Research & Forecast Report TRI-CITIES OFFICE Q2 217 Accelerating success. >> Strong Sales Activity Persists in Second Quarter Key Takeaways > Overall vacancy in the Tri-Cities office market decreased in second quarter from 13.5% to 13.3%. Absorption recorded positive 61,1 square feet () primarily driven by Pasadena and Burbank. > The average monthly asking rate ascended by $.3 to $2.99 per square foot (P) Full Service Gross (FSG). Up 4.3% year-over-year, this marks twelve straight quarters of increases. > Leasing activity in the Tri-Cities recorded 383,7, up almost 84, from last quarter. > There were no new construction deliveries this quarter, and there are no new projects currently under construction. > Investment activity continued with momentum in the second quarter. In the largest transaction, Kennedy-Wilson Properties, Ltd. acquired 4-45 N. Brand Blvd. in Glendale from MetLife, Inc. for $144. million ($329 P). Tri-Cities Office Market The market continued 217 on a slight rebound as demand was positive for the second time in five quarters. slid accordingly due to demand in Class A properties across the market. Glendale will see vacancy jump by midyear due to Nestle USA s relocation. Because of this relocation and others in Pasadena, sublease inventory will increase as tenants begin to vacate. Rents continued to rise, however, on the strength of Class A properties. Investment activity was widespread, with Glendale seeing its ninth and tenth Class A properties traded in the last 2 years. For investors, sizable discount to replacement cost and rents below peak levels are helping to fuel activity, along with a varied tenant base for the market. Market Indicators Relative to prior period Class A Class B Class C All Classes Average Asking Rent $3.13 $2.47 $2.24 $2.99 Change from Q1 17 ($) +$.4 +$.5 -$.2 +$.3 Y.O.Y. Change (%) 4.2% -1.6% -14.3% 4.3% 12-mo Employment Growth (%) 12-mo Actual Employment Change Nonfarm Q2 217 Prof. & Business Services Forecast Net Absorption Construction Rental Rate Summary Statistics Tri-Cities, Q2 217 Asking Rents Tri-Cities, Q2 217 Class A Class B All Classes Rate 14.1% 1.8% 13.3% Change from Q1 17 (Basis Points) -5 +3-2 Net Absorption* +9.1-2.7 +61.1 Construction Completions*... Under Construction*... *, Thousands Labor Force Los Angeles County, May 217 Financial Activities 1.3% 2.7%.4% 55,7 15,9 8
TRI-CITIES OFFICE Q2 216 > The overall vacancy rate slid by 2 basis points from 13.5% to 13.3%. > Three out of the five submarkets in the Tri-Cities saw decreasing vacancy; Glendale and Arcadia saw their vacancy rise by 5 and 13 basis points, respectively. > Year-over-year, vacancy in the TriCities has remained relatively static, sliding by 4 basis points during that period. > FORECAST: has stagnated of late in the Tri-Cities market; continued rightsizing and relocations out of market will keep vacancy gains static going forward. Historical v. Rents Tri-Cities Office Market Q2 13-17 $ P PER MONTH (WEIGHTED) $3. $2.9 $2.8 $2.7 $2.6 $2.5 RENTS VACANCY 25% 2% 15% 1% 5% % VACANT (TOTAL) Absorption and Leasing Activity > Absorption in Tri-Cities registered the second quarter of positive demand in the last 5 quarters. > Class A properties led all classes in demand for the quarter. Among the major move-ins were WeWork opening 74,7 of coworking space at Tower Burbank, Fuse LLC occupying 2,9 at 7 N. Central Ave. in Glendale and iherb taking 2, at 31 N. Lake. Ave in Pasadena. > Among the major leases signed this quarter were Service Titan renewing and expanding to two full floors (47,3 ) at 81 N. Brand Blvd. in Glendale, Eurofins renewing for 34,9 at 75 E. Royal Oaks Dr. in Monrovia and Spokeo renewing and expanding to 29,5 at 199 S. Los Robles Ave. in Pasadena. > FORECAST: While the Tri-Cities market continues to be a destination for tenants in a variety of industries, leasing and demand has the potential to flatten out in 217. Nestle USA s eventual move out of Glendale midyear will introduce almost 35, of available space to the market, subleases notwithstanding. Rental Rates > Average asking rents have seen a modest increase of 4.3% year-over-year, bettering the 3.1% growth seen from 215 to 216. > Burbank and Pasadena have continued to be leaders in average asking rate with $3.2 and $3.14 P, FSG, respectively. > The overall average asking rent of $2.99 P FSG is the highest since the first quarter of 29. However, it falls short of the post-recession high of $3.13 P a year earlier. > FORECAST: Rising rents in the Tri-Cities market are expected through 217, but modest demand might temper gains going forward. $2.4 2Q13 2Q14 2Q15 2Q16 2Q17 Net Absorption by Submarket Tri-Cities Office Market Q2 17 6, 5, 4, 3, 2, 1, (1,) (2,) (3,) (4,) (32,1) 55,2 (4,4) 11,3 % 31,1 Glendale Pasadena Arcadia Monrovia Burbank Historical Leasing Activity Tri-Cities Office Market Q2 13-17 1,, 9, 8, 7, 6, 5, 4, 3, 2, 1, 2Q13 2Q14 2Q15 2Q16 2Q17 2
Construction > Construction remains light in the Tri-Cities market, as no properties are currently under construction. > FORECAST: Construction will be scarce for the near future as several projects remain in proposed status throughout the Tri-Cities market. Investment Trends > Investment activity for properties over 25, dipped slightly in sales volume this quarter, recording $366.7 million over 9 transactions. > In addition to the sale of 4-45 N. Brand Blvd. in Glendale, 23 W. Empire Ave. in Burbank sold to New York Life Real Estate Investors for $133.2 million ($379 P) and 291 W. Alameda Ave. sold to a JV of Ocean West Capital and Fotress Investments for $4.3 million ($336 P). 8 S. Lake Ave. in Pasadena traded to TIAA-CREF for $3.8 million ($432 P). > Of the 25 Class A office properties in Glendale, 1 of them have sold within the last 2 years. That count figures to increase with 27 Goode Ave. currently under contract. > FORECAST: Minimal federal interest rate increases should help keep investment activity steady through early 218. Historical Net Absorption & Construction Completions Tri-Cities Office Market Q2 13-17 4, 3, 2, 1, (1,) (2,) NET ABSORPTION 2Q13 2Q14 2Q15 2Q16 2Q17 Investment Trends Chart Tri-Cities Office Market 11-17 $35. $3. Average Price P CONSTRUCTION COMPLETIONS Cap Rate 8 7 Outlook The Tri-Cities market continues to be an attractive market for tenants from a variety of industries. Large blocks of space still remain in some of the core submarkets, such as Pasadena and Burbank, at a price discount relative to other markets in the Greater Los Angeles region. A scarcity of new available construction might not be able to counter modest tenant demand. The market was subject to downsizing and relocations out of market this quarter. That trend has the potential to continue going forward. $/P $25. $2. $15. $1. $5. $- 211 212 213 214 215 216 217 6 5 4 3 2 1 Cap Rate Unemployment Rate U.S., CA & Los Angeles County May 217 4.8% 4.7% 4.7% 4.6% 4.5% 4.4% 4.4% 4.3% 4.2% 4.1% 4.1% 4.% 3.9% 3.8% United States California Los Angeles County 3
Market Description The Tri-Cities office market is a relatively small market, comprised of 23.1 million and represents just 8.5% of the total office space in buildings 25, and greater within the Los Angeles Basin. It is one of the premier locations for firms in entertainment (primarily in Burbank), insurance (primarily in Glendale), high tech/engineering (primarily in Pasadena stretching through Arcadia and into Monrovia), finance and professional services sectors. Much of the space is relatively new with 46% built in 1985 or later. In contrast to most office markets in the region, a relatively large percentage of the space is in mid-rise (5%) and high-rise (2%) buildings. Submarket Map RECENT TRANSACTIONS & MAJOR DEVELOPMENTS Tri Cities Office Market Q2 217 SALES ACTIVITY PROPERTY ADDRESS SIZE SALE PRICE PRICE P BUYER SELLER 4-45 N. Brand Blvd., Glendale 437,1 $144,, $329 P Kennedy-Wilson Properties, Ltd. MetLife, Inc. 23 W. Empire Ave., Burbank 351,3 $133,217, $379 P New York Life Real Estate Investors Walton Street Capital LLC 291 W. Alameda Ave., Burbank 119,8 $4,3, $336 P Fortress/Ocean West Lionstone Investments 8 S. Lake Ave., Pasadena 71,3 $3,8, $432 P TIAA-CREF IDS Real Estate Group 1218 S. 5th Ave., Monrovia 137,9 $15,5, $112 P City of Hope Samuelson & Fetter LEASING ACTIVITY PROPERTY ADDRESS LEASED LEASE TYPE BLDG TYPE LESSEE LESSOR 81 N. Brand Blvd., Glendale 47,3 Renewal/Exp A Service Titan Blackstone 75 E. Royal Oaks Dr., Monrovia 34,9 Renewal A Eurofins Monrovia Tech Campus 199 S. Los Robles Ave., Pasadena 29,5 Renewal/Exp A Spokeo, Inc. Ethika Investments 55 S. Lake Ave., Pasadena 12, Expansion A ADP CBRE Global Investors MAJOR DEVELOPMENTS PROJECT DEVELOPER SIZE SUBMARKET STATUS ESTIMATED COMPLETION 16 W. Olive Ave., Burbank Cusumano Real Estate Group 255, Burbank Proposed TBD 3377 W. Empire Ave., Burbank Worthe Real Estate Group 175, Burbank Proposed TBD 4
OFFICE OVERVIEW Tri Cities Office Market Q2 217 EXISTING PROPERTIES VACANCY ACTIVITY ABSORPTION CONSTRUCTION RENTS Submarket/ Class Bldgs Inventory Direct Sublease Prior Qtr Leasing Activity Current Qtr Leasing Activity YTD Net Absorption Current Qtr Net Absorption YTD Completions Current Qtr Under Construction Weighted Avg Asking Lease Rate BURBANK A 34 6,41,4 13.6%.% 13.6% 14.3% 62,7 158,8 45,5 43,4 $3.24 B 16 792,2 5.8%.% 5.8% 3.7% 45,5 51,5 (16,7) (16,3) $2.69 C 3 131,9 3.2%.% 3.2% 5.% 4,2 4,2 2,3 2,3 $2.4 SUBTOTAL 53 6,965,5 12.5%.% 12.5% 12.9% 112,4 214,5 31,1 29,4 $3.2 GLENDALE A 25 5,379,4 11.2%.4% 11.6% 11.7% 96,9 221,3 2,5 25,4 $2.72 B 15 785,4 14.2% 1.9% 16.1% 11.6% 9,6 25,2 (34,6) (62,) $2.27 C.%.%.%.% $. SUBTOTAL 4 6,164,8 11.6%.6% 12.2% 11.7% 16,5 246,5 (32,1) (36,6) $2.65 PASADENA A 27 4,764,8 17.8%.5% 18.4% 19.3% 72,1 125,3 42,2 (164,8) $3.33 B 4 3,331,3 8.3% 2.1% 1.5% 11.% 45,8 75,3 19,2 128,2 $2.61 C 9 376,4 4.7% 14.9% 19.6% 18.% 4,4 5, (6,2) (53,7) $2.3 SUBTOTAL 76 8,472,5 13.5% 1.8% 15.3% 16.% 122,3 25,6 55,2 (9,3) $3.14 ARCADIA A 2 12,3 4.3%.% 4.3%.% (5,2) (5,2) $2.72 B 4 188,8 1.5%.% 1.5% 4.2% 7,6 7,6 5,2 3,2 $2.24 C 1 25, 17.6%.% 17.6%.% (4,4) (4,4) $2.35 SUBTOTAL 7 334,1 3.7%.% 3.7% 2.4% 7,6 7,6 (4,4) (6,4) $2.48 MONROVIA A 4 46,5 5.8%.% 5.8% 7.1% 34,9 42,2 5,1 36,1 $2.26 B 9 714,1 14.9%.% 14.9% 15.8% 8,3 6,2 6,2 $2.22 C 1 25, 18.%.% 18.% 18.% $2.7 SUBTOTAL 14 1,145,6 11.7%.% 11.7% 12.7% 34,9 5,5 11,3 42,3 $2.22 MARKET TOTAL A 92 16,712,4 13.8%.3% 14.1% 14.6% 266,6 547,6 9,1 (65,1) $3.13 B 84 5,811,8 9.4% 1.5% 1.8% 1.5% 18,5 167,9 (2,7) 59,3 $2.47 C 14 558,3 5.6% 1.% 15.6% 14.1% 8,6 9,2 (8,3) (55,8) $2.24 TOTAL 19 23,82,5 12.5%.8% 13.3% 13.5% 383,7 724,7 61,1 (61,6) $2.99 Note: revisions to the inventory base were made effective Q2 217, historical data reported here reflect these revisions and may not match data reported in previous quarters. 5
Definitions of key terms in this report Rentable Square Feet: Office space in buildings with 25, square feet or more of speculative office space. Includes competitive space in Class A, B and C single-tenant and multi-tenant buildings. Excludes non-competitive owner-occupied buildings, buildings that include 3 percent or greater of medical or retail space, and space that is under-construction, underrenovation or off-market. Class A Space: Space that an image-conscious company would lease for its headquarters. Typically, this space has a very high level of finish and an excellent location, and commands the highest rents in the market. Class B Space: Highly functional, attractive space, but less prestigious than Class A Space, and commanding lower rental rates. Class C Space: Functional, competitive space, but with a lower level of finish and/or a less desirable location than with Class B Space, and commanding lower rental rates. Low-Rise: Buildings with a total of 4 floors or less. Mid-Rise: Buildings with a total of 5 to 13 floors. High-Rise: Buildings with 14 or more floors. Direct : Space in existing buildings that is vacant and immediately available during the quarter for direct lease, plus space that is vacant but not available for direct lease or sublease (for example, that is being held for a future commitment). : Space in existing buildings that is vacant and immediately available during the quarter for direct lease or for sublease, plus space that is vacant but not available for direct lease or sublease. Net Absorption: Net change in occupied square feet from one period to the next (includes the impact of change in vacant space available for sublease). Leasing Activity: Square feet leased from all known transactions completed during the quarter. Excludes lease renewals. Weighted Average Asking Rental Rates: Weighted by the total square feet available for direct lease. Data is based on Full Service Gross rents, and includes all costs associated with occupying the space, including taxes, insurance, maintenance, janitorial service and utilities. Reported on a monthly, per basis. Space Added (Net): square feet added during the quarter via construction completions, including renovated space returned to market, less total square feet taken off-market due to demolitions or conversions. Under Construction: Includes buildings that are in some phase of construction, beginning with foundation work and ending with the issuance of a Certificate of Occupancy Technical Note: Colliers International is continuously refining its database. The data shown in the historical tables and graphics in this report have been adjusted to take into account these changes in the database. This report has been prepared by Colliers International for general information only. Information contained herein has been obtained from sources deemed reliable and no representation is made as to the accuracy thereof. Colliers International does not guarantee, warrant or represent that the information contained in this document is correct. Any interested party should undertake their own inquiries as to the accuracy of the information. Colliers International excludes unequivocally all inferred or implied terms, conditions and warranties arising out of this document and excludes all liability for loss and damages arising there from. This report and other research materials may be found on our website at www.colliers.com/greaterlosangeles. 396 offices in 68 countries on 6 continents United States: 153 Canada: 29 Latin America: 24 Asia Pacific: 79 EMEA: 111 UNITED STATES: Downtown LA Office License No. 198231 865 S. Figueroa St., Ste. 35 Los Angeles, CA 917 HANS MUMPER Executive Managing Director Greater Los Angeles CHRIS WONG Regional Research Analyst Research Services > $2.6 billion in annual revenue > 2. billion square feet under management > Over 15, professionals TEL: +1 213 627 1214 FAX: +1 213 327 32 CAITLIN MATTESON Research Director Research Services 6