OFFICE ORANGE COUNTY MARKET REPORT Continues to Tighten As Decreases MARKET OVERVIEW MARKET INDICATORS - VACANCY 13.5% NET ABSORPTION 101,500 CONSTRUCTION 497,387 RENTAL RATE $2.21 P FSG UNEMPLOYMENT 4.2% The Orange County office market continued a positive stride into mid-year. In second quarter 2015, total vacancy decreased 10 basis points to 13.5% from the previous quarter s rate of 13.6%. Total net absorption remained positive for the fifth consecutive quarter recording at 101,500 square feet (). As market conditions continue to strive forward and vacancy rates decline, overall direct weighted average asking rental rates increased to $2.21 per square foot (P), per month, Full Service Gross (FSG) marking a 12% increase from the start of 2014. Construction activity remains limited as there are currently two buildings under construction. Orange County sales activity has slowly but steadily increased in the past few years as investors continue to take advantage of low interest rates: The Brookhollow Group JV PCCP acquired Pacific Center at 1600-1610 E St Andrew Pl in Santa Ana from Colony Realty Partners, CT Realty Investors acquired the Palm Terrace Portfolio in Lake Forest for $192 P and Royal BP LLC acquired the Buena Park Commerce Plaza portfolio for $182 P from Lincoln Property Corporation. MARKET TRENDS - >> Total vacancy rate decreased from 13.6% to 13.5% >> Weighted average asking rental rate increased from $2.14 P FSG to $2.21 P FSG >> Leasing activity increased from 1.8 million to 2.1 million >> 101,500 of net absorption recorded in 2Q HISTORICAL VACANCY VS RENTS Q2 2011- $ P PER MONTH (FSG) RENTS VACANCY $2.30 25% $2.25 $2.20 20% $2.15 $2.10 15% $2.05 $2.00 10% $1.95 $1.90 $1.85 5% $1.80 $1.75 0% 2Q11 2Q12 2Q13 2Q14 2Q15 % VACANT (TOTAL) HISTORICAL NET ABSORPTION & CONSTRUCTION COMPLETIONS Q2 2011 - SQUARE FEET 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 (500,000) (1,000,000) NET ABSORPTION CONSTRUCTION COMPLETIONS 2Q11 2Q12 2Q13 2Q14 2Q15 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. www.colliers.com/greaterlosangeles
MARKET REPORT OFFICE ORANGE COUNTY ORANGE COUNTY DEMOGRAPHICS >> POPULATION: 3,160,437 (2015 Estimate) 3,314,198 (2020 Projection) 4.9% (Growth 2015-2020) >> HOUSEHOLD INCOME: $99,514 (Average) $72,856 (Median) >> JOB GROWTH: 3.5% (past 12 months) >> UNEMPLOYMENT RATE: 4.2% (as of May 2015) VACANCY During the second quarter of 2015, the total vacancy rate decreased 10 basis points to 13.5% from 13.6% reported in the previous quarter. Tenants looking for spaces ranging from 5,000 to 20,000 can still select from a wide range of options. However, the number of large blocks of contiguous available space over 100,000 ; which is less than twenty, continues to decrease resulting in fewer options. Overall Class A Airport Area vacancy decreased to 14.6% from the previous quarter of 14.7%. NET ABSORPTION Net absorption remained positive for the fifth consecutive quarter recording at 101,500 during the second quarter. Three of the five submarkets experienced negative absorption. A large amount of this absorption resulted from Carrington Mortgage s consolidation and movein of 127,750 at 1600 S Douglass Rd in Anaheim, St. Joseph Heritage Medical s move-in at 200 E Center St in Anaheim totaling 191,647 and Local Lighthouse s sublease move-in at 770 The City Dr in Orange for 23,000. The Central County submarket recorded the highest amount of positive net absorption of 348,200, while Airport Area recorded the lowest amount at -154,800. UNEMPLOYMENT May 2015 figures from the Employment Development Department of California showed total nonfarm employment in Orange County reached 1,535,800 jobs as the unemployment rate decreased to 4.2%. This was an increase of 13,000 jobs over the past twelve months. The education and health services showed the biggest net gain over the past year, adding 2,900 jobs. Nearly 86% of the growth was in healthcare and social assistance services. Leisure and hospitality services added 2,900 payroll jobs; trade, transportation and utilities grew by 2,400 jobs and manufacturing by 1,500 jobs. Financial services reported the largest year-over loss, dropping only 600 jobs. VACANCY BY SUBMARKET NET ABSORPTION BY SUBMARKET % VACANT 18% 16% 14% 12% 10% 8% 6% SUBLEASE VACANCY DIRECT VACANCY 1.4% 0.2% 0.5% 15.0% 13.8% 13.3% 12.1% 0.8% 10.3% SQUARE FEET 400,000 300,000 200,000 100,000 0 (100,000) (91,000) (25,700) 24,800 348,200 4% NORTH CENTRAL AIRPORT WEST SOUTH (200,000) (154,800) AIRPORT SOUTH WEST NORTH CENTRAL 2 Source: California Employment Development Department, May 2015 data P. 2 COLLIERS INTERNATIONAL
MARKET REPORT OFFICE ORANGE COUNTY 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 AIRPORT A 106 22,136,097 14.5% 0.8% 15.3% 14.7% 597,391 1,211,110 (140,600) (94,500) 0 0 $2.56 B 242 14,444,492 12.7% 0.2% 12.9% 12.8% 247,559 570,795 (11,300) 17,800 0 0 $2.20 C 62 2,840,715 6.6% 0.2% 6.7% 6.6% 47,184 84,739 (2,900) 54,200 0 0 $1.80 SUBTOTAL 410 39,421,304 13.3% 0.5% 13.8% 13.4% 892,134 1,866,644 (154,800) (22,500) 0 0 $2.41 CENTRAL A 29 5,620,934 13.7% 0.4% 14.1% 19.7% 85,799 179,319 313,700 420,600 0 0 $2.16 B 80 5,724,400 12.0% 0.1% 12.1% 12.6% 63,416 139,493 28,800 (26,100) 0 0 $1.80 C 60 2,337,432 18.2% 0.0% 18.2% 18.4% 26,292 53,251 5,700 3,400 0 0 $1.38 SUBTOTAL 169 13,682,766 13.8% 0.2% 14.0% 16.5% 175,507 372,063 348,200 397,900 0 0 $1.86 NORTH A 14 1,633,659 14.6% 6.4% 21.0% 14.1% 65,279 83,173 (112,500) (164,200) 0 72,343 $2.13 B 57 5,072,399 14.6% 0.1% 14.6% 16.8% 40,204 175,609 109,500 103,100 0 0 $1.92 C 22 958,524 18.0% 0.0% 18.0% 20.9% 26,346 27,127 27,800 30,200 0 0 $1.48 SUBTOTAL 93 7,664,582 15.0% 1.4% 16.4% 16.7% 131,829 285,909 24,800 (30,900) 0 72,343 $1.90 SOUTH A 19 3,239,005 5.5% 2.7% 8.2% 7.1% 100,152 168,549 (35,900) (14,400) 0 425,044 $2.90 B 214 11,623,965 10.6% 0.3% 10.9% 10.4% 724,391 1,088,975 (58,300) 72,800 0 0 $2.22 C 17 752,857 26.8% 0.0% 26.8% 27.2% 14,293 25,419 3,200 15,800 0 0 $2.13 SUBTOTAL 250 15,615,827 10.3% 0.8% 11.1% 10.5% 838,836 1,282,943 (91,000) 74,200 0 425,044 $2.32 WEST A 8 1,029,708 11.9% 0.0% 11.9% 12.6% 24,750 56,689 6,800 25,600 0 0 $2.48 B 54 2,883,409 10.8% 0.0% 10.8% 9.6% 41,349 62,314 (33,300) (49,000) 0 0 $2.03 C 33 1,377,302 15.1% 0.2% 15.2% 15.3% 10,465 15,341 800 1,500 0 0 $1.68 SUBTOTAL 95 5,290,419 12.1% 0.1% 12.2% 11.7% 76,564 134,344 (25,700) (21,900) 0 0 $2.03 MARKET TOTAL A 176 33,659,403 13.5% 1.2% 14.6% 14.7% 873,371 1,698,840 31,500 173,100 0 497,387 $2.48 B 647 39,748,665 12.1% 0.2% 12.3% 12.3% 1,116,919 2,037,186 35,400 118,600 0 0 $2.09 C 194 8,266,830 14.4% 0.1% 14.5% 14.9% 124,580 205,877 34,600 105,100 0 0 $1.64 TOTAL 1,017 81,674,898 12.9% 0.6% 13.5% 13.6% 2,114,870 3,941,903 101,500 396,800 0 497,387 $2.21 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. COLLIERS INTERNATIONAL P. 3
MARKET REPORT OFFICE ORANGE COUNTY CONSTRUCTION >> Direct weighted average asking rentals rates increased to $2.21 P FSG >> Three out of five submarkets recorded an increase in average asking rents There were no office developments delivered to the market during the second quarter of 2015. Currently, there are two office properties under construction. The Irvine Company s development at 200 Spectrum Center Drive in Irvine is expected to be completed by first quarter 2016. The new office building is 21 stories consisting of 425,000. This will be the first new office tower built in the Irvine Spectrum within the last seven years. The Source Tower is a 7-story building located in Buena Park totaling 72,343 and is expected to be completed third quarter of 2015. The lifestyle center office building consists of retail space on the first two floors and 50,000 of office space. There is approximately 3.5 million of proposed office development space in Orange County. Hines is expect to soon start construction on 17850 Von Karman in Irvine totaling 242,000 and Parker Properties is expected to start construction in September on 35 Enterprise, a 205,000 office building located in Aliso Viejo which MicroVention has already pre-leased. ACTIVITY Leasing activity during the second quarter of 2015 totaled 2.1 million square feet, an increase from 1.8 million square feet of transactions during the first quarter 2015. Of the total leasing activity, 42% (892,134 ) occurred in the Airport submarket, followed by the South County submarket (838,836 ), Central County (175,507 ), North County (131,829 ), and West County (76,564 ). Buildings categorized as Class B recorded the largest amount with 1,116,919 of leasing activity and buildings categorized as Class C recorded the smallest amount with 124,580 of leasing activity. RENTAL RATES The direct weighted average asking rental rate in Orange County increased over the second quarter to $2.21 P FSG, up from $2.14 P FSG in the previous quarter and also up from $1.99 P FSG recorded one year ago. Class A weighted average asking rental rates increased to $2.48 P FSG from $2.38 P FSG from the previous quarter. Class B weighted average asking rental rates also increased to $2.09 P FSG from $2.05 P FSG. The high-caliber properties in Irvine Spectrum and Newport Center have the most consistent rental rate appreciation. CLASS A WEIGHTED AVERAGE ASKING LEASE RATES LEASING ACTIVITY BY SUBMARKET $P PER MONTH (FSG) $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $2.13 $2.16 $2.48 $2.56 $2.90 SQUARE FEET 1,000,000 900,000 800,000 700,000 600,000 500,000 400,000 300,000 200,000 100,000 892,134 838,836 175,507 131,829 76,564 $0.00 NORTH CENTRAL WEST AIRPORT SOUTH 0 AIRPORT SOUTH CENTRAL NORTH WEST P. 4 COLLIERS INTERNATIONAL
MARKET REPORT OFFICE ORANGE COUNTY OUTLOOK The second quarter of 2015 ended with positive activity as vacancy rates continue to decline and asking rental rates increase. The increase in activity stems from confident economic conditions and job growth. Investment spending is expected to remain strong as investors take advantage of low interest rates, which are expected to increase by year end. Chapman University forecast increased projection job growth to 47,000 jobs in 2015 and another 41,000 jobs in 2016. Education and health services are expected to grow by 8.8% through 2016. These positive market trends bode well for overall job creation in California and Orange County. HISTORICAL LEASING ACTIVITY Q2 2011 - MARKET DESCRIPTION Orange County is a moderately large suburban office market comprised of 81 million square feet and represents 29% of the total inventory in office buildings 25,000 square feet and greater in the Los Angeles basin. It is a relatively new and moderate-density market with 41% of the space in Class A buildings. Orange County is home to a broad mix of firms, including significant representation from the finance, insurance, telecommunications, high-tech, real estate, engineering and professional-service sectors. UNEMPLOYMENT RATE United States, California & Orange County May 2015 2,000,000 1,800,000 1,600,000 7.0% 6.0% 5.0% 4.0% 5.3% 6.2% 4.2% 1,400,000 3.0% 2.0% 1,200,000 1.0% 1,000,000 2Q11 2Q12 2Q13 2Q14 2Q15 0.0% United States California Orange County RECENT TRANSACTIONS & MAJOR DEVELOPMENTS SALES ACTIVITY PROPERTY ADDRESS SIZE SALE PRICE PRICE P BUYER SELLER 1600-1610 E Saint Andrew Pl, Santa Ana 392,879 $43,900,000 $111 P The Brookhollow Group Eaton Vance Corporation Palm Terrace Portfolio, Lake Forest 155,795 $30,050,000 $192 P CT Realty Investors LaSalle Investment Management 6301/6281 Beach Blvd, Buena Park 159,021 $29,100,000 $182 P Royal BP, LLC Lincoln Property Company 2420 East Lincoln Ave, Anaheim 53,686 $15,000,000 $279 P Individual Individual LEASING ACTIVITY PROPERTY ADDRESS LEASED LEASE TYPE BLDG CLASS LESSEE LESSOR 35 Enterprise, Aliso Viejo 205,000 Direct A MicroVention Parker Properties 26642 & 26672 Town Centre, Foothill Ranch 131,267 Renewal A LoanDepot Arden Realty, Inc. 3090 Bristol, Costa Mesa/25500 & 25510 Commercentre 107,465 Direct A LoanDepot Equity Office/CREF Pacific Vista LLC 15211& 15201 Laguna Canyon Rd, Irvine 90,043 Renewal A Kofax, Inc The Irvine Company 27121 Towne Centre Dr, Foothill Ranch 73,000 Direct B Cox Communications Menlo Equities MAJOR DEVELOPMENTS PROJECT DEVELOPER SIZE SUBMARKET STATUS ESTIMATED COMPLETION 200 Spectrum Center, Irvine The Irvine Company 425,044 South County Under Construction 1Q 2016 6940 Beach Blvd, Buena Park M+D Properties 72,343 North County Under Construction 3Q 2015 17850 Von Karman Ave, Irvine Hines 242,000 Airport Area Proposed N/A COLLIERS INTERNATIONAL P. 5
MARKET REPORT OFFICE ORANGE COUNTY DEFINITIONS OF KEY TERMS USED IN THIS REPORT Total Rentable Square Feet: Office space in buildings with 25,000 square feet 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 percent 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. 502 offices in 67 countries on 6 continents United States: 140 Canada: 31 Latin America: 24 Asia Pacific: 199 EMEA: 108 >> $2.3 billion in annual revenue >> 1.7 billion square feet under management >> Over 16,200 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/greaterlosangeles. UNITED STATES: Orange County Office License No. 01908231 3 Park Plaza, Suite 1200 Irvine, CA 92614 TEL +1 949 474 0707 FAX +1 949 724 5600 CAUDILL, ROBERT Regional Director/Orange County JOENS, MARK Associate KLUEWER, BRETT Vice President MACE, MAC Associate MATTESON, CAITLIN Research Director Research Services PUPIL, MARTIN President, Western Region PUTNAM, RICHARD Managing Director Western Region Capital Markets WARD, RYAN Senior Associate Accelerating success. P. 6 COLLIERS INTERNATIONAL www.colliers.com/marketname