Research & Forecast Report Central Los Angeles OFFICE Q4 216 Accelerating success. >> Market Records Strong Demand To End 216 Key Takeaways > There is currently 61,4 square feet () of office product under construction and 79,5 of expected proposed construction in the Hollywood submarket. > The average rent for Class A buildings in Central Los Angeles is $3.35 per square foot (P) Full Service Gross (FSG), an 8.6% increase year-over-year. > decreased 23 basis points from one quarter ago recording 19.1%. > Leasing activity fell from last quarter's 289,7 total to record 99,3 of velocity. > Investment activity finished the year with some momentum as one office property more than 25, traded hands in the market. Market Indicators Relative to prior period Q4 216 Forecast Net Absorption Construction Rental Rate Summary Statistics Central Los Angeles, Q4 216 Rate Class A Class B All Classes 14.7% 22.7% 19.1% -47-5 -23 279.2 38.6 334. 61.4 61.4 Change from Q3 16 (Basis Points) Net Absorption* Construction Completions* Under Construction* *, Thousands Central Los Angeles Office Market The Central Los Angeles market saw robust demand activity during fourth quarter with vacancy decreasing by 23 basis points from last quarter and absorption closing at 551,8 for the year. There is currently 61,4 of office product under construction along with 79,5 of additional proposed product. This additional new inventory will bode well for the Hollywood market, opening options for tenants seeking new product in a preferred high-image location. Media and tech companies continued to see the Hollywood submarket as an attractive offering of high-image new Class A inventory and abundant production facilities. While demand from strong leasing activity in 215 and 216 has finally started to manifest, rents have seen some flattening, registering an average increase of.8% in the last 3 quarters. Asking Rents Central Los Angeles, Q4 216 Average Asking Rent Change from Q3 16 ($) Class A Class B All Classes $3.35 $2.28 $2.65 -$.13 $6 $1 8.6% 5.5% 11.1% Y.O.Y. Change (%) Labor Force Los Angeles County, Q4 216 Nonfarm Prof. & Business Services Financial Activities 12-mo Employment Growth (%) 1.5% 1.1% 2.3% 12-mo Actual Employment Change 65,3 6,6 4,9
> in Central Los Angeles decreased by 23 basis points to 19.1% from one quarter ago. A longer historical perspective shows the current quarter recording 28 basis points below a year ago, indicative of steady demand for the glut of new construction that has come to market. > Hollywood Class A properties saw the largest delta in vacancy, moving to 21.% from 3.5% last quarter. > Mid-Wilshire also tightened, as smaller move-ins and renewals led to lower vacancy. > Forecast: Central Los Angeles should tighten through early 217 as strong leasing activity in the past year absorbs. Absorption and Leasing Activity > Absorption for the quarter totaled a yearly high of 334,, bringing the total demand for 216 to 551,8. This marks a high point in demand in the last 1 years. > Among the move-ins that drove demand this quarter were NetFlix occupying 74, at Sunset Bronson Studios, post -production sound company Formosa Group taking 3, at J.H. Snyder's 959 Seward project and visual effects house Legend 3D moving into 27,9 at Columbia Square. > Leasing activity totaled 99,3 for the quarter and 815,1 for the year. Among the larger deals signed this quarter in Central Los Angeles was an undisclosed tenant agreeing to occupy 32,4 at 1575 Gower St. in Hollywood, which is part of Kilroy Realty Corp.'s Columbia Square mixed-use complex. > Forecast: With continued demand in Central Los Angeles and several of Hollywood's larger projects having been delivered or about to deliver, absorption in 217 has the potential to match 216. Historical v. Rents Central Los Angeles Market Q4 12-16 $ P FSG PER ANNUM (WEIGHTED) Net Absorption by Submarket Central Los Angeles Market Q4 16 $3. $2.5 $2. $1.5 $1. 25, 2, 15, 1, 5, 4Q12 4Q13 4Q14 4Q15 4Q16 123, RENTS MID WILSHIRE VACANCY 211, HOLLYWOOD 24% 22% 2% 18% 16% 14% 12% 1% % VACANT (TOTAL) Rental Rates > The average asking rental rate for the market jumped $1, or.4%, from third quarter of 216. > The last 3 quarters have seen rents flatten, averaging an increase of.8%. The 3 quarters prior averaged a 8.1% rent increase per quarter. > The differences in rates between Mid-Wilshire and Hollywood continue to be stark as the Hollywood pipeline continues to push rates higher, while Mid-Wilshire remains a steady alternative for price-averse tenants. > Forecast: Rents currently stand 21.% higher than their pre-recession peak, which questions how much more rents will increase in the near future. The flattening of rental rates indicates the market may see a peak in the near future. 2 Historical Leasing Activity Central Los Angeles Market Q4 12-16 6, 5, 4, 3, 2, 1, 4Q12 4Q13 4Q14 4Q15 4Q16
Construction > No new office projects delivered to the market during fourth quarter. Central Los Angeles accounts for 15% of all under construction properties in Los Angeles County. > Due to several deliveries in the early part of 216, the construction pipeline has lessened in Hollywood. Projects such as Hudson Pacific's fully preleased ICON and J.H. Snyder's 161 N. Vine projects are set to deliver in early 217. > Hudson Pacific continues to be a player in the Hollywood development market. Following ICON's delivery, CUE (97,7 ), will deliver in the seocnd quarter of 217. In addition, Hudson Pacific received approval from the city this quarter for 591 W. Sunset Blvd. (274, ) and will begin construction in early 218. > Forecast: Construction deliveries have slowed in the second half of 216 as the previous construction highs left nowhere to go but down. However, a few projects under construction are set to deliver in early 217, while several proposed projects in the Hollywood submarket will break ground during the same time period. Historical Net Absorption & Construction Completions Central Los Angeles Office Market Q4 12-16 5, 4, 3, 2, 1, (1,) (2,) NET ABSORPTION 4Q12 4Q13 4Q14 4Q15 4Q16 Investment Trends Chart Central Los Angeles Office Market Q4 12-16 CONSTRUCTION COMPLETIONS Average Price P Cap Rate Investment Trends > Investment activity for properties over 25, showed a slight uptick in fourth quarter, with one project trading. > 817 N. Vine St., which had previously been an owner-user building occupied by the Musicians Club of Los Angeles, was acquired by Clarion Partners for $24.8 million ($678 P). After the end of the previous owner's sale-leaseback, Clarion intends to redevelop the property into a mixed-use project. > Forecast: Investors remain bullish in the Central Los Angeles market, targeting not only Class A trophy buildings, but also value-add and redevelopment opportunities. $/P $5 $45 $4 $35 $3 $25 $2 $15 $1 $5 $- 21 211 212 213 214 215 216 7 6 5 4 3 2 1 Cap Rate Outlook The Hollywood submarket will continue to see strong demand for space from entertainment, media and technology firms as pre-leased properties are delivered to the market. With the surrounding submarkets mostly built-out and creative tenants passing on the burgeoning, but not fully-realized Downtown Los Angeles creative market, Hollywood has the opportunity to attract tenants desiring quality space at a lower price-point than the Silicon Beach cluster. That window, however, is closing due to the ascent of Hollywood rents, concurrent with a robust pre-leasing environment. With fewer large block options currently available and a current focus on medium sized opportunities, the market will look to its proposed construction pipeline in 217 to continue fulfilling demand for high quality creative and headquarters spaces. Unemployment Rate U.S., CA & Los Angeles County November 216 5.1% 5.1% 5.% 5.% 4.9% 4.9% 4.8% 4.9% 5.% 5.1% United States California Los Angeles County 3
Market Description Central Los Angeles is an office market comprised of 14.1 million, representing 6% of the total office space 25, and greater in the Los Angeles Basin. Mid-Wilshire is attractive to small, entrepreneurial, and often Pacific Rimowned businesses while Hollywood has a mix of firms from the professional services, high-tech and entertainment/ media sectors. Submarket Map RECENT TRANSACTIONS & MAJOR DEVELOPMENTS Central Los Angeles Office Market Q4 216 SALES ACTIVITY PROPERTY ADDRESS SIZE SALE PRICE PRICE P BUYER SELLER 817 N. Vine St., Hollywood 36,5 $24,75, $678 P Clarion Partners Musicians Club of Los Angeles LEASING ACTIVITY PROPERTY ADDRESS LEASED LEASE TYPE BLDG CLASS LESSEE LESSOR 1575 Gower St., Hollywood 32,4 Direct-New A Undisclosed Tenant Kilroy Realty 353 Wilshire Blvd., Los Angeles 9,6 Direct-New A Undisclosed Tenant Jamison Services 6753 Hollywood Blvd., Hollywood 9,3 Sublease B Undisclosed Tenant Denley Investment MAJOR DEVELOPMENTS PROJECT DEVELOPER SIZE SUBMARKET STATUS ESTIMATED COMPLETION Icon at Sunset Bronson Studios (2 bldgs), Hollywood Hudson Pacific 323,3 Hollywood Under Construction Q1 217 161 N. Vine St., Hollywood J.H. Snyder Company128,6 Hollywood Under Construction Q1 217 CUE at Sunset Bronson Studios, Hollywood Hudson Pacific 97,7 Hollywood Under Construction Q2 217 77 Romaine St., Hollywood 11 N Orange La Llc 6,5 Hollywood Under Construction Q2 217 591 W. Sunset Blvd., Hollywood Hudson Pacific 3, Hollywood Proposed TBD Crossroads (2 bldgs), Hollywood Harridge 138,5 Hollywood Proposed TBD 1311 N Cahuenga Blvd., Hollywood Cal Coast 352, Hollywood Proposed TBD 4
office OVERVIEW Central Los Angeles Office Market Q4 216 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 MARKET TOTAL A 33 6,12,5 14.7%.1% 14.7% 19.4% 85,3 553,8 279,2 258,5 61,4 $3.35 B 59 6,99,2 22.3%.4% 22.7% 23.2% 12,8 246,2 38,6 288,2 $2.28 C 22 1,218, 19.3%.8% 2% 21.4% 1,2 15,1 16,2 5,1 $2.41 114 14,139,7 18.8%.3% 19.1% 21.4% 99,3 815,1 334, 551,8 61,4 $2.65 MID-WILSHIRE A 16 3,691,9 1.7% % 1.8% 12.4% 46,1 175, 6,3 35,4 $2.2 B 39 5,811,8 24.2%.1% 24.3% 25.1% 3,5 172,4 45,1 173,3 $2.14 C 9 693,4 28.% % 28.% 3.5% 9, 17,6 24,6 $2.31 Subtotal 64 1,197,1 19.6%.1% 19.7% 2.9% 49,6 356,4 123, 233,3 $2.17 HOLLYWOOD A 17 2,32,6 2.9%.1% 21.% 3.5% 39,2 378,8 218,9 223,1 61,4 $4.28 B 2 1,97,4 12.1% 1.7% 13.8% 13.2% 9,3 73,8 (6,5) 114,9 $3.74 C 13 524,6 7.7% 1.8% 9.5% 9.3% 1,2 6,1 (1,4) (19,5) $2.91 Subtotal 5 3,942,6 16.7%.8% 17.5% 22.9% 49,7 458,7 211, 318,5 61,4 $4.9 Note: revisions to the inventory base were made effective Q4 216, historical data reported here reflect these revisions and may not match data reported in previous quarters. 5
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