectives and elevate their prominence in the market.

Reed Christianson
Reed Christianson

Erin Wendorf
Erin Wendorf