LOS ANGELES COUNTY Economic Indicators Q2 16 Q2 17 Los Angeles Employment 4.38M 4.44M Los Angeles Unemployment 5.3% 4.4% U.S. Unemployment 4.9% 4.4% 12-Month Forecast Economy The job growth rate in Los Angeles County is slowing, but there is still plenty of room for job creation. Business expansion should remain healthy and so will demand for office space. LA County s unemployment rate dropped to 4.4% in June, from 5.3% one year ago. In the last year, nonfarm employment grew by 83,600 jobs for an annual growth of 1.9%. Job growth missed expectations but remained strong with no signs of a downturn and is expected to decline slowly over the next two years. Market Indicators (Overall, All Classes) Overall Net Absorption / Overall Asking Rent Overall Vacancy Q2 16 Q2 17 Vacancy 14.4% 14.5% Net Absorption 1.4M 258k Under Construction 1.8M 2.4M Average Asking Rent* $2.93 $3.18 *Rental rates reflect gross asking $psf/mo 1,500,000 1,000,000-500,000-1,000,000 2011 2012 2013 2014 2015 2016 2017 25% 20% 15% 10% 500,000 5% 0 Net Absorption 5-Year Historical Average = 16.9% Asking Rent, $psf/mo 12-Month Forecast Market Overview The Los Angeles County office market posted its 15 th consecutive quarter of occupancy gains, absorbing 209,091 square feet (sf). This is a considerable improvement from first quarter, but far below the 2016 quarterly average of 621,310 sf. Most of the absorption this quarter occurred in the LA Central and LA South markets where rent growth over the year was also strongest. Overall average asking rental rates increased by 8.5% year-over-year (YOY), reaching $3.18 per square foot per month (psf/mo), representing the largest annual increase since the recession. Inventory growth and inner market shuffling caused the overall vacancy rate of 14.5% to stay level over the past year. Year-to-date (YTD) new leasing has slowed by roughly 20% compared to mid-year 2016, finishing at 5.9 million square feet (msf). Every major office market experienced a slowdown in leasing except for LA West, which was on par with mid-year 2016 and made up 34.5% of activity in Los Angeles. Several large tenants are set to occupy space in the third quarter, including Warner Music Group (257,028 sf) in downtown, Kite Pharma (159,310 sf) in Santa Monica, and the Federal Aviation Administration (154,000 sf) in El Segundo. These move-ins will help keep vacancy steady in the face of new upcoming supply. New construction activity is up from last year with nearly 2.4 msf of projects under way, nearly half of which are in LA West. Over 730,000 sf of new office space has delivered so far and an estimated 1.8 msf more is expected before year-end. Outlook Businesses have added jobs at a slower pace and many that are growing are figuring out ways to use space more efficiently; however the tech industry continues to thrive, impacting just about every aspect of daily living and the evolving workspace environment. Demand for office space in LA is expected to remain healthy as it continues to be one of the leading centers for tech jobs and growth in the United States. 0% 2011 2012 2013 2014 2015 2016 2017 cushmanwakefield.com I 1
$2.66 $2.65 $2.59 $2.87 $2.87 $2.94 $3.34 $3.43 $3.61 $3.94 $4.29 $4.50 $2.91 $2.99 $3.18 $3.22 $3.38 $3.46 MARKETBEAT Los Angeles CBD The CBD office market posted another quarter of marginally positive net absorption of 31,867 sf. Average asking rents are up 5.1% from a year ago, reaching $3.46 psf/mo. New leasing activity of 433,563 sf in the second quarter was slightly above the past six-quarter average of 419,645 sf. The largest lease of the quarter was a 71,100-sf deal at US Bank Tower in Bunker Hill. Downtown s population growth showed no signs of slowing, increasing demand for residential, office, hotel and retail space. Mixed-use projects, such as the Wilshire Grand (hotel/office) and At Mateo (creative office/amenity-rich retail), have become commonplace. While new supply may keep the downtown vacancy rate flat, asking rental rates are expected to inch upward. Los Angeles West Demand continues in the LA West office market as new leasing reaches over 2.0 msf at the mid-year point. Large construction completions caused the vacancy rate to visibly increase from the previous year to 12.6%. Class A average asking rental rates have reached new peaks, finishing at $4.59 psf/mo. This is 11% higher than last year, debunking the notion that LA West asking rental rates couldn t climb any higher. Per square foot pricing continues to soar and break records in the Westside, specifically in Santa Monica. Blackstone sold Wilshire Palisades at 1299 Ocean Avenue to a joint venture between Douglas Emmett and Qatar Investment Authority for $352.8 million, or $1,460 psf of rentable office space. Large developments that will deliver throughout the remainder of the year will increase vacancy, but robust leasing will lead to more growth and will keep fundamentals solid for the foreseeable future. Tri-Cities Despite some large consolidations and more sublease availabilities in previous quarters, the Tri-Cities posted slight positive net absorption of 25,782 sf, causing the overall vacancy rate to decrease from 13.4% to 13.3% for the second quarter of 2017. The decrease in vacancy resulted in a moderate change to overall rent growth over the year. The largest YOY increase was seen in the Universal City / North Hollywood submarket, which now commands an average asking rental rate of $2.85 psf/mo. Tri-Cities new leasing activity fell short by more than half compared to mid-year 2016, finishing at 475,210 sf. Overall activity for space was strongest in Pasadena, making up 42.5% or 201,863 sf of total leasing activity in Tri-Cities this year. However, current activity is steady across TriCities, but is being led by smaller tenant demand. Positive net absorption broke the trend of occupancy losses in the previous two quarters. In the first quarter, an all-time high investment sale volume was recorded, during the second quarter four of the top ten office sales across Los Angeles were in the Tri-Cities. With more core assets for sale here, the investment market is expected to stay active. CENTRAL BUSINESS DISTRICT LOS ANGELES WEST $5.00 TRICITIES 2 cushmanwakefield.com I 2
$2.02 $2.02 $2.17 $2.29 $2.38 $2.17 $2.21 $2.26 $2.40 $2.42 $1.99 $1.99 $2.05 $2.14 MARKETBEAT San Gabriel Valley The overall average asking rental rate of psf/mo in the San Gabriel Valley was unchanged from the previous quarter, but still 3.9% higher than a year ago. City of Industry/Diamond Bar continues to boast the highest average asking rental rate of $2.42 psf/mo. A slow down in demand led to lower leasing activity of 304,965 sf YTD, a 22% drop from the 391,008 sf leased by mid-year 2016. A significant 34.2% of new leasing occurred in City of Industry/Diamond Bar. This submarket outperformed the others in San Gabriel Valley, with overall vacancy dropping 350 bps YOY to 5.5%. San Gabriel Valley overall absorption was positive at 29,717 sf, bringing the mid-year total to -101,137 sf. Absorption levels should remain positive for the remainder of the year as larger tenants occupy space in the second half. Los Angeles North LA North overall vacancy declined 40 bps YOY from 11.4% to 11.0%. Average asking rental rates increased a healthy 3.9% during this time period to $2.42 psf/mo. Class A rental rates increased by 3.7% to $2.52 psf/mo from this time last year. YTD leasing activity was down by 11.1% compared to mid-year 2016, but still a healthy volume of 937,937 sf. There was more demand for Class B space this year which made up 38.1% of new leasing so far this year, compared to the 28.1% of total leasing in 2016. Tech tenants continue to sign deals as NCR renewed for 51,802 sf in Westlake Village and iweb Grocer leased 16,821 sf in Calabasas. YTD overall net absorption is down 65.1% from mid-year 2016, finishing at 93,950 sf. There are only two office buildings currently under construction, totaling approximately 355,000 sf with a scheduled completion date in 2019. Supply restraints will cause vacancy to continue trending downward and more robust rent growth will follow. SAN GABRIEL VALLEY LOS ANGELES NORTH Los Angeles South South Bay office market fundamentals remained strong at mid-year with a 320-bp annual drop in overall vacancy to 16.3%. This office market absorbed the most space this year with mid-year occupancy gains of 323,467 sf. With tenants priced out of the lower Westside submarket, migration has filtered into the El Segundo / Manhattan Beach submarket. With asking rents for attractive space significantly lower than the competing LA West submarket, tenants have recognized the tremendous benefits of relocating there. In addition, El Segundo has a favorable tax structure and some of the lowest business taxes in the region. In the last four and half years, companies have leased 3.7 msf of space in this submarket. This leasing activity resulted in healthy gains with net demand of 894,968 sf during this time period and the overall vacancy rate dropped from 20.3% to 16.3%. Rents have been consistently trending up and South Bay asking rental rates have now surpassed the level achieved at the peak of the previous cycle in 2008 by 12.8%, driven largely by a 23.2% rent growth in El Segundo. 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 54 27,218,777 19.4% 20.3% 740,476 75,387 356,141 $3.46 $3.52 Los Angeles Central (Non-CBD) 140 20,315,970 14.7% 14.8% 558,149 278,836 424,194 $2.76 $2.94 Los Angeles West 416 52,799,363 11.8% 12.6% 2,027,338-438,561 1,171,175 $4.50 $4.63 Los Angeles North 406 31,262,045 10.8% 11.0% 937,937 93,950 355,000 $2.42 $2.52 Los Angeles South 250 30,249,460 15.3% 16.3% 840,055 323,467 130,602 $2.38 $2.64 Tri-Cities 194 24,095,956 11.9% 13.3% 475,210 25,782 0 $2.94 $3.19 San Gabriel Valley 169 12,458,736 16.3% 16.7% 304,965-101,137 0 $2.33 GREATER LOS ANGELES TOTALS 1,629 198,400,307 13.8% 14.5% 5,884,130 257,724 2,437,112 $3.18 $3.53 *Rental rates reflect gross asking $ Key Lease Transactions Q2 2017 PROPERTY SF TENANT TRANSACTION TYPE MARKET / SUBMARKET 633 W. 5 th Street / US Bank Tower 71,094 Marsh & McLennan New Lease LA CBD / Bunker Hill 10900 Wilshire Boulevard / Murdock Plaza 61,392 Wasserman Media Group New Lease LA West / Westwood 333 S. Hope Street / Bank of America Plaza 52,888 Analysis Group Renewal / Expansion LA CBD / Bunker Hill 555 S. Flower Street / Citi National Bank Tower 52,772 Foley & Lardner Renewal LA CBD / Financial District 5800 Bristol Parkway / C3 48,445 Dentsu Aegis Network New Lease LA West / Culver City 5800 Bristol Parkway / C3 48,445 Henkel New Lease LA West / Culver City 900 Wilshire Boulevard / Wilshire Grand 43,900 SCAG New Lease LA CBD / Financial District 900 Wilshire Boulevard / Wilshire Grand 35,456 Cushman & Wakefield New Lease LA CBD / Financial District 2150 E. Grand Avenue / Campus 2100 33,085 Thai Union North America New Lease LA South / El Segundo 199 S. Los Robles Avenue 29,521 Spokeo New Lease Tri-Cities / Pasadena Key Sales Transactions Q2 2017 PROPERTY OFFICE SF SELLER / BUYER PRICE / $PSF MARKET / SUBMARKET 110 E. 9 th Street / California Market Center 1,837,247 Jamison Services / Brookfield Properties $436,500,000 / $238 300 S. Grand Avenue / One California Plaza 1,036,673 1999 Avenue of the Stars / SunAmerica Center 764,274 Beacon Capital Partners / Rising Realty Partners The Blackstone Group / JMB Financial Advisors LA Corporate Center (4 Building Portfolio) 400,302 Cabi Developers / Omninet Capital $81,000,000 / $202 LA Central Non-CBD / Fashion District $459,000,000 / $443 LA CBD / Bunker Hill $860,000,000 / $1126 LA West / Century City San Gabriel Valley / Monterey Park 2300 Empire Avenue / Burbank Empire Center 343,729 Walton Street Capital / New York Life $133,217,000 / $388 Tri-Cities / Burbank 450 N. Brand Boulevard 257,000 MetLife / Kennedy Wilson $88,665,000 / $345 Tri-Cities / Glendale 1960 Grand Avenue 255,818 TA Realty / Brookfield $67,000,000 / $262 LA South / El Segundo 1299 Ocean Avenue 193,840 5161 Lankershim Boulevard 178,317 400 N. Brand Boulevard 163,000 The Blackstone Group / Douglas Emmett Kennedy Wilson / Beacon Capital Partners MetLife / Kennedy Wilson $285,000,000 / $1,460 LA West / Santa Monica $65,264,022 / $366 Tri-Cities / North Hollywood $56,235,000 / $345 Tri-Cities / Glendale cushmanwakefield.com I 4
OFFICE SUBMARKETS Cushman & Wakefield 601 S. Figueroa Street 47 th Floor Los Angeles, CA 90017 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