LOS ANGELES COUNTY Economic Indicators Q3 16 Q3 17 Los Angeles Employment 4.41M 4.44M Los Angeles Unemployment 5.2% 4.8% U.S. Unemployment 4.9% 4.4% Market Indicators (Overall, All Classes) Q3 16 Q3 17 Vacancy 13.9% 14.9% YTD Net Absorption (sf) 2.2M 1.2M 12-Month Forecast 12-Month Forecast Economy Los Angeles County s unemployment rate was 4.8%, down from 5.2% one year ago. However, there has been a slight slowdown in job growth and in the last year as nonfarm employment grew by only 0.8%. Educational and health services recorded the largest increase with job gains of 22,500 while the professional and business services sector added 4,900 jobs. Market Overview Healthy leasing in the first half of the year brought strong occupancy gains of 781,873 square feet (sf) in the third quarter, boosting the yearto-date total to over 1.2 million sf (msf). This is the highest amount of quarterly absorption since third quarter 2016 and was mostly driven by the growth in LA West, where half of the top ten leases occurred. Under Construction (sf) 2.1M 1.5M Average Asking Rent* $2.98 $3.18 *Rental rates reflect gross asking $psf/mo Overall Net Absorption / Overall Asking Rent 1,500,000 1,000,000 500,000 0-500,000-1,000,000 2011 2012 2013 2014 2015 2016 2017 Net Absorption Asking Rent, $psf/mo Overall Vacancy 25% 20% 15% 5-Year Historical Average = 16.8% 10% 5% 0% 2011 2012 2013 2014 2015 2016 2017 The average asking rental rate of $3.18 per square foot per month (psf/mo) is up 6.7% year-over-year. Annual rent growth in the region was strongest in LA South with an 8.0% hike, specifically in the El Segundo/Beach Cities submarket where asking rental rates are up 10.5% over the same time period. Over 1.3 msf of office space delivered in the third quarter, causing the overall vacancy rate to increase by 40 basis points (bps) to 14.9%. New supply has caused the vacancy rate to increase for four consecutive quarters. Of the 2.0 msf completed year-todate, 1.0 msf were in LA Central and 1.0 msf were in LA West. The Greater LA office inventory has now surpassed 200 msf, with an additional 1.5 msf under way. Although sales activity slowed after a strong first half of the year with only 2.2 msf sold to investors, there were approximately 73 transactions completed year-to-date, outpacing the amount traded by this time last year. Five out of the 16 transactions in third quarter were in LA South, where the largest sale also occurred. Starwood Capital, a Connecticutbased investment firm, purchased the 489,756-sf Continental Grand Plaza in El Segundo, with interest to purchase additional property in the area. Outlook Several large tenants are set to occupy space in the fourth quarter, including Wasserman Media Group (71,392 sf) and WeWork (69,534 sf) in the Westside, and the County of LA occupying over 100,000 sf in the San Gabriel Valley. Greater LA vacancy should remain flat as three major office projects will also be delivering before year-end and more in first quarter 2018. More growth will follow after these completions, causing the vacancy rate to finally take a turn and start declining by midyear 2018. cushmanwakefield.com I 1
$2.66 $2.65 $2.59 $2.87 $2.87 $2.95 $3.34 $3.43 $3.61 $3.94 $4.29 $4.48 $2.91 $2.99 $3.18 $3.22 $3.38 $3.51 Los Angeles CBD The CBD office market in the third quarter posted overall net absorption of -4,157 sf, characterizing a market that continues to see rightsizing and more inner market shuffling. However, average asking rents are up 4.8% from a year ago, reaching $3.51 psf/mo. New leasing activity of 381,417 sf in the third quarter was slightly down from the previous quarter, but up 20.2% from the start of the year and only 7.7% less than this time last year. Latham & Watkins expanded 41,710 sf at the Gas Company Tower and Diamond Generating (Mitsubishi) expanded 24,228 sf at US Bank Tower. The 356,141-sf Wilshire Grand delivered, causing a significant increase in overall vacancy, which is up 130 bps from the previous quarter to 21.6%. Los Angeles West Top four of the largest new deals signed in the county were in LA West submarkets, pushing activity here to over 3.0 msf year-to-date. Kite Pharma and Snap moved into Santa Monica which helped third quarter occupancy gains reach 504,002 sf. This brought year-to-date net absorption back into positive territory at 132,575 sf, which was negative at the mid-year point. Although LA West posted hefty amounts of absorption, vacancy is up 10 bps from the previous quarter due to three major construction completions (Pen Factory, Formosa West, C3). Over 1.0 msf of new supply has delivered so far in 2017, causing overall vacancy to reach 12.7%, a 210-bp increase from a year ago. Despite the recent increase in supply and vacancies, asking rental rates continue to rise and reach new peaks. Rental rates for Class A product, which makes up over 80% of leasing activity in LA West, increased by 6.5% over the year to $4.62 psf/mo. Largest year-over-year rent growth occurred in Playa Vista, Culver City, and West Hollywood. Tri-Cities Tri-Cities in the third quarter slowed slightly, but had marginal changes to market fundamentals. Despite Walt Disney vacating 49,000 sf of space at 611 N Brand in Glendale, overall net absorption remained slightly positive at 8,169 sf. This was representative of a somewhat flat quarter in the market and indicates that overall vacancy rates should trend similarly, closing at 13.4%, 10-bp increase from last quarter. Direct rental rates are up 4.1% year-over-year to $3.03 psf/mo. Tri-Cities leasing activity fell 36.5% year-over-year but remains on par from last quarter totaling 737,341 sf year-to-date. Glendale led leasing activity with 80,665 sf of new deals while Pasadena had the most leases signed, which ranged from small to mid-range leases. Quarterly leasing remained steady, and continued the trend of smaller tenant demand driving the market. CENTRAL BUSINESS DISTRICT LOS ANGELES WEST $5.00 TRICITIES 2 cushmanwakefield.com I 2
$2.02 $2.02 $2.13 $2.17 $2.29 $2.43 $2.17 $2.13 $2.21 $2.26 $2.40 $2.45 $1.99 $1.99 $2.05 $2.14 $2.14 San Gabriel Valley Although San Gabriel Valley s (SGV) vacancy remained flat since the beginning of the year at 16.3%, direct rental rates increased moderately by 2.4% over the year to $2.15 psf/mo. SGV s largest submarket, City of Industry/Diamond Bar, continues to demand the highest direct rental rate at $2.52 psf/mo and maintain low vacancy at 5.6%. San Gabriel Valley s year-to-date leasing activity slowed by 20.1% to 439,558 sf compared to the previous year. Overall net absorption remained flat year-over-year remaining slightly positive under 50,000 sf. Xencor, currently headquartered in Monrovia, expanded for an additional 23,652 sf, fully occupying the building. The 210 Corridor attributed to 64.6% of the total absorption this quarter. The County of Los Angeles is also set to occupy 106,108 sf in the 210 Corridor, which will lead to further growth and reduce SGV vacancy in the upcoming months. SAN GABRIEL VALLEY Los Angeles North Leasing activity slowed this year, finishing with 1.5 msf year-to-date, 15.4% lower than this time last year. Despite this, tenants occupying over the year caused vacancy to decline 40 bps to 11.0% from third quarter 2016. Hemacare, a biotech company, signed the largest lease at a newly constructed office building in Northridge (8500 Balboa), which currently demands the highest asking rental rates in the West Valley submarket. Significant occupancy gains of 150,966 for the quarter was an 82.1% increase from gains posted by mid-year. Coty, a wholesale cosmetic company, contributed to 64.2% of this absorption by moving into 96,944 sf in Calabasas. Investor sales activity closed the quarter at 667,726 sf, tripling square foot sales volume of third quarter 2016. Majestic Asset Management was involved in the two largest sales. They sold the 273,562-sf Sherman Plaza in Van Nuys for $61.9 million to Pacific Reach Properties and purchased Corporate Center Calabasas, a seven-building office campus of 351,101 sf for $53 million. Los Angeles South The second half of the year started strong with a 290-bp annual drop in overall vacancy and an 8.0% annual rent growth the highest rent growth in the Los Angeles region. There has been significant upward pressure on rental rates in the last three years and South Bay rents have now surpassed the level achieved at the peak of the previous cycle in 2008 by 15.2%. With healthy demand, South Bay posted net absorption of 392,057 sf year-to-date, which brought its vacancy down to 16.2%. The El Segundo office submarket continues to dominate the South Bay and accounted for 52.5% of net demand. Although rents have been trending up in the past few years, averaging $3.37 psf/mo (up 10.5% from last year), they are still 22.5% lower than Lower Westside s average of $4.35 psf/mo and a whopping 34.8% lower than the pricey Playa Vista. In the last year, this submarket absorbed 281,482 sf of space, resulting in a 140-bp drop in overall vacancy to 11.4%. LOS ANGELES NORTH LOS ANGELES SOUTH 2 cushmanwakefield.com I 3
MARKET TOTAL BUILDINGS INVENTORY DIRECT VACANCY RATE OVERALL VACANCY RATE YTD LEASING ACTIVITY YTD OVERALL NET ABSORPTION UNDER CONSTRUCTION OVERALL AVERAGE ASKING RENT (ALL CLASSES)* DIRECT AVERAGE ASKING RENT (CLASS A)* Los Angeles CBD 55 27,574,918 20.7% 21.6% 1,173,621 39,081 0 $3.51 $3.60 Los Angeles Central (Non-CBD) 147 20,940,135 16.3% 16.4% 802,248 403,336 395,909 $2.79 $2.96 Los Angeles West 420 53,468,616 11.6% 12.7% 3,025,638 132,575 566,867 $4.48 $4.62 Los Angeles North 407 31,507,130 11.0% 11.2% 1,476,607 233,859 355,000 $2.45 $2.55 Los Angeles South 248 30,288,489 15.1% 16.2% 1,371,043 392,057 181,600 $2.43 $2.79 Tri-Cities 195 24,147,090 11.9% 13.4% 737,341 34,121 0 $2.95 $3.21 San Gabriel Valley 168 12,418,736 15.9% 16.3% 439,558 (50,296) 0 $2.14 $2.34 GREATER LOS ANGELES TOTALS 1,640 200,345,114 14.1% 14.9% 9,026,056 1,184,733 1,499,376 $3.18 $3.52 *Rental rates reflect gross asking $psf/mo Key Lease Transactions Q3 2017 PROPERTY SF TENANT TRANSACTION TYPE MARKET / SUBMARKET 2222 Imperial Highway 140,705 Raytheon Renewal LA South / El Segundo 8942 Wilshire Boulevard / La Peer Bldg 80,118 Paradigm New Lease LA West / Beverly Hills 1899 Western Way 75,711 Unify Financial Credit Union Renewal LA South / Torrance 750 San Vicente / Red Bldg - West 69,534 WeWork New Lease LA West / West Hollywood 2049 Century Park East / South Tower 62,482 Mitchel Silberberg & Knupp New Lease LA West / Century City 2834 Colorado Avenue / Santa Monica Gateway 60,166 Starz New Lease LA West / Santa Monica 2200 Imperial Highway 55,962 AT&T New Lease LA South / El Segundo 400 S. Hope Street / Four Hundred Hope 41,664 Holland & Knight Renewal LA CBD / Bunker Hill 8500 Balboa Boulevard / The Mix 39,699 HemaCare New Lease LA North / Northridge 12121 Bluff Creek Drive / The Bluffs East Bldg 38,979 Fox Sports New Lease LA West / Playa Vista Key Sales Transactions Q3 2017 PROPERTY OFFICE SF SELLER / BUYER PRICE / $PSF MARKET / SUBMARKET 300 & 400 Continental Boulevard 489,756 Divco West / Starwood Capital $168,881,500 / $345 LA South / El Segundo 26565-26709 W. Agoura Road / Calabasas Corporate Center 351,101 177 E. Colorado Boulevard 291,735 15350 & 15400 Sherman Way / Sherman Plaza 273,562 1440 S. Bridge Gate Drive / Bridge Gate Plaza 134,858 2120 & 2150 Colorado Avenue / Arboretum Courtyard 133,835 Lincoln Property Company / Majestic Asset Management Saunders Property Company / Rockpoint Capital Majestic Asset Management / Pacific Reach Properties Pacifica Trenton Holdings / Great Far East The Blackstone Group / Tishman Speyer $53,000,000 / $151 LA North / Calabasas $161,500,000 / $553 Tri-Cities / Pasadena $61,900,000 / $226 LA North / Van Nuys $27,300,000 / $202 San Gabriel Valley / Diamond Bar $140,625,000 / $1,050 LA West / Santa Monica 10780 Santa Monica Boulevard 92,486 Zurich Alternative / ICO Group $40,850,000 / $441 LA West / West Los Angeles 21900 Burbank Boulevard 89,203 1899 Western Way 75,711 22144 Clarendon Street / Clarendon Crest 43,063 Washington Capital Management / Younan Properties Continental Development / Miramar Property Group The Blackstone Group / Kourose Shenassa $19,792,000 / $221 LA North / Woodland Hills $19,000,000 / $250 LA South / Torrance $10,000,000 / $232 LA North / Woodland Hills cushmanwakefield.com I 4
Office Q2 2017 OFFICE SUBMARKETS Cushman & Wakefield 900 Wilshire Blvd, 24 th Floor Los Angeles, CA 90017 cushmanwakefield.com For more information, contact: Eric Kenas, Market Director, Research Tel: +1 213 955 6446 eric.kenas@cushwake.com Vincent Chang Associate Market Director, Research Tel: +1 213 955 5125 vincent.chang@cushwake.com About Cushman & Wakefield Cushman & Wakefield is a leading global real estate services firm that helps clients transform the way people work, shop, and live. Our 43,000 employees in more than 60 countries help investors and occupiers optimize the value of their real estate by combining our global perspective and deep local knowledge with an impressive platform of real estate solutions. Cushman & Wakefield is among the largest commercial real estate services firms with revenue of $5 billion across core services of agency leasing, asset services, capital markets, facility services (C&W Services), global occupier services, investment & asset management (DTZ Investors), project & development services, tenant representation, and valuation & advisory. To learn more, visit www.cushmanwakefield.com or follow @CushWake on Twitter. Copyright 2017 Cushman & Wakefield. All rights reserved. The information contained within this report is gathered from multiple sources considered to be reliable. The information may contain errors or omissions and is presented without any warranty or representations as to its accuracy. cushmanwakefield.com I 5