Manulife US REIT - Annual Report 2021

ANNUAL REPORT 2021 51 2015 2017 2019 2016 2018 2020 2021 New-build vacancy has now fallen below average 30% 25% 20% 15% 10% Total vacancy (%) CBD Class A concessions packages are starting to correct 2021 will see a jump in completions, adding to vacancy Net effective rents are slowly rising $80 10 9 8 7 6 5 $70 $60 $50 $40 TI allowance ($ p.s.f.) Free months CBD Class A rents ($ p.s.f.) 2017 2018 2019 2020 2021 $60 10 $50 8 $30 6 9 $40 7 Average lease term (year) 2017 2008 2012 2016 2010 2014 2018 2018 2021 2020 2019 2020 2019 2017 2015 2013 2011 2009 2021 TI allowance Delivered since 2015 Asking rent Free months Delivered before 2015 Base rent Effective rent 2020 compared to just under 200 million sq ft of outflows in second-generation product. This has led to vacancy rates inverting, as total vacancy dropped by 80 basis points to 18.9% for new construction compared to a further rise to 19.7% elsewhere. Sublease space barely budged in Q4 after dipping slightly during Q3 as re-entry remained subdued and tenants continued to assess their real estate strategies in light of further extensions of return-to-office timeframes. Give-backs and withdrawals of sublease blocks also shifted further into balance, with new subtenants primarily coming from tech, life sciences and boutique financial players such as hedge funds and asset management firms. Markets were split evenly in terms of quarterly sublease shifts. While Austin, Charlotte and Miami continued their downward trajectories in line with faster recoveries, New York, San Francisco, Boston and Chicago also saw net decreases in sublease availability as companies that placed large portions or their entire portfolios on the market took some or all of it back due to adjustments in space planning. As a result of flight to quality and a stabilisation of sublease availability, net effective rents at the top of the market are also showing signs of a slowbut steady rebound. After falling by 18.7% upon the onset of COVID-19, three consecutive quarters of falling tenant improvement allowances and free month periods have brought effective rents to 7.1% belowpre-pandemic levels, while also pushing the effective rent discount back down closer to 20% of taking rents. 55.4 million sq ft of space was delivered over the course of 2021, one of the highest annual totals of the past decade’s cycle. Of this, 12.7 million sq ft was completed during the fourth quarter. In comparison, just 2.4 million sq ft across 11 buildings broke ground during the fourth quarter, pushing the construction pipeline below 100 million sq ft for the first time since 2015. As has been the case throughout the pandemic, new construction was almost entirely build-to-suit or heavily anchored prior to construction. The third office tower at Nashville Yards – anchored by Pinnacle – was by far the largest project to break ground in Q4 at 682,000 sq ft, with 1700 M Street NW in Washington, D.C. and 915 Meeting Street in Suburban Maryland also starting. Like the leasing market, investment sales is also making a recovery. US$120.8 billion in office assets traded hands throughout 2021, equivalent to a 47.6% increase over the year. Investment velocity is accelerating as well, as Q4 2021 transactions were 51.7% higher than in Q4 2020. The recovery in larger-scale liquidity in gateway markets has been the primary contributor to this improvement, coupled with sustained momentum of capital deployment in secondary geographies. In Q4 2020, only one office sale of more than US$100 million took place in New York, Los Angeles and Washington, D.C., whereas nine of these occurred in Q4 2021, totaling US$5 billion.