Research & Forecast Report ORANGE COUNTY OFFICE Accelerating success. >> Orange County Continues to Decline Key Takeaways > The South County submarket led the Orange County market in overall net absorption at 290,900 square feet () and lowest vacancy at 10.1%. > Asking rental rates continue to increase, recording at $2.48 per square foot (P) full service gross (FSG). This is a 12.2% increase from one year ago. > Overall vacancy fell 20 basis points from last quarter to 13.0%. This is a decrease of 50 basis points from one year ago. > Leasing activity climbed from first quarter recording 1.7 million, which was last seen second quarter of 2014. > The overall economy continues to see solid growth in second quarter. The Orange County unemployment rate has declined from 4.3% to 3.6% year over year. Orange County Office Market The Orange County office market closed second quarter 2016 on a positive note as net absorption recorded positive 234,100 and vacancy declined by 20 basis points. 1.2 million of new construction is expected to come online in 2017 with additional new planned development in the pipeline. The new inventory provides opportunities for tenants seeking large blocks of Class A office space. As space options have become limited with vacancy declining, asking rental rates have increased by 12.2% from one year ago. The Orange County office market will continue to be a target area for professional service tenants who are looking for lower asking rental rates compared to neighboring areas such as San Diego and parts of Los Angeles. Market Indicators Relative to prior period Class A Class B All Classes Average Asking Rent $2.86 $2.27 $2.48 Change from Q1 15 ($) $2.76 $2.22 $2.40 Y.O.Y. Change (%) 15.3% 8.6% 12.2% 12-mo Employment Growth (%) 12-mo Actual Employment Change Nonfarm Prof. & Business Services Forecast Net Absorption Construction Rental Rate Summary Statistics Orange County, Asking Rents Orange County, Class A Class B All Classes Rate 14.0% 12.2% 13.0% Change from Q1 16 (Basis Points) 0-40 -20 Net Absorption* -0.70 199.8 234.1 Construction Completions* 0 0 0 Under Construction* 1,173.4 0 1,173.4 *, Thousands Orange County Labor Force Financial Activities 3.5% 3.7% 0% 53,500 10,600 0
> Overall vacancy continues a downward trend recording at 13.0%. This is a 20 point basis decrease from one quarter ago, due mainly to small to mid-size expansions and new deals. > Tenants looking for spaces greater than 100,000 have more options given the new office space that will be delivering in 2017. > South County recorded the tightest vacancy of all the Orange County submarkets at 10.1%; a 180 basis point decrease from last quarter. > FORECAST: The Orange County office market vacancy is expected to trend downward as no new supply is expected to deliver for the remainder of 2016. Absorption and Leasing Activity > Net absorption remained positive for the ninth consecutive quarter recording 234,100 during second quarter. The Airport Area witnessed negative absorption (-199,000 ) due to a number of tenants relocating or downsizing from the area. > Large tenant move-ins during second quarter include: Alteryx (34,500 ) at Park Place in Irvine, Kaiser (30,300 ) in Cypress and Nations Direct Mortgage (26,300 ) at Hutton Centre in Santa Ana. > Class B buildings recorded the largest amount of leasing activity at 769,700 with Class A following at 697,900 and Class C recording the smallest amount at 182,650. > FORECAST: Absorption and leasing activity are both expected to remain positive through 2016 as tenants who are seeking new space alternatives will take advantage of new construction office developments. Historical v. Rents O.C. Office Market Q2 12-16 $ P PER MONTH (FSG) RENTS VACANCY $2.60 20% $2.50 18% 16% $2.40 14% $2.30 12% $2.20 10% $2.10 8% 6% $2.00 4% $1.90 2% $1.80 0% 2Q12 2Q13 2Q14 2Q15 2Q16 Net Absorption by Submarket O.C. Office Market Q2 16 SQUARE FEET 400,000 300,000 200,000 100,000 0 (100,000) (200,000) (300,000) 290,900 172,100 19,500 (49,400) (199,000) AIRPORT NORTH WEST CENTRAL SOUTH % VACANT (TOTAL) Rental Rates > The direct weighted average asking rental rate in Orange County increased over the second quarter to $2.48 P FSG, up from $2.40 P FSG in the previous quarter and also up from $2.21 P FSG recorded one year ago. > Class A rental rates increased to $2.86 P FSG from $2.76 P FSG from the previous quarter. > The high-caliber and newly constructed properties in the Irvine Spectrum and Newport Center market areas put upward pressure on rental rate appreciation. > FORECAST: Rental rates are expected to increase by 10% to 12% by year-end 2016. Much of the rental rate increase stems from the new office product coming online. Historical Leasing Activity O.C. Office Market Q2 12-16 2,200,000 2,000,000 1,800,000 1,600,000 1,400,000 1,200,000 1,000,000 2Q12 2Q13 2Q14 2Q15 2Q16 2
Construction > There were no new office developments delivered to the market during second quarter of 2016. > Currently, there are three new office properties under construction totaling 1.2 million. Trammell Crow s development The Boardwalk in Irvine is expected to be completed by third quarter 2017. Irvine Company s 400 Spectrum Center in Irvine is expected to be completed by third quarter 2017 and the Irvine Company is also currently developing the Sand Canyon Business Center office buildings in Irvine for a completion date of second quarter 2017. > FORECAST: New construction inventory is expected to grow in 2016 and into 2017. Irvine Company s The Quad at Discovery Business Center is expected to break ground soon which includes 4 office buildings totaling 317,000. As creative office space demand continues, the former LA Times facility in Costa Mesa will be redeveloped into creative space totaling 700,000. Investment Trends > Investment activity for properties over 25,000 slowed during second quarter. Sales volume recorded at $307.7 million compared to $784.5 million recorded one year ago. > Investors are expected to remain bullish in the Orange County market, targeting not only Class A trophy buildings, but also value-add creative space redevelopment opportunities. > Office building sales averaged $304 P with the two largest transactions being: J+R Group LLC purchasing 1901 Main St, Irvine for $382 P and Drawbride Realty Trust purchasing 1700 E Saint Andrew Pl, Santa Ana for $215 P. > FORECAST: Time will tell if investors will see the same type of investment climate seen in Orange County during 2015, which drove sales volume to a 10-year high. Historical Net Absorption & Construction Completions O.C. Office Market Q2 12-16 SQUARE FEET 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 (500,000) (1,000,000) NET ABSORPTION 2Q12 2Q13 2Q14 2Q15 2Q16 Investment Trends Chart O.C. Office Market Q2 12-16 $300.00 $250.00 $200.00 $150.00 $100.00 $50.00 $0.00 CONSTRUCTION COMPLETIONS 2010 2011 2012 2013 2014 2015 2016 $/P Cap Rate 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Outlook The second quarter of 2016 proved to be a positive for the Orange County office market as vacancy continues to decrease and absorption remains positive. Along with the new Class A trophy building construction, creative office redevelopment will continue to grow. Asking rental rates increased by 3.3% from one quarter ago and momentum is expected to carry through 2016. Unemployment Rate U.S., C.A. & O.C. May 2016 6.0% 5.2% 5.0% 4.7% 4.0% 3.6% 3.0% 2.0% 1.0% 0.0% United States California Orange County 3
Market Description Orange County is a moderately large suburban office market comprised of 82 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. Submarket Map RECENT TRANSACTIONS & MAJOR DEVELOPMENTS Orange County Office Market SALES ACTIVITY PROPERTY ADDRESS SIZE SALE PRICE PRICE P BUYER SELLER 1901 Main St, Irvine 172,800 $66,000,000 $382/P J+R Group, LLC Piedmont Office Realty Trust, Inc. 1700 E Saint Andrew Pl, Santa Ana 171,300 $37,000,000 $215/P Drawbridge Realty Trust Del Mar Partnerships, Inc. 675 Placentia Ave, Brea 133,900 $33,800,000 $252/P TIAA Piedmont Office Realty Trust, Inc. 26210 & 26220 Enterprise Ct, Lake Forest 100,000 $19,000,000 $189/P PRES Companies Lexington Realty Trust 10540 Talbert Ave, Fountain Valley (2 Bldgs) 53,600 $10,725,000 $200/P Swift Real Estate Partners The Blackstone Group LEASING ACTIVITY PROPERTY ADDRESS LEASED LEASE TYPE BLDG CLASS LESSEE LESSOR 26220 Enterprise Ct, Lake Forest 50,000 Renewal B Apria Healhcare Group, Inc PRES Companies 5665 Plaza Dr, Cypress 45,950 Renewal A Toyo Tires Deutsche Asset & Wealth Mgmt 18200 Von Karman Ave, Irvine 42,900 New Direct A Nationstar Mortgage The Irvine Company 145 S State College Blvd, Brea 41,500 Renewal A Chevron Hines 23 Corporate Plaza 41,000 Renewal B Real Office Centers The Irvine Company MAJOR DEVELOPMENTS PROJECT DEVELOPER SIZE SUBMARKET STATUS ESTIMATED COMPLETION The Boardwalk, Irvine Trammell Crow 537,224 Airport Area Under Construction 3Q 2017 400 Spectrum Center, Irvine The Irvine Company 425,044 South County Under Construction 3Q 2017 15485/15495 Sand Canyon Ave, Irvine The Irvine Company 211,200 South County Under Construction 2Q 2017 4
OFFICE OVERVIEW Orange County Office Market 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 AIRPORT A 106 22,136,097 13.2% 1.1% 14.2% 13.4% 443,300 750,800 (180,600) (231,500) 0 537,200 $3.04 B 244 14,624,186 12.3% 0.3% 12.5% 12.3% 326,900 630,900 (31,900) (33,700) 0 0 $2.47 C 61 2,802,864 5.4% 0.2% 5.5% 6.0% 76,400 99,500 13,500 (1,400) 0 0 $2.01 SUBTOTAL 411 39,563,147 12.3% 0.7% 13.0% 12.5% 846,600 1,481,200 (199,000) (266,600) 0 537,200 $2.80 CENTRAL A 29 5,620,934 14.5% 0.3% 14.8% 15.9% 84,800 201,700 61,000 65,100 0 0 $2.27 B 81 6,331,677 19.3% 0.5% 19.8% 21.3% 94,100 217,600 95,800 (109,800) 0 0 $2.00 C 58 2,281,509 16.3% 0.0% 16.3% 17.0% 44,500 86,300 15,300 55,700 0 0 $1.41 SUBTOTAL 168 14,234,120 17.0% 0.3% 17.3% 18.5% 223,400 505,600 172,100 11,000 0 0 $2.00 NORTH A 14 1,633,659 10.8% 4.5% 15.3% 14.6% 40,400 83,500 (10,800) (41,000) 0 0 $2.21 B 56 4,984,361 10.8% 0.0% 10.8% 9.7% 47,500 89,200 (54,600) 51,100 0 0 $1.97 C 22 958,524 9.4% 0.0% 9.4% 11.0% 14,600 42,800 16,000 73,000 0 0 $1.60 SUBTOTAL 92 7,576,544 10.6% 1.0% 11.6% 10.9% 102,500 215,500 (49,400) 83,100 0 0 $1.98 SOUTH A 21 3,753,184 12.6% 0.5% 13.1% 16.3% 114,600 349,200 122,200 154,200 0 636,200 $3.08 B 214 11,623,965 7.4% 0.9% 8.3% 9.6% 274,500 448,900 149,800 301,400 0 0 $2.50 C 16 728,552 22.2% 0.7% 23.0% 25.6% 24,950 43,150 18,900 (12,200) 0 0 $2.15 SUBTOTAL 251 16,105,701 9.3% 0.8% 10.1% 11.9% 414,050 841,250 290,900 443,400 0 636,200 $2.64 WEST A 8 1,029,708 6.3% 0.2% 6.5% 7.3% 14,800 46,800 7,500 17,100 0 0 $2.61 B 53 2,877,802 11.3% 0.0% 11.3% 12.7% 26,700 54,600 40,700 11,500 0 0 $2.09 C 33 1,377,302 16.3% 0.0% 16.3% 14.2% 22,200 55,900 (28,700) (30,500) 0 0 $1.86 SUBTOTAL 94 5,284,812 11.6% 0.0% 11.7% 12.0% 63,700 157,300 19,500 (1,900) 0 0 $2.06 MARKET TOTAL A 178 34,173,582 13.0% 1.0% 14.0% 14.0% 697,900 1,432,000 (700) (36,100) 0 1,173,400 $2.86 B 648 40,441,991 11.7% 0.4% 12.2% 12.6% 769,700 1,441,200 199,800 220,500 0 0 $2.27 C 190 8,148,751 12.3% 0.1% 12.4% 12.8% 182,650 327,650 35,000 84,600 0 0 $1.74 TOTAL 1,016 82,764,324 12.3% 0.6% 13.0% 13.2% 1,650,250 3,200,850 234,100 269,000 0 1,173,400 $2.48 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. 5
Definitions of key terms in this report 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 single-tenant 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 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: Orange County Office License No. 00813140 3 Park Plaza, 12th Floor Irvine, CA 92614 MARTIN PUPIL President, Western Region CAITLIN MATTESON Research Director Research Services > $2.5 billion in annual revenue > 2.0 billion square feet under management > Over 16,100 professionals TEL: +1 949 474 0707 FAX: +1 949 724 5600 ROBERT CAUDILL Regional Director/O.C. 6