www.colliers.com/losangeles OFFICE LOS ANGELES MARKET REPORT Rate Decrease Below 20% As Market Activity Remains Flat MARKET OVERVIEW MARKET INDICATORS - VACANCY 19.5% The Downtown Los Angeles market in the second quarter 2014 recorded net absorption of negative -8,400 square feet. Total overall vacancy rate slightly decreased to 19.5 percent from 20.1 percent in the previous quarter; a 60 basis point decrease. As market fundamental continue to slowly improve, direct weighted average asking rents recorded an increase to $34.80 per square foot in the second quarter 2014 compared to $33.04 P one year ago. NET ABSORPTION -8,400 CONSTRUCTION 508,200 RENTAL RATE $34.80 P UNEMPLOYMENT 8.0% New leasing activity in the second quarter of 2014 was 555,400 square feet relative to 375,600 square feet in the first quarter of 2014. The leasing activity was a combination of tenants closing small expansion deals within their existing space and also some tenants relocating from outside the market. Sales activity in the second quarter was relatively slow, however the Federal Reserve recently made it clear that they will not begin raising interest rates until 2015 at the earliest. Jade Enterprises aquired the Figueroa Tower at 660 S Figueroa St from C-III Asset Management for $260 P. MARKET TRENDS - >> Total vacancy rate decreases to 19.5% from 20.1% >> Weighted average asking rental rate at $34.80 P >> Leasing activity at 555,400 >> Absorption of -8,400 recorded >> Construction activity at 508,200 $ P FSG PER ANNUM (WEIGHTED) HISTORICAL VACANCY VS RENTS Q2 2010 - RENTS VACANCY $35 $35 $34 $34 $33 $33 $32 $32 $31 2Q10 2Q11 2Q12 2Q13 2Q14 22% 20% 18% 16% 14% 12% 10% % VACANT (TOTAL) HISTORICAL NET ABSORPTION & CONSTRUCTION COMPLETIONS Q2 2010-50,000 0 (50,000) () (150,000) (200,000) (250,000) (300,000) (350,000) NET ABSORPTION CONSTRUCTION COMPLETIONS 2Q10 2Q11 2Q12 2Q13 2Q14 1 Colliers International continuously refines its database. As a result, data reflected in this report may not be consistent with data reported in previous quarters.
VACANCY LOS ANGELES DEMOGRAPHICS >> POPULATION: 10,063,995 (2014 Estimate) 10,423,669 (2019 Projection) 3.57% (Growth 2014-2019) >> HOUSEHOLD INCOME: $75,972 (Average) $53,125 (Median) >> JOB GROWTH: 2.2% (past 12 months) >> UNEMPLOYMENT RATE: 8.0% (as of May 2014) The total vacancy rate, including sublet space decreased to 19.5% compared to 20.1% last quarter. A longer historical perspective of the total vacancy rate shows that the vacancy rate a year ago stood at 19.2%. Total vacancy rates were highest in the Financial District submarket (21.7%) and lowest in the South Park submarket (14.4%). rates were highest for Class C space (23.5%) and lowest for Class A space (18.5%) with Class B space in-between at 20.1%. NET ABSORPTION Net absorption was for the second quarter remained flat, recording negative absorption of -8,400 square feet. The best performing submarket in the second quarter 2014 was the Financial District, recording a positive 98,900 square feet of net absorption. This can be primarily attributed to KPMG moving into 88,500 square feet at 550 S Hope St. Negative to flat absorption is a trend that is expected to continue in 2014 as tenants continue to downsize their space needs. There is possible anticipation of tenants from outside the market that require larger blocks of space and new space alternatives such as creative space. The major upcoming lease expirations in 2014 are not as substantial as in 2015. The Bunker Hill submarket has experienced a decrease in demand for space from tenants as the Financial District submarket continues to evolve into an appealing option for tenants. This trend is supported by the year-to-date net absorption of -167,500 recored in the Bunker Hill submarket. UNEMPLOYMENT May 2014 figures for nonfarm employment in Los Angeles County showed a recovering job market. Over the past 12 months, Los Angeles County has gained 102,800 jobs for an increase of 2.2 percent. This gain in employment led to the unemployment lowering to 8.0 percent compared to 9.2 percent a year ago. Year-overyear job gains were most significant in Educational and Health Services (36,400 jobs) and Trade, Transportation, and Utilities (12,300 jobs). The largest decline in jobs was seen in Manufacturing (14,500 jobs). VACANCY BY SUBMARKET NET ABSORPTION BY SUBMARKET SUBLEASE VACANCY DIRECT VACANCY 120,000 25% 98,900 0.2% 80,000 20% 0.5% 60,000 % VACANT 15% 10% 0.2% 1.0% 17.3% 21.5% 40,000 20,000 0 11,800 14.2% 14.4% (20,000) 5% (40,000) (60,000) (47,800) 0% SOUTH PARK BUNKER HILL FINANCIAL (80,000) (71,300) BUNKER HILL SOUTH PARK FINANCIAL P. 2 COLLIERS INTERNATIONAL
OFFICE OVERVIEW EXISTING PROPERTIES VACANCY ACTIVITY ABSORPTION CONSTRUCTION RENTS Submarket/ Class Bldgs Total Inventory Direct Sublease Total Total 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 FINANCIAL A 9 9,732,700 20.3% 0.0% 20.4% 21.2% 350,200 163,000 82,200 135,300 0 400,000 $37.56 B 25 8,388,400 22.8% 0.3% 23.1% 23.3% 67,500 117,600 16,700 52,100 0 0 $30.24 C 2 326,400 25.0% 0.4% 25.3% 25.3% 0 0 0 1,200 0 0 $23.16 SUBTOTAL 36 18,447,500 21.5% 0.2% 21.7% 23.1% 417,700 280,600 98,900 188,600 0 400,000 $33.96 BUNKER HILL A 6 7,221,100 18.0% 0.6% 18.6% 17.6% 50,200 15,100 (73,300) (178,800) 0 0 $37.30 B 5 845,400 6.7% 0.0% 6.7% 6.7% 0 0 0 100 0 0 $29.52 C 1 370,200 28.1% 1.0% 29.1% 29.6% 3,900 9,600 2,000 11,200 0 0 $23.52 SUBTOTAL 12 8,436,700 17.3% 0.5% 17.8% 17.0% 54,100 24,700 (71,300) (167,500) 0 0 $36.34 SOUTH PARK A 2 1,144,200 4.6% 0.6% 5.2% 5.4% 1,300 14,200 2,700 2,100 0 78,500 $36.72 B 7 1,850,500 19.7% 0.0% 19.7% 18.3% 47,900 18,400 (27,400) (174,800) 0 0 $31.93 C 2 266,400 16.8% 0.0% 16.8% 8.1% 1,000 7,200 (23,100) 4,200 0 0 $28.14 SUBTOTAL 11 3,261,100 14.2% 0.2% 14.4% 12.9% 50,200 39,800 (47,800) (168,500) 0 78,500 $32.28 B 6 1,828,500 11.9% 1.4% 13.2% 13.8% 31,900 22,100 10,800 17,900 0 29,700 $29.64 C 8 592,300 22.1% 0.0% 22.1% 22.2% 1,500 8,400 1,000 (16,300) 0 0 $24.72 SUBTOTAL 14 2,420,800 14.4% 1.0% 15.4% 18.1% 33,400 30,500 11,800 1,600 0 29,700 $27.60 MARKET TOTAL A 17 18,098,100 18.4% 0.3% 18.7% 19.5% 401,700 192,300 11,600 (41,400) 0 478,500 $37.44 B 43 12,912,700 19.8% 0.4% 20.1% 20.8% 147,300 158,100 100 (104,700) 0 29,700 $30.40 C 13 1,555,300 23.2% 0.3% 23.5% 22.2% 6,400 25,200 (20,100) 300 0 0 $24.43 TOTAL 73 32,566,100 19.2% 0.3% 19.5% 20.1% 555,400 375,600 (8,400) (145,800) 0 508,200 $34.80 COLLIERS INTERNATIONAL P. 3
>> Leasing activity increased 67% compared to first quarter 2014. >> Rents continue to rise as creative office tenants look to downtown as office amenities continue to rise >>Year to date office demand is negative, however there has been a recent uptick in demand as office tenants plan for economic recovery CONSTRUCTION No new projects were delivered to the market in Q2; however there is currently 508,200 square feet of office space under construction. There is one project under construction in South Park as follows: the renovation of a 78,500 square feet Class A office building at 425 W 11th St in South Park. A 29,700 square-foot building in the Greater Downtown submarket has begun the renovation process to creative office. The largest project under construction is the 400,000 square feet of Class A office space that is part of the Wilshire Grand Tower development. The renovation projects are expected to start delivering at the end of 2014 and beginning of 2015, while the 400,000 square feet of Class A office space is expected to deliver in 2017. ACTIVITY New leasing activity during Q2 totaled 555,400 square feet compared to 375,600 square feet in Q1 2014, a substantial (67%) increase. The average quarterly leasing activity in 2013 was 301,000 square feet; therefore Q2 leasing activity is above that average. Legal, financial services and engineering firms continue to account for a large portion of the leasing activity. The leasing highlights in Q2 were Deloitte leasing 112,028 square feet at 555 W 5th St, US Bank renewing and downsizing to 105,000 square feet at 633 W 5th St, AEG Worldwide leasing 82,000 square feet at The Desmond, which is currently under renovation and Nationbuilder leasing 60,000 at 500-515 S Grand Ave. RENTAL RATES Average asking rents were highest in the Bunker Hill submarket ($36.34 P) and lowest in Greater Downtown submarket ($27.60 P). Class A asking rents were $37.44 P compared to Class B at $30.40 P and Class C at $24.43 P. Market-wide rates in 2013 ranged from $32.40 P to 33.84 P, the market-wide rental rate this quarter surpassed that level at $34.80 P. Looking ahead, no significant rental growth trend is expected in Downtown LA given the consistant elevated total vacancy levels. Landlords are expected to continue to utilize concessions as a means to attract and retain existing tenants. WEIGHTED AVERAGE ASKING LEASE RATES BY SUBMARKET LEASING ACTIVITY BY SUBMARKET $ P PER ANNUM (FSG) $40 $35 $30 $25 $20 $15 $10 $5 $36.34 $33.96 $32.28 $27.60 450,000 400,000 350,000 300,000 250,000 200,000 150,000 50,000 33,400 50,200 54,100 417,700 $0 BUNKER HILL FINANCIAL SOUTH PARK 0 SOUTH PARK BUNKER HILL FINANCIAL P. 4 COLLIERS INTERNATIONAL
OUTLOOK Market fundamentals are expected to remain flat throughout the remaining part of 2014. Larger tenants in the market will continue to have many options as there is still a large amount of blocks of space over 50,000 square feet and larger available for lease. With the expansion of the Metro Light rail to the West LA market from Downtown Los Angeles, there is anticipation of tenant movement from outside the market. With that said, it is believed creative and technology tenants requiring larger blocks of new space alternatives may be moving into the Downtown Los Angeles market in the near future. MARKET DESCRIPTION Downtown LA is a moderately large office market comprised of 32.5 million square feet, representing 11 percent of the total office space over 25,000 square feet in the LA Basin. Approximately 52 percent of the space in this market was built prior to 1980, and is considered relatively old by Southern California standards. Downtown Los Angeles is the most dense market in the region with only one percent of the space contained within low-rise buildings, while 24 percent and 75 percent of the space are in mid-rise and high-rise structures, respectively. Downtown includes a large concentration of firms from the legal, utilities, accounting and financial services sectors, and is home to many federal, state, and local government agencies as well. HISTORICAL LEASING ACTIVITY Q2 2010 - UNEMPLOYMENT RATE United States, California & Los Angeles County May 2014 4,000,000 900,000 800,000 3,500,000 700,000 3,000,000 600,000 9.0% 8.0% 7.0% 6.0% 6.3% 7.8% 8.0% 500,000 2,500,000 400,000 5.0% 4.0% 2,000,000 300,000 3.0% 200,000 1,500,000 2.0% 1.0% 1,000,0000 4Q08 2Q10 4Q09 2Q11 4Q10 2Q12 4Q11 2Q13 4Q122Q14 0.0% United States California Los Angeles County RECENT TRANSACTIONS & MAJOR DEVELOPMENTS SALES ACTIVITY PROPERTY ADDRESS SIZE SALE PRICE PRICE P BUYER SELLER 660 S Figueroa St, Los Angeles 278,657 $72,500,000 $260 P Jade Enterprises C-III Asset Management LEASING ACTIVITY PROPERTY ADDRESS LEASED LEASE TYPE BLDG TYPE LESSEE LESSOR 555 W 5th St, Los Angeles 112,028 New A Deloitte Brookfield Office Properties 633 W 5th St, Los Angeles 105,000 Renewal/Downsize A US Bank Overseas Union 425 W 11th St, Los Angeles 82,000 New B AEG Worldwide Lincoln Property 500-515 S Grand Ave, Los Angeles 60,000 New A Nationbuilder WHB Biltmore LLC 444 S Flower St 14,542 New A Haworth, Inc. Hines MAJOR DEVELOPMENTS PROJECT DEVELOPER SIZE SUBMARKET STATUS ESTIMATED COMPLETION 900 Wilshire Blvd, Los Angeles Hanjin International Corp 400,000 Financial District Under Construction Q1 2017 425 W 11th St, Los Angeles Lincoln Property Company 78,500 South Park Under Renovation Q2 2015 353 S Broadway, Los Angeles Flatiron Development Co LLC 29,700 Greater Downtown Under Renovation Q1 2015 COLLIERS INTERNATIONAL P. 5
P. 6 COLLIERS INTERNATIONAL www.colliers.com/marketname DEFINITIONS OF KEY TERMS USED IN THIS REPORT Total Rentable Square Feet: Office space in buildings with 25,000 or more of speculative office space. Includes competitive space in Class A, B and C singletenant and multi-tenant buildings. Excludes non-competitive owner-occupied buildings, buildings that include 30% or greater of medical or retail space, and space that is underconstruction, under-renovation or off-market. 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. 485 offices in 63 countries on 6 continents United States: 143 Canada: 42 Latin America: 20 Asia Pacific: 195 EMEA: 85 >> $2.1 billion in annual revenue >> 1.46 billion square feet under management >> Over 15,800 professionals 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). Total : 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. 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): Total 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/losangeles. UNITED STATES: Downtown Los Angeles Office License No. 01908231 865 S. Figueroa Street, Suite 3500 Los Angeles, CA 90017 TEL +1 213 627 1214 FAX +1 213 327 3200 ALGERMISSEN, STEPHEN Executive DWIGHT, TIM Associate KIRK, TERENCE MARADEI, GREG MATTESON, CAITLIN Research Manager Research Services MUMPER, HANS Executive Managing Director PELLOW, NATHAN Senior PUTNAM, RICK Managing Director Western Region Capital Markets SCHNELL, RICHARD C. Senior TARCZYNSKI, MARK Executive TISCHER, ADAM TUSZYNSKI, GREG VILGIATE, NICO Executive WALKER, SHADD G. Senior WOODS, RANDALL Accelerating success.