Research & Forecast Report MID-COUNTIES INDUSTRIAL Accelerating success. >> Negative Net Absorption Despite Completions Key Takeaways > This quarter, 542,000 square feet of industrial space finished construction, all of which was preleased. > Industrial absorption was negative 245,300 square feet, the first quarter of space givebacks since 2010. > Average asking rents increased $0.01 over the prior quarter to $0.75 per square foot (P) triple-net (NNN). > The overall vacancy rate was 1.6%, up 80 basis points from the previous quarter. This was due to a handful of large space givebacks. > Sales and leasing activity totaled 1,350,700 square feet for the quarter, including three sales (47,000 square feet) and 28 leases (1,303,700 square feet). > Only 255,700 square feet remains under construction, most of which is pre-leased. Market Indicators Relative to prior period Forecast Vacancy Net Absorption Construction Rental Rate Summary Statistics Mid-Counties, Vacancy Rate 1.6% Change from Q1 17 (Basis Points) Net Absorption Construction Completions Under Construction +80 BPS -245,300 542,000 255,700 Asking Rents Mid-Counties, Mid-Counties Industrial Market Average Asking Monthly Rent Mid-Counties Industrial Market $0.75 P NNN The Mid-Counties remains one of the tightest industrial market in Southern California, with a vacancy rate of 1.6%. This has left very few options for firms looking to expand in that market. As new construction slows, tenants who need to be located in this marketplace will pay a premium as quality space remains scarce. Change from Q4 17 +$0.01 Labor Force Mid-Counties, 12-mo Employment Growth (%) 12-mo Actual Employment Change Construction Manufacturing Transportation, Trade & Utilities 3.0% 0.6% -0.6% +4,100 2,200-5,400
MID-COUNTIES INDUSTRIAL Vacancy > The vacancy rate rose over the quarter to 1.6%. > Under construction buildings totaled 255,700 square feet, which will not have a significant impact on the vacancy rate in future quarters. > FORECAST: Despite space givebacks this quarter, vacancy remains tight and is expected to decrease in future quarters. Tenants are advised to start their building search well in advance of lease termination. Absorption and Leasing Activity > Net absorption reached negative 245,300 square feet this quarter, the first quarter of negative net absorption since 2010. > Sales and leasing activity totaled 1,350,700 square feet. Tight market conditions for quality buildings continue to limit options for tenants looking to expand. > FORECAST: Absorption will likely be positive next quarter as fully leased buildings are brought to the market. Historical Vacancy v. Rents Mid-Counties Q2 14-18 $ PER PER MONTH (NNN) RENTS VACANCY 0.8 7% 0.7 6% 0.6 5% 0.5 4% 0.4 3% 0.3 2% 0.2 0.1 1% 0 0% Avg. Asking Lease Rates Mid-Counties Q2 18 % VACANT (TOTAL) Rental Rates > Rents increased to $0.75 P NNN, which is the highest average rental rate ever for this market. > Significant barriers to creating new supply coupled with increased demand by tenants are putting continued upward pressure on rents. This will continue to make the Mid- Counties one of the more expensive markets in Southern California. > FORECAST: Rents will continue to rise in future quarters and tenants can expect to pay a premium for all types of industrial space. Tenants who signed leases five years ago can expect their rents to increase significantly upon renewal. $P PER MONTH (NNN) $0.90 $0.80 $0.70 $0.60 $0.50 $0.40 $0.30 $0.81 $0.81 10,000-19,999 20,000-39,999 $0.75 40,000-69,999 $0.72 70,000-99,999 $0.76 100,000-249,999 $0.75 250,000-499,999 500,000+ Historical Sales & Leasing Activity Mid-Counties Q2 14-18 3000000 2500000 2000000 SQUARE FEET 1500000 1000000 500000 0 2
MID COUNTIES INDUSTRIAL Construction Historical Net Absorption & Construction Completions Mid-Counties Q2 14-18 > New construction deliveries totaled 542,000 square feet this quarter, while 255,700 square feet of additional space remains under construction. > Development opportunities continue to be scarce, and land prices for even marginal industrial parcels are seeing new highs. 1,200,000 1,000,000 800,000 600,000 NET ABSORPTION CONSTRUCTION COMPLETIONS > FORECAST: Increasing rental rates and sales prices, along with continued low vacancy rates, may lead to older buildings being redeveloped into new projects. 400,000 200,000 0-200,000 Investment Trends -400,000 > Capitalization rates increased 140 basis point this quarter in Los Angeles County averaging 5.8% in the second quarter of 2018. Investment Trends Chart Los Angeles County Q2 14-18 > Average sale prices rose over the quarter to $188 P. > FORECAST: Industrial real estate will remain in high demand, especially densely-populated infill markets. 7.0% 6.0% Average Price Per sf Average Cap Rate $200 $180 $160 5.0% $140 Outlook The Mid-Counties market remains a tight infill market, despite rising vacancy rates this quarter. Industrial demand remains at record levels for Southern California with the Mid-Counties being one of the most sought after areas for distribution and last-mile industrial uses. 4.0% 3.0% 2.0% 1.0% 0.0% $120 $100 $80 $60 $40 $20 $0 High industrial demand and low inventory continues to put upward pressure on asking rates, which have hit a new peak every quarter for the last two years. As rents continue to rise, industrial users continue to purchase real estate, which is further driving up sale prices. Unemployment Rate May 2018 4.5% 4.4% 4.4% 4.3% 4.2% 4.2% 4.1% 4.0% 3.9% 3.8% 3.8% 3.7% 3.6% 3.5% United States California Los Angeles County 3
MID-COUNTIES INDUSTRIAL Market Description The Mid-Counties industrial market represents 104 million square feet of industrial space located in cities that border Los Angeles and Orange Counties. It is at the geographic heart of Southern California, a strategic location in the middle of the largest industrial market in the nation. It has a mix of industrial property types, with 50 percent in big box space (100,000+ square feet) and the balance in small- and medium-sized buildings. Businesses are attracted to the Mid-Counties due to its central location and proximity to the Ports of Long Beach and Los Angeles. Submarket Map RECENT TRANSACTIONS & MAJOR DEVELOPMENTS Mid-Counties Industrial Market SALES ACTIVITY PROPERTY ADDRESS SIZE SALE PRICE PRICE P BUYER SELLER 11323 Shoemaker, Santa Fe Springs 24,000 $4.7 Million $196 P GL Trading, Inc. Cuve Investments LLC 13575 Larwin, Santa Fe Springs 11,400 $2.4 Million $210 P UMT Group LLC Secoma, Co LTD 13810 Bentley, Cerritos 10,000 $2.1 Million $206 P 13810 Bentley LLC Llama Import Inc. 12655 Imperial, Santa Fe Springs 14,000 $1.9 Million $135 P Delia Barba Hak Shin LEASING ACTIVITY PROPERTY ADDRESS LEASED LEASE TYPE BLDG TYPE LESSEE LESSOR 15614 Shoemaker, Santa Fe Springs 525,000 Renewal Distribution Vans / VF Outdoor Prudential Real Estate 12418 Florence, Santa Fe Springs 506,500 Direct Distribution Funai Goodman North America 11500 Los Nietos, Santa Fe Springs 121,300 Sublease Distribution Midas Express Inc. Priority 1 Warehouse 11650 Burke, Santa Fe Springs 106,100 Direct Distribution Innovative Operations Solutions Kekropia Inc. MAJOR DEVELOPMENTS PROJECT DEVELOPER SIZE SUBMARKET STATUS ESTIMATED COMPLETION 12418 Florence, Santa Fe Springs Goodman North America 506,500 Mid-Counties Completed 12070 Altamar, Santa Fe Springs CEG Construction 35,500 Mid-Counties Completed 6300 Regio, Buena Park Fullmer Construction 100,000 Mid-Counties Under Construction Q3 2018 4
MID COUNTIES INDUSTRIAL INDUSTRIAL OVERVIEW MID-COUNTIES EXISTING PROPERTIES CONSTRUCTION VACANCY AVAILABILITY ACTIVITY ABSORPTION RENTS Submarket/ Building Size Bldgs Total Inventory Completions Current Qtr Under Construction Vacancy Vacancy Prior Qtr Availability Sales Number of Activity Sales Lease Activity Number of Leases Total Gross Activity Current Qtr Total Gross Activity YTD Net Absorption Current Qtr Net Absorption YTD Weighted Avg Asking Lease Rates MARKET TOTAL 10,000-19,999 737 10,313,500 0 0 1.3% 1.0% 2.3% 47,000 3 72,800 5 119,800 232,700 (28,600) (85,500) $0.81 20,000-39,999 514 14,060,900 35,500 0 1.4% 0.7% 3.1% 0 0 267,000 11 267,000 448,200 (75,200) (95,300) $0.81 40,000-69,999 318 16,353,200 0 70,700 1.3% 0.5% 1.7% 0 0 59,500 4 59,500 322,900 (128,500) (138,500) $0.75 70,000-99,999 133 10,791,800 0 0 1.0% 0.6% 4.3% 0 0 141,900 4 141,900 322,400 (39,500) 70,400 $0.72 100,000-249,999 216 31,940,600 0 185,000 2.2% 1.6% 5.1% 0 0 256,000 3 256,000 648,200 (174,600) (144,000) $0.76 250,000-499,999 49 16,119,400 0 0 1.9% 0.0% 11.3% 0 0 0 0 0 1,358,800 (305,400) 870,800 $0.75 500,000+ 6 4,407,600 506,500 0 0.0% 0.0% 25.1% 0 0 506,500 1 506,500 690,800 506,500 506,500 N/A TOTAL 1,973 103,987,000 542,000 255,700 1.6% 0.8% 5.7% 47,000 3 1,303,700 28 1,350,700 4,024,000 (245,300) 984,400 $0.75 5
MID-COUNTIES INDUSTRIAL Definitions of key terms in this report Total Rentable Square Feet: Industrial space in buildings with 10,000 square feet or more of industrial space. Includes speculative as well as owner-occupied buildings. Excludes Research & Development (R&D) buildings (industrial buildings with at least 30% office build-out, 3/1000 parking ratio and a high level of finish). Excludes space that is underconstruction or renovation. Vacancy: Space in existing buildings that is vacant and immediately available during the quarter for direct lease, for sublease or for sale, plus space that is vacant but not available for direct lease or sublease. Availability: All space that is currently being marketed for occupancy, including space which may currently be occupied or which may be under construction or renovation. 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). Gross Activity: Square feet sold and leased for all known transactions completed during the quarter, excluding lease renewals and investment sale transactions. Weighted Average Asking Rental Rates: Weighted by square feet available for direct lease. Data is based on triple net rents, and excludes expenses such as taxes, insurance, maintenance, janitorial services and utilities. Reported on a monthly per-square-foot basis. 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. 413 offices in 69 countries on 6 continents United States: 145 Canada: 28 Latin America: 23 Asia Pacific: 79 EMEA: 131 > $2.7 billion in annual revenue > 2.0 billion square feet under management > Over 15,400 professionals Construction Completions: 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. UNITED STATES: Commerce Office License No. 01908231 5100 S. Eastern, Suite 100 Commerce, CA 90040 THOMAS GALVIN Research Analyst Research Services TEL: +1 323 726 1200 FAX: +1 323 278 3000 JENNIFER REESE Research Associate Research Services 6