NAI CAPITAL Market Perspective Spring 2012

Transcription

1 NAI CAPITAL Market Perspective Spring

2 1 Market Perspective Spring NAI Capital is pleased to provide the following economic outlook to our clients. We understand the importance of timely, accurate data when making significant financial decisions. As such, we have taken every measure to verify the data contained in this report. We hope that the information contained in this report is helpful to you. Economic Trends Looking back, economic growth in Los Angeles County was rather robust in as the County rebounded from one of its worst recessions. Unfortunately, Los Angeles County was unable to keep up the momentum in as the County experienced an up and down economy. Economic growth fell in the second quarter of and was rather anemic in quarters 1 and 3, but rebounded nicely in. The fact that Los Angeles County could not maintain its momentum is sign of how weak the recovery is. Economic growth has been sustained by low interest rates and quantitative easing not fundamental economic growth. Going forward, we expect much of the same as growth is likely to be anemic. Troubles in the public sector are likely to offset gains in the private sector. The unemployment rate remains high and 3% % % Source: CERF Los Angeles County GDP Seasonally Adjusted Rate Quarter Over Quarter % Change job growth appears to be slowing. Additionally, gas prices remain high. Taken together these conditions are likely to keep economic growth constrained in. Ventura County is in a position similar to Los Angeles County. Ventura County s economic growth was relatively robust in but experienced a similar pattern of up and down growth in. The only significant difference between the two counties is the forecasted growth rates. We expect Ventura County to fare marginally better than Los Angeles County, as its smaller economic base is not as prone to the macroeconomic factors that are likely to impact Los Angeles County. There are significant risks to the local economy. The first is high gas prices. California in general, and the Los Angeles Basin in particular, have some of the highest gas prices in the nation. Continued high gas prices may derail consumer spending and consumer confidence. Persistent budget problems have plagued all levels of government over the last several years. Although these problems were not caused by the recession, they were exacerbated by it. More importantly, even as the economy rebounded, government budget problems persisted. To be sure, that recovery was not as robust as one would have hoped. Continued budget problems at the state and local levels indicated their inability to meet financial obligations despite an improved economy. This issue is not likely to go away any time soon. The contined European debt crisis is another of our concerns, and it shows no signs of abating. The recent bailout given to Greece will not permanently solve the country s problems. We expect Greece will require more funds before the crisis is resolved. Additionally, it now appears that Spain will need bailout funds as the cost of borrowing new funds has risen dramatically in recent weeks. It is not just the bailout funds that are so troubling. The austerity measures Greece and Spain have enacted, while needed, are causing economic problems. Growth in both countries is 4% Ventura County GDP Seasonally Adjusted Rate Quarter Over Quarter % Change 16% 1 Unemployment Rate by County 3% 14% 13% 1 1% 11% 1 9% -1% - 7% Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb -3% Los Angeles Orange Inland Empire Ventura Source: CERF Source: California Employment Development Department

3 2 expected to decline in putting further pressure on each nation to meet their financial obligations. Finally, the austerity measures are creating significant social turmoil in each nation. Protests and anti-government rallies are regular occurrences in both nations. One must wonder how long each society will tolerate continued reductions to the public sector. Locally, unemployment rates throughout the Los Angeles Basin steadily declined from July to December. Unfortunately, unemployment rates in the Basin began to rise again in January. No matter how small the increases were, they are unwelcome as unemployment remains a problem throughout the Basin. Unemployment rates in Los Angeles County and the Inland Empire remain above 1. The unemployment rate in Ventura County is just below 1 while Orange County s unemployment rate stands at. These levels indicate that the labor market is still weak. Additional unemployment is the last thing the Basin needs. The weak labor market is one of the key reasons we are forecasting an anemic recovery. In the U.S. economic growth is derived from a healthy labor market. Approximately 7 of the U.S. economy comes from consumer spending. Therefore, if consumers do not have jobs or are worried about their jobs spending tends to decline. Hence, weak labor markets play a key role in economic growth. The mild improvement in the labor force can also be shown by via the number of unemployed persons. Unemployed persons in Los Angeles County fell 2.3% last year. The good news is that the number of unemployed persons is declining rather than increasing. The bad news is the rate of decline, like the decline in unemployment rates, is slow. The number of unemployed persons is improving, but it is doing so slowly. Although the 52,100 fewer unemployed persons may seem like a large number, it is small relative to the size of the overall labor force of approximately 8.8 million civilian workers. Hence the slow decline in the unemployment rate. Government Other Services Leisure & Hospitality Educational & Health Services Professional & Business Services Financial Activities Information Transportation, Warehousing & Utilities Retail Trade Wholesale Trade Los Angeles Basin Job Growth Feb to Feb Manufacturing Construction - 4% Source: California Employment Development Department Our biggest concern has to do with the Information Sector. Included in this sector are jobs related to Motion Picture and Sound Recording. Considering that Los Angeles County is the Mecca of this industry any sustained job losses in this industry may spell trouble for the County. Approximately 1,300 jobs were lost in the Motion Picture and Sound Recording industry from February to February, but this is not yet a significant amount considering over 121,000 people are currently employed in the industry. Furthermore, the industry experienced an increase from February to February. We note the losses due to the importance this industry has in Los Angeles County. This is one industry to keep an eye on in the future. Comprised of two industries, the Education and Health Services sector added jobs. However, this is somewhat misleading, as all of the growth occured in the Health Services segment while Education actually experienced a decline. We expect Health Services to continue growing, as aging baby boomers will require more health related services. The State s budget problems are impacting budgets and employment at all levels of education. Given the troubles mentioned above, it is likely that more Education jobs will be lost in. Five out of the twelve major industries within the Los Angeles basin experienced job declines over the past twelve months. Given all of the problems with government budgets, it comes as no surprise that the Government Sector experienced the largest percentage decline over the past twelve months. The same applies to the Financial Activities Sector. Job losses are expected in this sector as banks and other financial companies scale back operations. Change in Unemployed Persons 100,000 90,000 80,000 70,000 60,000 Notices of Default By County Feb - Feb Feb - Feb Number % Change Number % Change Los Angeles (13,900) -2.3% (1,400) -0. Orange (13,400) -9.4% (10,800) -7. Inland Empire (21,100) -8. (13,800) -5.3% Ventura (3,700) -8.1% (2,100) -4.4% Total/Average (52,100) -7.1% (28,100) -4. Source: California Employment Development Department 50,000 40,000 30,000 20,000 10, Los Angeles Orange Riverside San Bernardino Ventura Source: DataQuick

4 3 35,000 30,000 Foreclosures By County 2 Port of Long Beach & Los Angeles Year-Over-Year % Change in Container Trade 1 25, ,000 15,000-10, , Source: DataQuick 2009 Los Angeles Orange Riverside San Bernardino Ventura Source: Port of Long Beach 2009 The good news regarding job growth is that the Construction Sector improved over the past twelve months. The improvement was not large, but given how badly this sector suffered during the recession it is nice to see some improvement. Most, if not all, of the improvement resulted from a booming apartment market. Developers are building new apartment complexes at a phenomenal rate Port Hueneme Year-Over-Year % Change in Container Trade The increase in the Manufacturing Sector is also good news. The increase in manufacturing jobs provides more evidence that the Basin s Manufacturing Sector is improving. Although the increase in jobs is less than 1%, any increase in this sector is good news as manufacturing jobs tend to be well paying jobs. Problems persist in the housing market. Notices of default and foreclosures remain extremely high relative to their historic norms. Although both have fallen from their peaks, the rate of decline slowed in. Persistent high unemployment and a failed government home saving program have kept notices of default and foreclosures elevated. Looking forward, we expect these trends to continue. In other words, we expect notices of default and foreclosures will slowly decline in, but we do not anticipate a significant improvement in either variable Source: Port of Long Beach 2009 The reasons for our pessimism are simple: the Basin s housing market remains weak. Job growth is insufficient to spur a recovery in the housing market. Given current conditions it is safer for households to rent rather than buy. Furthermore, credit remains tight. Many would-be home buyers are unable to secure financing. 2 1 California Real Median Home Price Growth Existing Single Family Homes Year-Over-Year % Change This pessimistic view is reflected in our forecast of price growth. Median home prices for existing single family homes declined during in California. For the reasons we mentioned above we expect median home prices to fall a bit further in. On a positive note we do not expect the decline to be as great as it was in Unfortunately, we do not see any significant improvement in the residential market in the coming year. Mortgage rates are at an alltime low, yet households are still not buying homes. Weak labor markets and a high number of notices of default and foreclosures (though declining) will continue to exert pressure on home prices. This is particularly true in areas that have been hit the hardest by foreclosures, such as the Inland Empire, where we expect median home prices to lag prices in the coastal counties. Communities such as the Inland Empire have a larger backlog of foreclosed homes that must be reduced before prices can increase. Source: CERF

5 4 1 1 Total Gross Box Office Receipts Annual % Change commercials increased 4.4%. Only permits for television declined in. In total 45,484 production permits were issued in the Basin during. This compares very favorably to the 43,646 permits that were issued in. 6% 4% % -6% Source: CERF The rate of growth in container volume slowed considerably in. In fact, the growth was actually negative in the last two quarters of the year. This decline in growth is troubling; it suggests that declining economic conditions in Europe are impacting world trade. We do not expect conditions in Europe will improve in. Given the area s significant budget challenges and austerity measures we expect European Gross Domestic Product to fall in. As a result, we do not expect activity at the Port of Long Beach/Los Angeles to improve greatly in. At first glance, the data for the Port of Hueneme may seem even worse. As measured by container cargo, activity at the Port of Hueneme decreased each quarter in. However, it should be noted that was a great year for the Port. Growth in exceeded 19% every quarter. Growth of this magnitude cannot be expected to continue. Although positive growth would have been nice, we do not expect the negative growth rates in to persist in. In fact, we expect growth rates to return to positive territory in. Retail Market Retail sales in the Basin improved in as every county in the Basin experienced increases in retail sales during the year. This continues a trend that started in. Retail sales started with a bang in as growth exceeded 1.9% in every market in the first quarter of the year. However, growth turned negative in some markets in. In growth rebounded to the 1% level and then fell to 0. level in. This up and down cycle is to be expected given the uncertainty in the economy. Going forward we expect retail sales growth to be in the 0. to 1% range for the Basin. An anemic economy and a weak labor market will likely keep retail sales constrained. Unlike, the improvement in retail sales has not translated into an improvement in the retail real estate market. Compared to last year the market is relatively unchanged. For the Basin as a whole vacancy rates increased slightly from 7.1% to 7.. More importantly, increased retail sales have not stopped the decline in lease rates. They fell an average of eleven cents per square foot during the year. 3% % 0. Retail Sales Growth Quarter-Over-Quarter was not a great year for the entertainment industry. Box office receipts fell 3.7% as compared to. On a positive note, box office receipts exceeded $10 billion for the third consecutive year. -0. Los Angeles Orange Riverside San Bernardino Ventura The decline in box office receipts was solely due to a decline in tickets sold. Compared to the number of tickets sold fell 4.. The decline in ticket sales was slightly offset by an increase in ticket prices. But rising ticket prices combined with falling attendance is not a good combination, and as a result, ticket prices, on average, declined in January and February of. Box office receipts are an important measure of the entertainment industry for the entire country as box office receipts are collected in every state. But for the LA Basin, an even more important statistic is the number of production permits issued. Production permits provide information regarding the number feature films, television shows and commercials produced in the Basin. Considering the small army of labor it takes to produce these programs, production permits give us indication of the overall health of the local industry. According to Film LA, production permits increased 4. in. Permits for feature films increased 5.7% while permits for Source: CERF Los Angeles County Retail Vacancy Rates 1 9% 7% 6% 4% 3% 1% 9% % 5.9% 5.4% 5.6% 5.7% % % Antelope Mid-Cities Mid-Wilshire Santa Clarita San Fernando San Gabriel South Bay Southeast LA Tri-Cities West LA Los Angeles County

6 5 1 9% 7% 6% Orange County Retail Vacancy Rates 8.7% 7.4% 7% 6.7% 5.1% Unfortunately, we do not see this trend ending. Consumers are switching their purchases from brick and mortar stores to the internet. In the long run this will reshape the retail real estate segment. We expect premium Class A space to remain healthy. Places like the Grove in Los Angeles, South Coast Plaza Mall in Orange County and the Oaks Mall in Ventura County will continue to command premium prices. Premium Class A space has an energy and social component that consumers continue to demand. 4% 3% 1% OC Airport OC Central OC North OC South OC West Orange County Inland Empire Retail Vacancy Rates % 1 8.6% The Class B and C spaces are not expected to do as well. We anticipate demand for these spaces will diminish in the future. To improve sales, retailers will look for properties that achieve a critical mass in consumers. Unfortunately, Class B and C spaces lack that critical mass. Compared to last year vacancy rates remained constant from to. There was some movement in the Inland Empire and Ventura County but the change was small. Only Orange County experienced an increase worthy of discussion. Vacancy rates in Orange County rose from 6.3% to 7%. We find this troubling as Orange County has the highest retail sales per capita and the lowest unemployment rate in the Basin. This increase is worth monitoring, and we hope it will reverse in. 6% 4% IE East IE West Inland Empire Los Angeles County Retail Net Absorption 150,00 100,00 83,271 93,344 50,00 34,256 24,822 16,054 (5,993) (23,088) (50,00) (50,062) (45,555) (50,743) Ventura County Retail Vacancy Rates (100,00) (150,00) (149,264) (200,00) Antelope Mid- Cities Mid- Wilshire Santa Clarita San Fernando San Gabriel South Bay Southeast LA Tri- Cities West LA 6.4% 6.4% 60,00 40,00 Orange County Retail Net Absorption 40, % 6.3% 20,00 Ventura North Ventura South Ventura County This divergence between increasing retail sales and a nonresponsive retail real estate market is troubling. We have a growing concern that internet sales are starting to hamper a recovery in the retail real estate market. The recent announcement by Best Buy to shut 50 stores nationwide as well as the bankruptcies of major retail players like Borders and Blockbuster are starting to impact the market. (20,00) (40,00) (41,003) (60,00) (61,158) (67,809) (80,00) (100,00) (120,00) (140,00) (135,234) (160,00) OC Airport OC Central OC North OC South OC West

7 6 One troubling sign in the retail segment is the negative net absorption in the first quarter of this year. Every market in the Basin, with the exception of the Inland Empire, experienced negative net absorption in. Orange County returned 265,000 square feet of space to the market. By contrast, the other markets in the Basin experienced relatively little negative net absorption during the quarter. Net absorption was a positive 457,000 square feet in the Inland Empire. 400,00 350,00 300,00 Inland Empire Retail Net Absorption 370,086 The lack of demand for retail space continues to put pressure on lease rates. Lease rates fell in four of the five markets. Orange County experienced a slight increase in lease rates, a paltry $0.01 per square foot. As insignificant as this increase was on its own, at least it was an increase. $2.50 $2.00 Orange County Retail Rental Rates $2.06 $1.74 $2.03 $1.91 $ ,00 $1.50 $ ,00 150,00 $ ,00 86,587 $ ,00 IE East IE West $0.00 OC Airport OC Central OC North OC South OC West Orange County Ventura County Retail Net Absorption 10,00 6,855 (10,00) (20,00) (30,00) $1.46 $1.44 $1.42 $1.40 $1.38 $1.36 $1.34 $1.32 Inland Empire Retail Rental Rates $1.43 $1.36 $1.32 (40,000) SF (41,609) (50,00) Ventura North Ventura South Los Angeles County Retail Rental Rates $4.00 $3.50 $3.47 $3.00 $2.78 $2.50 $2.00 $2.06 $2.03 $1.92 $1.68 $1.76 $1.95 $1.50 $1.35 $1.47 $1.47 $1.52 $1.00 $0.50 $0.00 Antelope Mid-Cities Mid-Wilshire Santa Clarita San Fernando San Gabriel South Bay Southeast LA Tri-Cities West LA Los Angeles County $1.30 $1.28 $1.26 IE East IE West Inland Empire Ventura County Retail Rental Rates $2.00 $1.86 $1.80 $1.74 $1.60 $1.53 $1.40 $1.20 $1.00 $0.80 $0.60 $0.40 $0.20 $0.00 Ventura North Ventura South Ventura County

8 7 Los Angeles Basin Retail Market n First Quarter Vacancy Rate Average Asking Rental Rate 1 Difference Net Absorption (SF) Difference Antelope % -1.1% (5,993) $1.35 $1.42 $(0.07) % ,822 $2.06 $2.06 $0.00 Mid Cities 6.7% % 83,271 $1.47 $2.03 $(0.56) Mid Wilshire 4.6% (149,264) $2.78 $2.89 $(0.11) Santa Clarita % 34,256 $1.92 $1.90 $0.02 San Fernando 5.9% 5.4% 0.6% (50,062) $1.68 $1.85 $(0.17) San Gabriel % 0.4% (45,555) $1.47 $1.54 $(0.07) South Bay (50,743) $1.76 $2.19 $(0.43) Southeast LA 5.4% 6.4% ,054 $1.52 $1.62 $(0.10) Tri Cities 3.9% 5.1% ,344 $2.03 $2.16 $(0.14) West LA 5.6% 5.6% 0. (23,088) $3.47 $3.26 $0.21 Los Angeles County 5.7% 5.7% 0. (72,958) $1.95 $2.12 $(0.17) OC Airport 5.1% 5.3% -0. (67,809) $2.06 $2.03 $0.03 OC Central 8.7% % 40,498 $1.53 $1.55 $(0.02) OC North (61,158) $1.74 $1.72 $0.02 OC South 6.7% % (41,003) $2.03 $2.05 $(0.02) OC West 7.4% 4.9% 2. (135,234) $1.91 $1.85 $0.06 Orange County % 0.7% (264,706) $1.86 $1.85 $0.01 IE East ,086 $1.32 $1.46 $(0.14) IE West 8.6% 9.1% ,587 $1.43 $1.33 $0.11 Inland Empire 10.4% 10.7% -0.3% 456,673 $1.36 $1.41 $(0.06) Ventura North % -0.1% 6,855 $1.53 $1.67 $(0.13) Ventura South 6.3% (41,609) $1.86 $2.24 $(0.38) Ventura County 6.4% (34,754) $1.74 $2.03 $(0.29) Total LA Basin % 0.1% 84,255 $1.77 $1.89 $(0.11) 1 Per SF per month, NNN. Total is weighted by available space. Data is for all Class A, B and C buildings 20,00 or larger. Excludes owner-occupied.

9 8 Office Market Conditions in the office market are slowly improving. For the Basin as a whole, vacancy rates fell from 16.6% to 16.. More importantly, the erosion in lease rates abated in. The average lease rate fell from $2.21 per square foot to $2.19. The anemic economic conditions in the Basin and the weak job market are not helping the office market. Although the unemployment rate is falling, it is not falling fast enough to impact the office market. The same can be said of the economy as a whole. Similar to the retail segment, we are concerned that the internet may be impacting the office market. Numerous companies appear to be shifting to a work-from-home philosophy, encouraging employees to work from home part of the week in order to save money on rent. This allows companies to reduce their space requirements, as employees can share office space. The end result is high vacancy rates. Despite the improvement from last year, the average vacancy rate in the Los Angeles Basin is 16., and none of the markets we track enjoys a vacancy rate below 1. Ventura County has the highest vacancy rate in the Basin, 19.. Despite the high vacancy rate, there is one positive sign. Net absorption in the first quarter of was positive for the Basin as a whole. The only market to experience negative net absorption was Orange County where 470,000 square feet of space was returned during. Los Angeles County experienced the largest positive net absorption: 350,000 square feet. Positive net absorption is always viewed as a good sign. We expect this trend will continue in Los Angeles County, the Inland Empire and Ventura County. Net absorption is unlikely to be significant but we do expect it to be positive. Although net absorption was negative in Orange County during, we expect this to turn positive during. The decline in lease rates has slowed significantly. On average, lease rates fell a paltry $0.01 per square foot in. Los Angeles County actually experienced an increase in lease rates. One market that continues to trouble us is the Inland Empire. Lease rates in the market fell $0.10 per square foot. While the decline is small, the Inland Empire continues to experience the highest erosion in lease rates. Los Angeles County Office Vacancy Rates 2 2 Inland Empire Office Vacancy Rates % 19.3% 15.7% % 13.3% % % % % Antelope Mid-Cities Mid-Wilshire Santa Clarita San Fernando San Gabriel South Bay Southeast LA Tri-Cities West LA Los Angeles County IE East IE West Inland Empire 2 Orange County Office Vacancy Rates 2 Ventura County Office Vacancy Rates % % % % OC Airport OC Central OC North OC South OC West Orange County Ventura North Ventura South Ventura County

10 9 $3.50 Los Angeles County Office Rental Rates $2.00 Ventura County Office Rental Rates $3.00 $2.50 $2.54 $2.39 $2.50 $3.11 $2.40 $1.95 $1.96 $1.94 $2.00 $1.86 $1.95 $2.06 $1.99 $1.89 $1.99 $1.77 $1.90 $1.50 $1.00 $1.85 $0.50 $1.83 $0.00 Antelope Mid-Cities Mid-Wilshire Santa Clarita San Fernando San Gabriel South Bay Southeast LA Tri-Cities West LA Los Angeles County $1.80 $1.75 Ventura North Ventura South Ventura County Orange County Office Rental Rates $2.00 $1.95 $1.94 $1.91 $1.90 $1.90 $1.87 $1.85 $1.80 $1.79 $1.75 $1.73 $1.70 $1.65 $1.60 OC Airport OC Central OC North OC South OC West Orange County 120,00 100,00 Los Angeles County Office Net Absorption 80,00 60,00 40,00 20,00 (20,00) (40,00) (60,00) 5,832 Antelope (7,129) 81,356 Mid- Cities 44,076 31,443 Mid- Wilshire Santa Clarita 110,215 San Fernando 9,887 San Gabriel 39,710 South Bay (3,921) Southeast LA 77,452 Tri- Cities (38,509) West LA $1.68 $1.66 Inland Empire Office Rental Rates $1.66 Orange County Office Net Absorption 50,00 9,448 $1.64 $1.62 $1.60 $1.59 (50,00) (100,00) (98,113) (70,252) (27,166) $1.58 (150,00) $1.56 $1.54 $1.52 $1.50 $1.56 IE East IE West Inland Empire (200,00) (250,00) (300,00) (283,809) OC Airport OC Central OC North OC South OC West

11 10 300,00 Inland Empire Office Net Absoption 70,00 Ventura County Office Net Absorption 63, ,00 243,927 60,00 200,00 50,00 150,00 40,00 100,00 30,00 23,095 50,00 20,00 10,00 (11,655) (50,00) IE East IE West Ventura North Ventura South Los Angeles Basin Office Market n First Quarter Vacancy Rate Average Asking Rental Rate 1 Difference Net Absorption (SF) Difference Antelope % 5,832 $1.86 $1.93 $(0.07) 13.3% 12.7% 0.7% (7,129) $2.54 $2.48 $0.06 Mid Cities 10.7% % 81,356 $1.95 $1.92 $0.03 Mid Wilshire 14.7% 14.6% 0.1% 44,076 $2.06 $2.10 $(0.04) Santa Clarita 20.1% 22.6% -2.4% 31,443 $2.39 $2.40 $(0.02) San Fernando 15.7% 17.1% -1.4% 110,215 $1.99 $2.06 $(0.08) San Gabriel % 9,887 $1.89 $1.86 $0.03 South Bay 19.3% 18.4% 0.9% 39,710 $1.99 $1.96 $0.04 Southeast LA % -0.9% (3,921) $1.77 $1.87 $(0.10) Tri Cities 14.9% 15.9% -0.9% 77,452 $2.50 $2.44 $0.06 West LA % (38,509) $3.11 $3.13 $(0.01) Los Angeles County 15.1% % 350,412 $2.40 $2.39 $0.01 OC Airport % -1.7% (283,809) $1.94 $2.00 $(0.07) OC Central 16.1% (98,113) $1.73 $1.80 $(0.07) OC North % -0.4% 9,448 $1.79 $1.79 $(0.01) OC South 16.6% % (70,252) $1.90 $1.93 $(0.03) OC West % 2. (27,166) $1.91 $1.92 $(0.01) Orange County 17.6% (469,892) $1.87 $1.93 $(0.05) IE East ,927 $1.56 $1.67 $(0.11) IE West % -0.3% (11,655) $1.66 $1.74 $(0.08) Inland Empire ,272 $1.59 $1.69 $(0.10) Ventura North 15.6% 17.3% -1.7% 23,095 $1.83 $1.85 $(0.03) Ventura South % 63,986 $1.96 $1.97 $0.00 Ventura County % 0. 87,081 $1.94 $1.95 $(0.01) Total LA Basin % ,873 $2.19 $2.21 $(0.01) 1 Per SF per month, NNN. Total is weighted by available space. Data is for all Class A, B and C buildings 20,00 or larger. Excludes owner-occupied.

12 11 Industrial Market Compared to last year, the industrial market improved more than any other market segment in the Los Angeles Basin. Vacancy rates fell in three of the four markets. More importantly, lease rates slightly improved from last year. While it is too early to say that the industrial market is in full recovery mode, we are encouraged by these numbers. Vacancy rates fell in Los Angeles County, Orange County and the Inland Empire. The decline in vacancy rates was most pronounced in the Inland Empire and Orange County where the rates fell 3 percentage points and 1.5 percentage points respectively. Ventura County was the only area to experience an increase in vacancy rates. Of course, we saved the best news for last. Net absorption during was phenomenal! In total, 3.4 million square feet of space was absorbed during the quarter. Most of this occurred in Los Angeles County where 1.6 million square feet of space was absorbed. Even Ventura County, which lagged the other markets in, experienced positive net absorption during the first quarter. This incredible amount of net absorption bodes well for the industrial segment. We fully expect to see vacancy rates fall and lease rates to rise in the second quarter. Going forward we anticipate more positive net absorption but not at this level. In other words, we expect conditions in the industrial market to improve in. Lease rates are also improving. Compared to last year the average lease rate rose in the Basin. The increase is not significant but it does point to a strengthening market. The combination of lower vacancy rates and slightly higher lease rates is good sign. Los Angeles County Industrial Vacancy Rates 7% 6% 4% 3% 1% % 6.4% % 5.1% % 1. Antelope Mid-Cities Mid-Wilshire Santa Clarita San Fernando San Gabriel South Bay Southeast LA Tri-Cities West LA Los Angeles County 8.6% % 8.3% 8.3% % 7.9% % IE East IE West Inland Empire Inland Empire Industrial Vacancy Rates 1 Orange County Industrial Vacancy Rates 1 Ventura County Industrial Vacancy Rates 9% 7% 6% 6.4% 7.4% 9% % 1 9.9% 7.1% 8.1% 6% 4% 3% 4% 1% OC Airport OC Central OC North OC South OC West Orange County Ventura North Ventura South Ventura County

13 12 $1.80 $1.60 $1.40 $1.20 $1.00 $0.80 $0.60 $0.40 $0.20 $0.00 Los Angeles County Industrial Rental Rates $1.70 $1.68 $0.93 $0.59 $0.58 $0.53 $0.54 $0.48 $0.48 $0.38 $0.41 $0.45 Antelope Mid-Cities Mid-Wilshire Santa Clarita San Fernando San Gabriel South Bay Southeast LA Tri-Cities West LA Los Angeles County $0.66 $0.64 $0.62 $0.60 $0.58 $0.56 $0.54 $0.52 $0.50 $0.48 Ventura County Industrial Rental Rates $0.64 $0.60 $0.54 Ventura North Ventura South Ventura County $0.90 $0.80 $0.70 $0.60 $0.50 $0.40 $0.30 $0.20 $0.10 $0.00 Orange County Industrial Rental Rates $0.78 $0.61 $0.60 $0.59 $0.53 $0.49 OC Airport OC Central OC North OC South OC West Orange County Los Angeles County Industrial Net Absorption 700,00 600,00 500,00 400,00 300,00 200,00 100,00 (100,00) (200,00) (300,00) 79,915 Antelope (80,563) 572,756 Mid- Cities 13,220 Mid- Wilshire 265,793 Santa Clarita 131,259 San Fernando 531,338 San Gabriel 233,419 South Bay (197,067) Southeast LA 34,145 61,298 Tri- Cities West LA $0.36 $0.35 $0.35 $0.34 Inland Empire Industrial Rental Rates $0.35 $0.34 Orange County Industrial Net Absorption 700,00 600,00 562, ,00 436, ,00 300,00 200,00 $0.34 $ ,00 35,281 $0.33 (100,00) (48,186) $0.33 $0.32 IE East IE West Inland Empire (200,00) (300,00) (400,00) (305,885) OC Airport OC Central OC North OC South OC West

14 13 Inland Empire Industrial Net Absoption 2,000,00 1,591,305 1,500,00 1,000,00 Ventura County Industrial Net Absorption 89,00 88,577 88,50 88,00 87,50 500,00 87,00 86,50 86,385 86,00 (500,00) 85,50 (1,000,00) IE East (716,658) IE West 85,00 Ventura North Ventura South Los Angeles Basin Industrial Market n First Quarter Vacancy Rate Average Asking Rental Rate 1 Difference Net Absorption (SF) Difference Antelope 2.9% % 79,915 $0.38 $0.19 $ % % (80,563) $0.48 $0.52 $(0.03) Mid Cities % -1.3% 572,756 $0.53 $0.50 $0.04 Mid Wilshire % -2.9% 13,220 $1.70 $1.80 $(0.09) Santa Clarita % 265,793 $0.48 $0.47 $0.01 San Fernando 6.4% 5.6% ,259 $0.59 $0.59 $0.00 San Gabriel ,338 $0.41 $0.44 $(0.03) South Bay 6.4% ,419 $0.58 $0.59 $(0.01) Southeast LA % -1.3% (197,067) $0.45 $0.44 $0.02 Tri Cities 5.1% 5.3% -0.3% 34,145 $0.93 $0.82 $0.11 West LA % -0.3% 61,298 $1.68 $1.64 $0.04 Los Angeles County % -0. 1,645,513 $0.54 $0.53 $0.01 OC Airport 6.4% % 562,755 $0.61 $0.65 $(0.04) OC Central 7.4% % 35,281 $0.53 $0.52 $0.01 OC North % -2.6% 436,578 $0.49 $0.46 $0.03 OC South % -0.7% (48,186) $0.78 $0.81 $(0.03) OC West % 1.9% (305,885) $0.60 $0.61 $(0.01) Orange County 6.6% ,543 $0.59 $0.59 $(0.01) IE East % -4.9% 1,591,305 $0.33 $0.31 $0.02 IE West % -1.3% (716,658) $0.35 $0.33 $0.03 Inland Empire 8.3% 11.3% ,647 $0.34 $0.32 $0.02 Ventura North 9.9% % 88,577 $0.54 $0.59 $(0.05) Ventura South 7.1% % 86,385 $0.64 $0.64 $0.00 Ventura County 8.1% 7.7% 0.4% 174,962 $0.60 $0.62 $(0.02) Total LA Basin % -1.4% 3,375,665 $0.49 $0.48 $ Per SF per month, NNN. Total is weighted by available space. Data is for all Class A, B and C buildings 20,00 or larger. Excludes owner-occupied.

15 14 Multifamily Market The multifamily market continues to perform well. Rents are holding steady and vacancy rates are still falling. In Ventura County, where all of our multifamily data comes from, the average weighted vacancy rate as of January was 3.43%. This compares favorably to January when the vacancy rate was 4.16%. In addition, rental rates fell a paltry 0.. On the whole, we expect the multifamily market to perform well in. However, we do have some concerns. The first has to do with decreasing rents in larger units. As the table below shows rents for studio and one bedroom apartments rose from July to January. Unfortunately, rents for two and three bedroom apartments fell during the same time period. Our concern has to do with the fact that demand for larger units maybe declining as families turn to single family homes instead of apartments. The housing crisis has provided investors the opportunity to purchase homes in bulk. Rather than reselling these homes in a depressed market investors are renting them instead. The investors are generating positive cash flow while they wait for housing prices to increase. We believe that families are more likely to rent homes instead of apartments because they typically get more space and amenities, such as a garage and washer and dryer hookups, relative to apartments. Additionally, rents for single family homes are competitive with apartment rents because investors can purchase homes at extremely low prices. Hence, when confronted with the opportunity to rent a home rather than an apartment more families are choosing homes. Low vacancy rates and high rental rates have created a boom in apartment construction. Permits for new multifamily housing are increasing throughout the Basin. Additionally, some developers are resubmitting plans to change proposed condominiums into apartments. The apartment building boom is causing us some concern as it is has the potential to resemble the housing boom that led to the recession. During the housing craze developers were building homes are a breakneck pace. The same is happening now with apartments. If the Basin is not careful it may experience a crash in the apartment market. The question is how likely is a bubble in the apartment market? It is too early to answer this question. Quite frankly a bubble may never occur. However, if the Basin continues to build apartments at current rates, the odds of a bubble or crash occurring increase. We must not forget that the Basin has a tremendous amount of excess capacity in the housing market in the form of foreclosed homes. Given current prices investors are finding that buying and renting homes is a profitable endeavor. This greatly expands the supply of rentable single family homes that compete with larger apartments. Finally, we should note that the discussion above is only cautionary. The multifamily market is currently enjoying a tremendous boom. As we noted vacancy rates are low and rental rates are high. We caution the reader because we have concerns about the future of multifamily housing. As we discovered in the single-family segment too much supply can quickly erode prices and vacancy rates. Average Monthly Rent Average Monthly Rent per Sq. Ft. Jan-10 % ± to Jul-10 % ± to Jan-11 % ± to Jul-11 % ± to Jan-12 Jan-10 % ± to Jul-10 % ± to Jan-11 % ± to Jul-11 % ± to Jan-12 Studio $ $ % $ $ % $1,015 $ % $ % $ % $ $ Br $1, % $1, % $1, % $1, $1,256 $ % $ % $ % $ % $ Br $1, $1, % $1, $1, % $1,543 $ % $ % $ % $ $ Br $1, % $1, $1, % $1, $1,868 $ % $ % $ $ $1.52 Overall $1, % $1, % $1, % $1, $1,435 $ % $ % $ % $ $1.68 Weighted Avg. Vacancy Rate for Dates Indicated Above: 5.24% 4.33% 4.16% 3.66% 3.43% Source: Dyer Sheenan Group, Inc. Historical Data: Combined Ventura County Market Areas Historical Average Monthly Rent Combined Ventura County Market Areas Historical Average Monthly Rent per Sq. ft. Combined Ventura County Market Areas $2,500 $2.50 $2,000 $2.00 $1,500 $1.50 $1,000 $1.00 $500 $0.50 $0 Studio 1 Bedroom 2 Bedroom 3 Bedroom Overall $0 Studio 1 Bedroom 2 Bedroom 3 Bedroom Overall January July January July January January July January July January Source: Dyer Sheenan Group, Inc. Source: Dyer Sheenan Group, Inc.

16 Regional Offices COMMERCE (866) PALM DESERT (760) SIMI VALLEY (805) WEST LOS ANGELES (310) ENCINO-Corporate Office (800) PASADENA (866) SOUTH BAY (866) WESTLAKE VILLAGE (805) ORANGE COUNTY (866) ONTARIO (909) RIVERSIDE (866) SANTA CLARITA (661) TEMECULA VALLEY (951) VENTURA COUNTY (805) CAL LUTHERAN UNIVERSITY Kirk M. Lesh, Senior Economist Center of Economic Research and Forecasting n Committed to Southern California. Connected to the World. Find us online: