Research & Forecast Report DOWNTOWN L.A. OFFICE Q1 217 Accelerating success. >> Rises With New Deliveries Key Takeaways > After seven consecutive quarters of declining or unchanged vacancy, the overall vacancy rate rose in first quarter of 217, recording at 19.8% for the quarter. > Net absorption fell from last quarter s total of -16, square feet (), ending at -157,2. > The overall asking rental rate climbed by $.2 to $38.51 per square foot (P) Full Service Gross (FSG), marking a.2% increase since the first quarter of 216. > Midsized to small leases dominated velocity in both the Financial District and South Park submarkets. Leasing activity totaled 641,3 for the quarter. > No properties traded hands in first quarter, but investment activity in 217 will not be muted with several buildings either under contract or on the market. Downtown Los Angeles Office Market In first quarter 217, the Downtown Los Angeles office market recorded negative absorption for the second straight quarter. The delivery of 2 vacant office buildings contributed to the uptick in vacancy. Leasing volume recorded 641,3. Asking rents continued to climb, recording growth of.2% year-overyear. While positive, growth was flatter than the previous 3 quarters, which saw growth rates of 1.5%, 1.9% and 1.4% respectively. Traditional tenants in the finance, insurance and real estate (FIRE) industries continue to dominate the tenant base in the market, although these sectors have seen a fair amount of rightsizing. This, combined with a wave of deliveries in the next year, will put pressure on the market as more space becomes vacant. Market Indicators Relative to prior period Q1 217 Forecast Net Absorption Construction Rental Rate Summary Statistics DTLA, Q1 217 Rate Class A Class B All Classes 15.6% 25.2% 19.8% +3 +33 +16-54.4-88.2-14.6 Change from Q4 16 (Basis Points) Net Absorption* Construction Completions* Under Construction*. 446.2 446.2 356.1 1,72.9 2,59. *, Thousands Asking Rents DTLA, Q1 217 Average Asking Rent Change from Q4 16 ($) Y.O.Y. Change (%) Class A Class B Class C All Classes $41.81 $36.32 $32.99 $38.51 +$.41 -$.32 +$2.64 +$.2 1.8% -.3% 11.5%.2% Labor Force Los Angeles County, February 217 Nonfarm Prof. & Business Services Financial Activities 12-mo Employment Growth (%) 1.6% 1.5% 1.3% 12-mo Actual Employment Change 7,8 9, 2,8
> Direct vacancy for the quarter was 19.2%, while sublease vacancy recorded at.6%. > in both Bunker Hill and the Financial District rose by 9 and 6 basis points, respectively. These were primarily due to re-tenanting and relocations/downsizes. > The Greater Downtown/Arts District vacancy rate rose disproportionately from absorption due to the addition of 2 vacant office buildings to the market: 767 S. Alameda St. and 537 S. Broadway. > Forecast: is expected to increase as new construction deliveries in both the Financial District and Greater Downtown/Arts District submarkets have the potential to surpass demand from tenants. Absorption and Leasing Activity > Midsized and small leases dominated leasing activity for the quarter. Among the major deals were TJ Maxx parent company TJX renewing for 43,1 at 888 S. Figueroa St., GSA signing a 36, lease at Gas Company Tower and Tokio Marine consolidating with recently acquired company HCC at 81 S. Figueroa St. in 32,2 of space. > South Park (47,8 ) recorded positive net absorption on strength of move-ins by Lynberg Watkins (19,1 ) and Simpson Gumperts & Heger (14,8 ) at 115 S. Olive St. > Bunker Hill demand recorded -76,8, as Munger Tolles completed its relocation to 35 S. Grand Ave, and thereby downsizing by 35, from 355 S. Grand Ave. > Forecast: A concentrated focus on efficient workplace design and new construction deliveries could temper demand from future out of market relocations to Downtown. Rental Rates > The overall average asking rate for direct space increased year-over-year by.2%, although growth fell from 1.4% a quarter ago. > Asking rental rates increased for Class A and C properties, with Class B seeing rents slide to $36.32 P FSG. > While rental growth has remained positive in Downtown Los Angeles, there has been a tapering of gains compared to past years. > Forecast: Rents are expected to flatten through 217 with some minor positive/negative fluctuations. However, if vacancy stagnates or rises considerably, rents have the potential to slide. Historical v. Rents DTLA Office Market Q1 13-17 $ P FSG PER ANNUM (WEIGHTED) Net Absorption by Submarket DTLA Office Market Q1 17 $39 $38 $37 $36 $35 $34 $33 $32 $31 $3 6, 4, 2, 1Q13 1Q14 1Q15 1Q16 1Q17 (2,) (4,) (6,) (8,) (1,) (12,) (21,4) GREATER DOWNTOWN RENTS (16,8) FINANCIAL DISTRICT VACANCY 47,8 SOUTH PARK 3% 25% 2% 15% 1% (76,8) % VACANT (TOTAL) BUNKER HILL Historical Leasing Activity DTLA Office Market Q1 13-17 1,, 9, 8, 7, 6, 5, 4, 3, 2, 1, 1Q13 1Q14 1Q15 1Q16 1Q17 2
Construction > New construction projects remain concentrated in the Greater Downtown/Arts District submarket, with only the office component (356,1 ) at Korean Air s Wilshire Grand project slated to deliver in the Financial District. > The first phase of RowDTLA at 767 S. Alameda St. and 537 S. Broadway delivered vacant to the market, adding a total of 446,2 to Greater Downtown/Arts District. > Forecast: Future construction will provide an abundance of high quality creative space to the market, as Downtown Los Angeles accounts for 51% of all new construction in Los Angeles County. Its effect on vacancy will depend on delivery timing and preleasing efforts of landlords. Investment Trends > No properties over 25, traded in first quarter. > Investment activity in 217 is forthcoming, as 811 W. 7th St. and 3 S. Grand Ave. are currently under contract. In addition, 355 S. Grand Ave. and 445 S. Figueroa St. are on the market, figuring prominently in activity for the latter half of 217. > Forecast: Capitalization rates are expected to continue compressing while sale prices rise as Los Angeles County remains an favorable investment environment for foreign and domestic capital. Outlook Downtown Los Angeles market vacancy is expected to rise. Continued rightsizing and the delivery of speculative office space both in and on the fringe of the CBD will potentially outweigh interest from out of market tenants. Despite this, asking rental rates will remain stable as landlords and investors exercise cautious optimism about the local economy and real estate fundamentals for the time being. Investment activity will gain momentum through 217 as properties under escrow close and few remain on the market. Historical Net Absorption & Construction Completions DTLA Office Market Q1 13-17 2, 15, 1, 5, (5,) (1,) (15,) (2,) NET ABSORPTION 1Q13 1Q14 1Q15 1Q16 1Q17 Investment Trends Chart DTLA Office Market 11-17 $/P CONSTRUCTION COMPLETIONS Unemployment Rate U.S., CA & Los Angeles County February 217 5.1% 5.% 5.% 4.9% 4.9% 4.8% 4.8% 4.7% 4.7% 4.6% 4.6% $4. $35. $3. $25. $2. $15. $1. $5. $- 4.7% Average Price P 5.% Cap Rate 21 211 212 213 214 215 216 4.8% United States California Los Angeles County 9 8 7 6 5 4 3 2 1 Cap Rate 3
Market Description Downtown LA is a moderately large office market comprised of 32.3 million, representing 11% of the total office space ver 25, in the LA Basin. Approximately 52% of the space in this market was built prior to 198, and is considered relatively old by Southern California standards. Downtown Los Angeles is the densest market in the region with only one percent of the space contained within low-rise buildings, while 24% and 75% of the space are in mid-rise and highrise structures, respectively. Downtown includes a large concentration of firms from the legal, utilities, accounting and financial services sectors, and is home to many federal, state, and local government agencies as well. Submarket Map RECENT TRANSACTIONS & MAJOR DEVELOPMENTS Downtown Los Angeles Office Market Q1 217 SALES ACTIVITY PROPERTY ADDRESS SIZE SALE PRICE PRICE P BUYER SELLER LEASING ACTIVITY PROPERTY ADDRESS LEASED LEASE TYPE BLDG TYPE LESSEE LESSOR 888 S. Figueroa St., Los Angeles 43,1 Renewal B TJX JADE Enterprises 555 W. 5th St., Los Angeles 36, Direct-New A GSA Brookfield 81 S. Figueroa St., Los Angeles 32,2 Direct-New A Tokio Marine HCC Barings Real Estate Advisers LLC 555-581 Mateo St., Los Angeles 26,6 Direct-New B Soylent ASB Capital Management 725 S. Figueroa St., Los Angeles 23,4 Renewal A JLT Worldwide Facilities Brookfield MAJOR DEVELOPMENTS PROJECT DEVELOPER SIZE SUBMARKET STATUS ESTIMATED COMPLETION 81 S Broadway, Los Angeles Waterbridge Capital LLC 5, Greater Downtown Under Construction Q3 217 757 S. Alameda St., Los Angeles Atlas Capital Group, LLC 425,1 Greater Downtown Under Construction Q1 218 9 Wilshire Blvd, Los Angeles Hanjin International Corp 356,1 Financial District Under Construction Q2 217 26 E 7th St, Los Angeles Shorenstein Properties, LLC 257, Greater Downtown Under Renovation Q3 217 555-581 Mateo St., Los Angeles Blatteis & Schnur 183,56 Greater Downtown Under Construction Q2 217 963 E 4th St, Los Angeles Atlas Capital Group, LLC 13, Greater Downtown Under Renovation Q2 217 1111 S. Broadway, Los Angeles Broadway Eleventh Owners LLC 116, Greater Downtown Under Renovation Q4 217 5 S. Santa Fe Ave., Los Angeles Chalmers-Santa Fe LLC 91,2 Greater Downtown Under Construction Q4 217 747 S. Alameda St., Los Angeles Atlas Capital Group, LLC 389,67 Greater Downtown Proposed TBD 4
office OVERVIEW Downtown Los Angeles Office Market Q1 217 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 FINANCIAL DISTRICT A 9 9,732,7 14.4%.3% 14.7% 15.2% 19,1 19,1 52,6 52,6 356,1 $42.34 B 25 8,365,2 27.8%.7% 28.5% 26.6% 113, 113, (158,7) (158,7) $36.84 C 2 326,4 19.3% 1.8% 21.2% 21.% 1,9 1,9 (7) (7) $3.59 Subtotal 36 18,424,3 2.6%.5% 21.1% 2.5% 35, 35, (16,8) (16,8) 356,1 $38.77 BUNKER HILL A 6 7,221,1 16.8% 1.1% 17.9% 16.6% 13,4 13,4 (94,1) (94,1) $41.44 B 4 537,8 1.9%.% 1.9% 1.9% $4.6 C 1 37,2 27.1%.% 27.1% 31.7% 17,3 17,3 $32. Subtotal 11 8,129,1 16.8% 1.% 17.8% 16.9% 13,4 13,4 (76,8) (76,8) $4.69 SOUTH PARK A 2 1,144,2 8.2%.6% 8.8% 7.7% 64,2 64,2 (12,9) (12,9) $38.55 B 7 1,85,5 15.1%.% 15.1% 18.% 52,2 52,2 54,4 54,4 $36.33 C 2 266,4 1.% 1.5% 11.4% 13.8% 15,1 15,1 6,3 6,3 $33.24 Subtotal 11 3,261,1 12.3%.3% 12.6% 14.% 131,5 131,5 47,8 47,8 $36.65 GREATER DOWNTOWN / ARTS DISTRICT B 8 2,333,9 24.7%.% 24.7% 7.8% 41,4 41,4 16,1 16,1 446,2 1,656,9 $33.83 C 8 592,3 23.5% 3.2% 26.7% 2.4% 6,4 6,4 (37,5) (37,5) $34.73 Subtotal 16 2,926,2 24.5%.6% 25.1% 1.8% 47,8 47,8 (21,4) (21,4) 1,656,9 $34.1 MARKET TOTAL A 17 18,98, 14.9%.7% 15.6% 15.3% 384,7 384,7 (54,4) (54,4) 356,1 $41.81 B 44 13,87,4 24.7%.4% 25.2% 21.9% 26,6 26,6 (88,2) (88,2) 446,2 1,656,9 $36.32 C 13 1,555,3 21.2% 1.8% 23.% 22.1% 23,4 23,4 (14,6) (14,6) $32.99 74 32,74,7 19.2%.6% 19.8% 18.2% 614,7 614,7 (157,2) (157,2) 446,2 2,13, $38.51 Note: revisions to the inventory base were made effective Q1 217, 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. 396 offices in 68 countries on 6 continents United States: 153 Canada: 29 Latin America: 24 Asia Pacific: 79 EMEA: 111 UNITED STATES: Downtown LA Office License No. 198231 865 S. Figueroa St., Ste. 35 Los Angeles, CA 917 HANS MUMPER Executive Managing Director Greater Los Angeles CHRIS WONG Regional Research Analyst Research Services > $2.6 billion in annual revenue > 2. billion square feet under management > Over 15, professionals TEL: +1 213 627 1214 FAX: +1 213 327 32 CAITLIN MATTESON Research Director Research Services 6