Research & Forecast Report DOWNTOWN L.A. OFFICE Accelerating success. >> Continues to Decline While Rents Rise Key Takeaways > continued its gradual descent for the sixth straight quarter, recording at 18.2%, down 1 basis points from the previous quarter. > Net absorption fell from last quarter s total of 18,5 square feet () but remained positive at 45,. > The overall asking rental rate slightly increased by $.2 to $38.43 per square foot (P) Full Service Gross (FSG), marking a 1.9% increase since the third quarter of 215. > Midsize leases once again dominated velocity in both Class A and B product type. Leasing activity totaled 548,1 for the quarter. > Several properties traded hands in third quarter, highlighted by the LA Times building located at 22 W. 1st St. selling for $14 P from Tribune Media Company to Canadian investor/ developer Onni Group. Market Indicators Relative to prior period Forecast Net Absorption Construction Rental Rate Summary Statistics DTLA, Rate Class A Class B All Classes 15.4% 21.5% 18.2% -2-2 -1 22.4 2.3 45. Change from Q2 16 (Basis Points) Net Absorption* Construction Completions* Under Construction*... 356.1 1,634.5 1,99.6 *, Thousands Downtown Los Angeles Office Market In third quarter 216, the Downtown Los Angeles office market continued to see positive momentum. While the overall market recorded positive absorption, the Financial District submarket contributed the majority of negative demand due to Millbank Tweed, LLP s relocation to Century City. However, leasing velocity recorded 548,1, as a number of out-ofmarket tenants agreed to relocate to downtown, which bodes well for future demand. Asking rents continued to climb, recording growth of 1.9% year-over-year. Traditional tenants in the finance, insurance and real estate (FIRE) industries continue to dominate the tenant base in the market, although these sectors have seen a fair amount of rightsizing. As new construction deliveries in the Greater Downtown/Arts District are forthcoming shortly, the possibility of a large creative/tech/media tenant landing in one of those new properties will help solidify that submarket s validity as a tenant destination. Asking Rents DTLA, Average Asking Rent Change from Q2 16 ($) Y.O.Y. Change (%) Class A Class B Class C All Classes $41.3 $36.6 $3.35 $38.43 $.25 -$.7 $.72 $.2 1.2% 5.5% 6.3% 1.9% Labor Force Los Angeles County, Nonfarm Prof. & Business Services Financial Activities 12-mo Employment Growth (%) 1.7% 3.1% 2.4% 12-mo Actual Employment Change 73,9 18,6 5,1
DTLA OFFICE > Direct vacancy for the quarter was 17.6%, while sublease vacancy recorded at.5%. > Both Bunker Hill and South Park saw drops in vacancy, while vacancy in the Financial District increased by 7 basis points due to Millbank Tweed, LLP vacating approximately 8, as they completed their move from 61 S. Figueroa St. to Century City. > Renewals and relocations within the market helped contribute to lower vacancy deltas in third quarter compared to last quarter. > Forecast: is expected to increase as new construction deliveries in both the Financial District and Greater Downtown/Arts District submarkets have the potential to surpass demand from tenants. Absorption and Leasing Activity > The market saw some traction as out-of-market tenants signed leases this quarter. American Realty Advisors agreed to relocate from Glendale to 39,3 at 515 S. Flower St. Additionally, Real Office Centers signed a new lease at ROW DTLA for 27, and invite website Evite, Inc. jumped from West Hollywood into 18,9 at 6 Wilshire Blvd. > The Financial District and Greater Downtown/Arts District recorded negative absorption with -123,7 and -4,2 respectively. Bunker Hill (119,9 ) and South Park (53, ) recorded positive net absorption at for the quarter. > The majority of prominent move-ins occurred in South Park and Bunker Hill with Allen Matkins moving into 49,5 at 865 S. Figueroa St. and LTL Attorneys occupying 24,6 of sublease space at 3 S. Grand Ave. > Forecast: Shifts in workplace design has led to tenants downsizing from their previous footprints, causing lower demand as more tenants are needed to offset the rightsizing trend. Rental Rates > The overall average asking rate for direct space increased year-over-year by 1.9% as vacancy continues to hover around 17.7-18.3%. > Asking rental rates increased across all classes with Class properties seeing the largest increase of $.25 P. > Rents in trophy properties have pushed closer to $4. P FSG as landlords have marketed a combination of Class A amenities and creative build-outs to prospective tenants. > Forecast: Rents are largely expected to remain flat with some minor positive/negative fluctuations. More generous concessions might help offset a lack of aggressiveness in asking rents and help keep occupancy levels high. Historical v. Rents DTLA Office Market Q3 12-16 $ P FSG PER ANNUM (WEIGHTED) Net Absorption by Submarket DTLA Office Market Q3 16 $39 $38 $37 $36 $35 $34 $33 $32 $31 $3 15, 1, 5, 2Q12 2Q13 2Q14 2Q15 2Q16 (5,) (1,) (15,) (4,2) GREATER DOWNTOWN RENTS (123,7) FINANCIAL DISTRICT VACANCY 53, SOUTH PARK 3% 25% 2% 15% 1% 119,9 % VACANT (TOTAL) BUNKER HILL Historical Leasing Activity DTLA Office Market Q3 12-16 9, 8, 7, 6, 5, 4, 3, 2, 1, 3Q12 3Q13 3Q14 3Q15 3Q16 2
DTLA OFFICE Construction > New construction projects remain concentrated in the Greater Downtown/Arts District submarket, with only the office component (356,1 ) at Korean Air s Wilshire Grand project slated to deliver in the Financial District. > Several projects in the Arts District constitute the majority of new construction. The Ford Factory (271, ), 4th & Traction (15, ) and the first phase of RowDTLA (415,9 ) are all competing for the first major creative or tech lease in the much-hyped area. > Forecast: Future construction will provide an abundance of high quality creative space to the market, as Downtown Los Angeles accounts for 48% of all new construction in Los Angeles County. Its effect on vacancy will depend on delivery timing and when a tenant ventures outside of the traditional borders of the CBD. Historical Net Absorption & Construction Completions DTLA Office Market Q3 12-16 2, 15, 1, 5, (5,) (1,) (15,) (2,) (25,) NET ABSORPTION CONSTRUCTION COMPLETIONS 3Q12 3Q13 3Q14 3Q15 3Q16 Investment Trends > Investment activity for properties over 25, decreased in third quarter, recording $191. million in volume, up from $969. million last quarter. > Onni Group continued on its acquisition spree in the market, picking up the LA Times complex from Tribune Media Co. for $15 million. The developer plans to convert the property into a mixed use development, replete with creative office and retail. > 888 W. Sixth sold from the Somerset Group to a local private investment firm. The 19,3 property sold for $54.2 million dollars, or $495 P. > Forecast: Capitalization rates are expected to continue to compress while sale prices rise as Los Angeles County remains an apparent safe haven for foreign and domestic investment. The last quarter of 216 will see some activity as 444 S. Flower St. is under contract to Coretrust Partners. Investment Trends Chart DTLA Office Market 1-16 $/P $4. $35. $3. $25. $2. $15. $1. $5. $- Average Price P Cap Rate 21 211 212 213 214 215 216 9 8 7 6 5 4 3 2 1 Cap Rate Outlook The Downtown Los Angeles market activity is expected to remain on a steady path as vacancy is projected to remain relatively flat through the end of 216. While tenant demand has been steady in the past, continued rightsizing from existing tenants and the influx of potentially vacant creative properties on the CBD fringe could temper any major vacancy gains. Asking rental rates will remain stable as landlords aim to hold high occupancy rates by offering large concession packages. Unemployment Rate U.S., CA & Los Angeles County August 216 5.6% 5.5% 5.4% 5.3% 5.2% 5.1% 5.% 4.9% 4.8% 4.7% 4.6% 4.5% 4.9% 5.5% 4.9% United States California Los Angeles County 3
DTLA OFFICE Market Description Downtown LA is a moderately large office market comprised of 32.3 million, representing 11% of the total office space ver 25, in the LA Basin. Approximately 52% of the space in this market was built prior to 198, and is considered relatively old by Southern California standards. Downtown Los Angeles is the densest market in the region with only one percent of the space contained within low-rise buildings, while 24% and 75% of the space are in mid-rise and highrise 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. Submarket Map RECENT TRANSACTIONS & MAJOR DEVELOPMENTS Downtown Los Angeles Office Market SALES ACTIVITY PROPERTY ADDRESS SIZE SALE PRICE PRICE P BUYER SELLER 22 W. 1st St., Los Angeles 75, $15,, $14 P Onni Group Tribune Media Company 888 W. 6th St., Los Angeles 19,3 $54,2, $457 P Copperfield Investments The Somerset Group 755 S. Los Angeles St., Los Angeles 81,2 $17,55, $216 P Urban Offerings Safir LLC 2 S. San Pedro St., Los Angeles 39,8 $14,25, $358 P Tokyo East LLC Pedro LLC LEASING ACTIVITY PROPERTY ADDRESS LEASED LEASE TYPE BLDG TYPE LESSEE LESSOR 515 S. Flower St., Los Angeles 39,3 Direct-New A American Realty Advisors Commonwealth Partners 777 S. Alameda St., Los Angeles 27, Direct-New B Real Office Centers Atlas Capital Group 3 S. Grand Ave., Los Angeles 24,6 Sublease A LTL Attorneys Dentons LLP 523 W. 6th St., Los Angeles 22,9 Direct-New A K-Swiss Callahan Capital 155 W. 7th St., Los Angeles 2,5 Renewal B Harrington, Foxx Jamison Services MAJOR DEVELOPMENTS PROJECT DEVELOPER SIZE SUBMARKET STATUS ESTIMATED COMPLETION 81 S Broadway, Los Angeles Waterbridge Capital LLC 5, Greater Downtown Under Construction Q3 217 767 S. Alameda St., Los Angeles Atlas Capital Group, LLC 415,9 Greater Downtown Under Renovation Q4 216 9 Wilshire Blvd, Los Angeles Hanjin International Corp 356,1 Financial District Under Construction Q2 217 26 E 7th St, Los Angeles Shorenstein Properties, LLC 254, Greater Downtown Under Renovation Q4 216 963 E 4th St, Los Angeles Atlas Capital Group, LLC 15, Greater Downtown Under Renovation Q4 216 555-581 Mateo St., Los Angeles Blatteis & Schnur 53,4 Greater Downtown Under Construction Q4 216 537 S. Broadway, Los Angeles Markwood Enterprises 49,5 Greater Downtown Under Renovation Q1 217 1111 S. Broadway, Los Angeles Broadway Eleventh Owners LLC 116, Greater Downtown Under Renovation Q4 217 5 S. Santa Fe Ave., Los Angeles Chalmers-Santa Fe LLC 95,7 Greater Downtown Under Construction Q1 218 747-757 S. Alameda St., Los Angeles Atlas Capital Group, LLC 814,7 Greater Downtown Proposed TBD 4
DTLA OFFICE office OVERVIEW Downtown Los Angeles Office Market 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 FINANCIAL DISTRICT A 9 9,732,7 14.4%.4% 14.7% 13.7% 172, 36,6 (11,) 37,2 356,1 $41.51 B 25 8,365,2 25.5%.4% 25.8% 25.5% 182,1 448,9 (3,2) (246,8) $37. C 2 326,4 2.5%.% 2.5% 22.8% 12,3 18,4 7,5 1,4 $3.78 Subtotal 36 18,424,3 19.5%.4% 19.9% 19.2% 366,4 827,9 (123,7) (28,2) 356,1 $38.64 BUNKER HILL A 6 7,221,1 16.2% 1.1% 17.3% 18.9% 62,7 217,7 116, 38, $41.31 B 4 537,8 12.3%.% 12.3% 13.% 6,5 3,9 2,5 $39. C 1 37,2 31.7%.% 31.7% 31.7% 18, 9,1 $27.93 Subtotal 11 8,129,1 16.7% 1.% 17.7% 19.1% 62,7 242,2 119,9 391,6 $4.4 SOUTH PARK A 2 1,144,2 9.6%.% 9.6% 1.2% 17,4 38,6 7,4 2 $38.45 B 7 1,85,5 17.7%.% 17.7% 2.1% 13,7 191,7 43,1 74,7 $35.31 C 2 266,4 21.2%.6% 21.9% 22.8% 26,8 29,9 2,5 (11,3) $31.62 Subtotal 11 3,261,1 15.2%.1% 15.2% 16.8% 57,9 26,2 53, 63,6 $35.58 GREATER DOWNTOWN / ARTS DISTRICT B 6 1,828,5 7.4%.9% 8.3% 8.5% 61,1 1,4 3,5 43,8 1,634,5 $32.22 C 8 592,3 18.1%.% 18.1% 16.8% 22, (7,7) (1,7) $32.5 Subtotal 14 2,42,8 1.%.7% 1.7% 1.5% 61,1 122,4 (4,2) 42,1 1,634,5 $32.14 MARKET TOTAL A 17 18,98, 14.8%.6% 15.4% 15.6% 252,1 616,9 22,4 417,4 356,1 $41.3 B 42 12,582, 21.1%.4% 21.5% 21.7% 256,9 747,5 2,3 (125,8) 1,634,5 $36.6 C 13 1,555,3 22.4%.1% 22.5% 22.6% 39,1 88,3 2,3 (2,5) $3.35 72 32,235,3 17.6%.5% 18.2% 18.3% 548,1 1,452,7 45, 289,1 1,99,6 $38.43 Note: revisions to the inventory base were made effective, historical data reported here reflect these revisions and may not match data reported in previous quarters. 5
DTLA OFFICE 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. 554 offices in 66 countries on 6 continents United States: 153 Canada: 34 Latin America: 24 Asia Pacific: 231 EMEA: 112 UNITED STATES: Downtown LA Office License No. 198231 865 S. Figueroa St., Ste. 35 Los Angeles, CA 917 HANS MUMPER Executive Managing Director CHRIS WONG Regional Research Analyst Research Services > $2.5 billion in annual revenue > 2. billion square feet under management > Over 16,1 professionals TEL: +1 213 627 1214 FAX: +1 213 327 32 CAITLIN MATTESON Research Director Research Services 6