Manulife US REIT - Annual Report 2020

include finance, insurance, energy and retail tenants, which have borne the brunt of the current economic downturn. Annual completions fell in 2020 compared to 2019 by 16.8%, largely a result of COVID-19 induced construction delays, leading to the broader construction pipeline remaining relatively static at 123.9m.s.f. Oversupply remains a significant risk through 2022, however, despite a longer timeframe for delivery of projects currently underway through 2025. Few large-scale projects delivered in Q4, with only three (167 N Green in Chicago, the TSA HQ in Northern Virginia and 45 L in Washington, D.C.) larger than 500,000 s.f. being occupied during the final three months of the year. Groundbreakings were evenmore restricted; apart fromVisa’s newheadquarters beginning construction in San Francisco, all starts were less than 250,000 s.f., almost all of which were majority or fully pre-leased at the time of groundbreaking. Preparatory works for the expansion of 1 Madison in New York also started, underlining the positive longer-term sentiment in gateway markets. Liquidity once again improved in Q4, bringing sales volumes up by a further $24.8 billion to $78.6 billion at year-end. At 42.4%, annual sales volumes for office trailed industrial and multi-family significantly, but remained above retail and hotels. As with leasing, primary markets saw a greater shift in cap rates, rising to 6.2% (+21 basis points), whereas secondary geographies registered a 12-basis-point increase. Net Absorption Hit A Record Low of -84 M.s.f. in 2020 Sublease Space has Surpassed Dot-Com Levels NYC, SF and Seattle Account for 28% of Sublease Growth 2021 will See a Jump in Completions, Adding to Vacancy 160 140 120 100 80 60 40 20 0 100 80 60 40 20 0 -20 -40 -60 -80 -100 150 100 50 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 Net absorption (m.s.f.) Sublease space (m.s.f.) Completions (m.s.f.) Office closures, work-from-home initiatives and financial pressures led many tenants to place space on the sublease market. In Q4, an additional 18.4 m.s.f. of sublease space hit the market, bringing the segment to more than 141.5 m.s.f. Over the course of the pandemic, the sublease market has expanded by nearly 47.6 m.s.f., or 50.7%. Shadow space – sublease product that is available but not yet vacant – now stands at 48.8 m.s.f., which will keep total vacancy on an upward trend through much of 2021 as current users eventually vacate these blocks. Sublease has been a disproportionate contributor to rising vacancy: despite representing 13% of current vacancy, it has been responsible for 29% of space added onto the market since the onset of the pandemic. As a result, sublease as a share of total vacancy is up 38% and set to rise further as much of the current shadow space is realized as vacant in the coming quarters. At the market level, sublease vacancy represents the largest share of total vacancy in San Francisco (43.0%), New York (30.5%), Seattle (28.5%), Austin (27.5%), Fairfield County (23.8%), Silicon Valley (20.7%) and the San Francisco Peninsula (20.5%). Throughout 2020, tech has been by far the largest driver of large (>50,000 s.f.) sublease blocks, totaling 5.9 m.s.f., some of which include partial or full headquarters listings in the Bay Area and other industry hubs. Other major drivers New York San Francisco Seattle All Other Markets Under Construction (Available) Under Construction (Leased) Delivered 41 ANNUAL REPORT 2020