Real Estate Trends in Central Ohio

2016

Cover Image Source: Crawford Hoying Development

© 2015 Urban Land Institute

Urban Land Institute1025 Thomas Jefferson Street, NW Suite 500 WestWashington, DC 20007-5201www.uli.org

ULI Columbus1196 Hope AvenueColumbus, OH 43212http://columbus.uli.org

A PUBLICATION FROM TABLE OF CONTENTS

Background 1Survey Respondent Characteristics 1General Business Prospects 2Key Issues for 2016 3 Real Estate Sectors 5 Capital Markets 7Central Ohio Submarkets 8 Hot Topics 10

Real Estate Trends in Central Ohio

2016

Respondents by field

Respondents by sector (multiple selections allowed) Respondents by position

1

BACKGROUND

Real Estate Trends in Central Ohio takes a pulse of the region's real estate market, including capital markets, various sectors, and

area submarkets. This survey complements the national Urban Land Institute's Emerging Trends in Real Estate, adding an in-

depth local perspective to the national survey's insights on the U.S. economy and real estate markets.

In early October, ULI Columbus distributed a link to an online survey to its full e-mail list, from which 38 responses were collected

from October 6 to November 9. Additionally, 17 interviews were conducted throughout October with key local experts from the

private and public sectors across a range of professional developments, in particular real estate development, management,

finance, and planning.

The information presented in this report comprise quantitative data from the survey and quotes from the interviews as well as the

comment sections in the survey.

Private Developer

32%

Builder 3%

Lender 8% Institutional

Investor 8%

Brokerage 3%

Professional Service Firm

30%

Government 8%

University 3%

Other 5%

Owner 32%

President/CEO 13%

EVP/COO/CFO 10%

Vice President 8%

Director/Manager 26%

Associate 8%

Other 3%

64%

58%

47%

28%

28%

25%

25%

22%

0% 20% 40% 60% 80% 100%

Residential - rental

Office

Retail

Residential - for sale

Industrial/distribution

Hospitality

Niche/alternative

Institutional/public

Other responses: historic preservation consultant, nonprofit market research.

SURVEY RESPONDENT CHARACTERISTICS

Private developers represent the largest share of survey

respondents at 32 percent, followed by professional

service firms (30 percent).

Compared to past years, owners and high-level

executives represent the lion's share of survey

respondents, with 63 percent at VP level and up.

Nearly half or more of the respondents are active in rental

housing, office, and retail. The sector composition in

general is similar to last year.

Expected and actual profitability of own business

Central Ohio compared to other U.S. markets by industry area

2

GENERAL BUSINESS PROSPECTS

Survey respondents' expectations of how 2015 will wrap up

matches sentiments from a year ago. With "turmoil in the

stock market" and cap rates trending down, real estate has

become a destination for investment as "people try to put

money to work." Another interviewee notes that 2015 has

been "a record year in total commercial square footage

under construction."

Expectations for 2016, at an average score of 4.27, are at

an all-time high in the five years covered by this report

series. Interviewees' opinions are more mixed, with some

seeing a leveling off in the market while other predict a

continued but perhaps smaller improvements

3.68 4.02 4.05

4.27 3.89 3.91 4.06

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

2013 2014 2015 2016

Expectations Actual

Excellent

Good

Fair

Poor

Abysmal

Prospects by industry, relative to other markets

Prospects are high across industry areas relative to other markets. Survey respondents view Central Ohio more favorably for

investment, lending, property management, and professional services. Despite an upbeat mood about the market for development

and scores still above neutral (3.00), the gap between Central Ohio and other markets is expected to narrow.

3.30

3.42

3.75

3.50

3.30

3.30

3.46

3.46

3.39

3.42

3.22

3.21

3.09

3.29

3.42

3.23

3.27

3.43

3.22

3.09

3.26

3.54

3.58

3.35

1.00 2.00 3.00 4.00 5.00

REITs

Real estate investment management

Private local real estate owners

Commercial bank real estate lenders

CMBS lenders/issuers

Insurance company real estate lenders

Real estate brokers

Architects, designers

Real estate consultants

Commercial developers

Multifamily developers

Homebuilders/residential land developers

2016

2015

Much worse Somewhat better

Much better

About the same

Somewhat worse

Top economic issues for Central Ohio in 2016

Central Ohio's biggest needs for land use and development

3

KEY ISSUES FOR 2016

Economic issues

Job growth is again the top economic

concern among Central Ohio's development

community, reflecting its status as the

ultimate driver of demand across sectors.

As the economy continues to strengthen,

interest rates and inflation have the greatest

gains in scoring. In contrast, energy prices fall

to the bottom of the list, reflecting cheaper oil

and gas costs.

3.67

4.03

4.14

3.78

3.56

3.63

3.24

4.14

3.86

4.14

3.62

3.17

1.00 2.00 3.00 4.00 5.00

Better building and zoning regulations

More economic growth

More workforce for construction and skilled trades

Better public transportation

Better parking in downtown/Short North

Greater availability of sites for development

2016

2015

Low priority High priority Moderate

4.22

4.03

4.00

3.51

3.19

3.38

3.95

3.95

3.65

3.10

3.30

3.18

1.00 2.00 3.00 4.00 5.00

Job growth

Income and wage growth

Interest rates

Inflation

Energy prices

State and local budgetproblems

2016 2015

No importance

Great importance Moderate

Land use and development needs

In 2016, workforce rises to the top of the priority list for development. "Every sub trade has the same issue of finding qual ified

workforce." One interviewee claims to "have never seen a tighter sub[contractor] market."

The workforce shortage is leading to higher construction costs being passed on from general contractor to developer and, in the

end, the tenant or buyer. "Material costs for the most part have stayed pretty level, but labor costs are going up quite a bi t."

Adding in increased development activity means that "the trades are exercising some pricing power."

Survey respondents rated building regulations and site availability as higher priorities than in years past. As the market

strengthens, developers are running into limits. "Sites are going to be a challenge due to zoning regulations." There is conc ern of

excessive regulation as well: "it’s a fight to get anything done, even if it's routine."

Demographics

Finance

Public Leadership

Design

Development

4

Household formations

62%

Wage growth 32%

Immigration 6%

Creative financing

56%

Deleveraging trends 10%

Tighter regulations

34%

Zoning reform 34%

Land availability

19%

Tax credits, incentives

47%

Mixed-use 86%

TOD 11%

Healthy/green 3%

Space efficiency

60%

Modular 3%

Healthy/ green 37%

The big trends

For the first time this year, the survey asked respondents to

choose what they think is the most important trend across

demographics, finance, public leadership, design and

development.

In demographics, household formations far outpaces wage

growth. And in finance, despite the increased availability of

both debt and equity, creative financing remains of great

interest. Part of the financing formula may be government tax

credits and incentives which , even with the rising concern

about building and zoning regulations, still rose to the top for

public leadership.

Concepts of building healthy places and green design fare

differently between the design and development categories.

In design, healthy and green draws more than a third of

respondents but does not factor much into development.

These results, at least in part, may be due to the competing

choices. "Mixed use" is the buzzword here and throughout

other parts of this report. In design, many people across the

office, retail, and rental housing sectors are seeking to create

more value with less space.

Investment recommendation for 2016: INDUSTRIAL

Investment recommendation for 2016: OFFICE

5

REAL ESTATE SECTORS

Industrial

The majority of survey respondents gives the

industrial sector a hold rating, with more on the

buy side than the sell side. There is a preference

for larger bulk/distribution or general industrial

space.

Interviewees appear more bullish, stating that

"industrial is huge for us right now" and "industrial

will continue to stay strong." And while industrial

is generally "very attractive on a national scale,"

Central Ohio performs well "even as it relates to

other markets around the country."

Office

Survey respondents and interviews continue to be

down on office generally, but the disparity

between urban and suburban office locations is

increasing sharply.

Fundamentally, the "office environment is

changing. The number of people per square foot

has changed and are downsizing." "I think the

rental rate growth over the past decade is zero."

However, while "velocity has slowed in suburban

locations," there is a growing trend of companies

"wanting to locate in an urban area for their

workforce, more so than we have seen over the

past 20 or 30 years."

0% 20% 40% 60% 80% 100%

All industrial

Bulk/distribution space

General industrial

R&D industrial

Self-storage

Sell

Hold

Buy

0% 20% 40% 60% 80% 100%

All office

CBD office

Suburban office

Medical office

Sell

Hold

Buy

Hospitality

Last year's report noted some concerns about the number of new hotel projects and rooms coming on the market. Again,

going into 2016, "you’ve got a lot of new rooms coming online. They’re building hotels everywhere."

The success of recent projects may have helped demonstrate that there is demand. Interviewees seem less concerned this

time and expect some continued increase in the hospitality sector.

Investment recommendation for 2016: RETAIL

Investment recommendation for 2016: RESIDENTAL - RENTAL

6

Retail

Neighborhood shopping centers continue to outpace

other retail, with strong survey ratings on the buy

side. In contrast, retail overall is "very flat." Multiple

interviewees believe that retail projects of any

significant scale will rely on "niche" characteristics

around location, design, and tenant base. On this

note, "Easton is a unique animal."

0% 20% 40% 60% 80% 100%

All retail

Regional malls

Power centers

Neighborhood/community

Sell

Hold

Buy

0% 20% 40% 60% 80% 100%

All apartments

Luxury apartments

Moderate apartments

Tax credit apartments

Student housing

Sell

Hold

Buy

Rental housing

Survey respondents continue to cool on rental

housing, with sell numbers starting match or

outnumber the buy side. Many interviewees have

seen continued growth in 2015 and expect more in

2016. Some remain highly optimistic: "I don't see

anything on the horizon slowing the activity down."

New rental housing stock is "white hot."

A smaller number are "cautiously bullish."

"Multifamily might slow down a little bit, but the

demand is still out there."

For-sale housing

Interviewees are positive about prospects in for-sale housing, supported by survey numbers, though limited, leaning toward the

buy side. Comments range from "residential sales have been very good" to "the market is hot for residential for sale."

While the market for urban condominiums is re-emerging, there is a clear shift for suburban single-family from previous eras of

housing growth. Compared to when developers stockpiled land purchases and options, "land is getting tougher and tougher to

find."

Moderate growth may be the best forecast: "I don’t think the for-sale model will be as frothy as the early 2000’s, but we are

seeing a growing demand for buyers."

"Financially, retail is very strong" perhaps due to years of discipline enforced on real estate from "downsizing and consolid ation of

tenants caused by online distribution channels." In addition to e-commerce, omnichannel brings on "a two-way consolidation. One

is the shrinking size of retailers, that they are trying to do more or the same in smaller spaces because they approach the r etail as

an omnichannel tool. Second is that you can do this with fewer stores."

Opinions are mixed on rents. One interviewee sees good increases and stable occupancy, while another believes that rents will

not grow dramatically as more supply enters the market. The rising cost of rent may also be "starting to keep some of that

[renter] demand in check."

As the adage goes, location may be the determinant on how different parts of the rental market perform in the future. "There is a

really strong push to downsize and want the quality of life downtown can provide."

Expected change in interest rates in the next three years Response to interest rate rise

Overall state of capital availability through 2016 Expected change in the availability of capital

7

CAPITAL MARKETS

Interest rates

Survey respondents and interviewees alike anticipate small increases in interest rates, which will remain low overall. One

interviewee bets on slight increases totaling 50 to 75 basis points.

After years of anticipation now of interest rate rises, the more interesting question is around how everyone will respond. Ma ny

survey respondents will seek to obtain financing or refinance and/or make portfolio adjustments. Strategies may include

"putting in hedges and interest rate caps and swaps" and "locking our rates for existing assets at sub-5% rates." Portfolio

adjustments will also be part of the puzzle, but interestingly enough, no one among the survey is looking to reduce

development activity just yet.

Capital availability

Underwriting and credit standards "continue to level and loosen slightly" as "lenders try to get more competitive for the number of

loans out there." Even though Dodd-Frank and other regulations have pushed up some peripheral costs around financing, "the

banks have been more aggressive than they were even in 2013 and 2014, so that has freed up capital to get deals done." A

similar story pertains to the equity side. "For every dollar of equity needed, there are $4 or $5 chasing those deals that could be on

acquisitions or ground-up development.”

While there is plenty of debt and equity capital available, the "blocking and tackling is more difficult" in terms of demonstrating

project feasibility. For example, "lenders are requiring evidence that there is a market for the projects they are financing, so they

have increased their requirements, oftentimes including a market study."

Fall Moderately 3%

Remain Stable 19%

Increase Moderately

75%

Increase Substantially

3% 58%

47%

0%

21%

0% 20% 40% 60% 80% 100%

Obtain financing orrefinancing now

Adjust portfolio

Reduce development activity

Scale back risk

Oversupplied 18%

In Balance 55%

Undersupplied 24%

Substantially Undersupplied

3% Some Increase 35%

No Change 56%

Some Decline 9%

Prospects for submarkets in 2016 (vs. past years' prospects for 2015 and 2014)

8

CENTRAL OHIO SUBMARKETS

Best prospects for 2016 and beyond

Downtown Columbus takes the top spot

for development and investment

prospects in 2016. "There is a

tremendous amount of momentum and

it's on its way to becoming a great

neighborhood."

The only constraint for downtown and

surrounding neighborhoods may be

transportation and parking, which "will

continue to be a main factor in solving for

how people live and work downtown."

Compared to last year, the Upper

Arlington/Grandview Heights area sees

the greatest boost in prospects, with

average scores up 0.39 points. As in

downtown, the continued and highly

visible development in Grandview Yard

appears to be raising prospects.

After Easton, there is a string of suburbs

across the north side of I-270 and in

Delaware County where prospects are

high. The map on the next page illustrates

a clear north-south divide in Central Ohio.

4.33

4.27

4.26

4.21

4.12

3.94

3.80

3.75

3.73

3.66

3.50

3.50

3.41

3.34

3.34

3.13

3.07

3.07

2.91

2.81

2.74

2.72

2.70

2.44

1.00 2.00 3.00 4.00 5.00

Downtown Columbus

UA/Grandview

Easton

Dublin

New Albany

Polaris

Powell

Worthington

Westerville

Gahanna/ Airport

Columbus -North

North Delaware

Hilliard

Union

Grove City

Groveport/ Obetz

Fairfield

Licking

Reynoldsburg

Columbus -East

Madison

Columbus -West

Pickaway

Columbus -South

Abysmal Poor Fair Good Excellent

Prospects for Central Ohio submarkets in 2016 (with change in score from 2015 prospects)

9

Powell 3.80 (+0.03)

Polaris 3.94 (+0.02)

Dublin 4.21 (+0.21)

New Albany 4.12 (-0.15)

UA/Grandview 4.27 (+0.39)

Downtown 4.33 (+0.12)

Easton 4.26 (-0.11)

Hilliard 3.41 (-0.18)

Gahanna/CMH 3.66 (+0.22)

Cbus North 3.50 (-0.32)

Cbus West 2.72 (+0.22)

Cbus East 2.81 (+0.17)

Worthington 3.75 (+0.33)

Westerville 3.73 (+0.08)

Cbus South 2.44 (+0.12)

Reynoldsburg 2.91 (+0.26)

Groveport/Obetz 3.13 (-0.06)

Grove City 3.34 (+0.15)

North Delaware 3.50 (+0.08)

Union 3.34 (+0.06)

Madison 2.74 (-0.06)

Pickaway 2.70 (-0.10)

Licking 3.07 (+0.31)

Fairfield 3.07 (+0.23)

Prospects elsewhere in Central Ohio

Outside of downtown and north side neighborhoods, other areas of Columbus continue to score lower in their development and

investment prospects. "There is a stigma against single-family development ground in the Columbus public school system.”

However, a couple of interviewees highlight opportunities in central Columbus neighborhoods such as the Near East Side and

Franklinton, which are already benefiting as downtown and the Short North area build out and prices rise.

As suburbs and outer counties see that "anything urban is hot," "it will be interesting to see the willingness of further out suburban

communities to urbanize." More areas around central Ohio may be taking note of millennials and baby boomers currently headin g

to urban settings and, in turn, seek to capture some of that market. "Mixed-use development in urban centers is a trend that is

going to continue for quite a while.”

Sentiments on statements about multifamily rental product

Level of support for job access solutions

10

HOT TOPICS

Housing affordability

While survey respondents generally feel that the multifamily housing market has been too focused on high-end rental units, the

concern is more from a social than a market perspective. Similar to the survey, interviewees are confident about the demographics

and that demand will continue to be there, even for the smaller rental product. "The vacancy rate downtown is pretty low, so I think

that the market is able to satisfy the creation of these luxury apartments." "We haven’t overbuilt because everything is filling."

However, interviewees also recognize that high "costs are keeping some of that demand in check." "There needs to be affordable

peppered into there somewhere." Developer interest in larger scale development projects could provide an opportunity "to be able

to mix in affordable housing." In part due to the labor shortages discussed earlier (page 3), the "cost of construction and land is

becoming more and more difficult to make [housing] affordable." Public incentives and subsidies will be required because private

developers "simply can’t build the [affordable housing] product. We can’t afford to do that."

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Development is in line with demographic trends andmarket demand

There has been too much focus on high-end rental units

Much of the new rental product is too small to continue tobe competitive in the market as millennials age

Strongly disagree

Disagree

Neutral

Agree

Strongly agree

62%

53%

38%

0% 20% 40% 60% 80% 100%

More affordable housingnear employment centers

Better COTA service

Employer contribution totransportation alternatives

Job access

Recent initiatives at New Albany Business Park and

Rickenbacker point to possible solutions around the link between

housing and employment. The combination of extended COTA

service and employers helping to resolve the "last-mile" problem

is a major step in connecting workers to jobs. "The New Albany

Smart Ride program is up from seven people when we launched

to 2,000 today, a huge increase and really needed for economic

development."

Car-wise "nobody is easy to get around as we are. It’s a dream

moving around this city." For those without their own reliable

transportation, including people in lower-wage distribution,

packaging, or call center jobs, "we have to come together with a

real transportation plan." "How we handle transit will have

everything to do with the success of our city or not. It's going to

create a lot of opportunity."

REAL ESTATE TRENDS IN CENTRAL OHIO 2016 TEAM

Jung Kim * Columbus 2020

Becca Capriniz * The Ohio State University

Jack Clark * The Ohio State University

Derek Ehlers *American Structurepoint

Jordan Fromm * JNF Creative

Autumn Glover *The Ohio State University - PACT

Jana HrdinovaCenter for Real Estate The Ohio State University

Phil Larger *Center for Real Estate

MANAGEMENT COMMITTEE

Terry Feogler *Chair

Jonathan Barnes *Chair for Mission Advancement

Michael Martin * Treasurer

Joseph Reidy *Governance Committee Chair

Jung Kim *Programs Cochair

Jennifer Knittle *Membership Cochair

Cheryl Pentella *Communications Chair

J. Jeffery McNealey *Programs Cochair

Justin Metzler *Membership Cochair

Michael Simpson *Sponsorship Chair

Allison Srail *Young Leaders Group Chair

ULI LEADERSHIP

Randall K. RoweChairman

ULI DISTRICT COUNCIL LEADERSHIP

Eric SwansonChair District Councils

ULI COLUMBUS PROJECT STAFF

Alicia Gaston District Council Coordinator

SPECIAL THANKS TO:

Jung Kim, ULI Columbus Management Committee Member, Jana Hrdinova and Phil Larger of Center for Real Estate at The Ohio State University, for their advisory and technical roles throughout the project. All the online survey respondents and individual interviewees. Members of the ULI Columbus Young Leaders Group who conducted the interviews.

INTERVIEWEES

William BrennanCFO Pizzuti Companies

Tom CaldwellExecutive Vice President of Finance and DevelopmentContinental Real Estate Companies

Don Casto, III *Principal CASTO

Jennifer ChryslerDirector of Community DevelopmentCity of New Albany

William Ebbing *PresidentNew Albany Company

Brian EllisPresident and COO Nationwide Realty Investors

Terry Foegler *Director of Strategic Initiatives/ Special ProjectsCity of Dublin

Brett Kaufman *Owner Kaufman Development

The Ohio State University

Pete LaRose *LaRose Companies

Peter Lohman *RL Partners

Patrick Lynch *Lifestyle Communities

Julie Mickley *Borror Properties

Michael Reeves *Civil & Environmental Consultants

Allison Srail *Crawford Hoying

Jason Wells *US Bank

Keith Myers *Associate Vice President of Physical Planning and Real Estate at The Ohio State University

John Royer *President Kohr Royer Griffith

Michael Simpson *President NAI Ohio Equities

Yaromir Steiner *Founder and CEO Steiner + Associates

Steven R. Schoeny *Director Department of Development, City of Columbus

Robert Vogt * PartnerVogt Strategic Insights

Bob White Jr.President Daimler

Mark WagenbrennerPresidentWagenbrenner Development

* ULI MEMBER

Patrick L. PhillipsChief Executive Officer

Marilee UtterExecutive Vice President District Councils

Urban Land Institute1025 Thomas Jefferson Street, NW Suite 500 WestWashington, DC 20007-5201www.uli.org

ULI Columbus1196 Hope AvenueColumbus, OH 43212http://columbus.uli.org