Research & Forecast Report South Bay OFFICE Q1 2017 Accelerating success. >> South Bay Continues Momentum To Start 2017 Key Takeaways > Although leasing velocity dropped from 2016, demand from that period kept the South Bay market tight, recording 206,800 of positive absorption. > Average asking rents for the overall market rebounded from last quarter s slide, climbing to $2.34 per square foot (P) Full Service Gross (FSG) from $2.30 P FSG. > Class B properties in both size classifications saw the only decreases in vacancy for the quarter, registering drops of 140 basis points (25,000 +) and 60 basis points (10,000-24,999 ). > No new properties delivered this quarter. The South Bay market still has 173,900 of inventory under construction, due to deliver throughout 2017. > Sales activity in first quarter was highlighted by an entity for pharmaceutical company NantWorks acquiring 2300 E. Imperial Hwy. in El Segundo for $52 million ($344 P) from V.C.I. Corporation. Market Indicators Relative to prior period Q1 2017 Forecast Net Absorption Construction Rental Rate Summary Statistics South Bay, Q1 2017 Rate Class A Class B All Classes 13.3% 20.4% 16.8% +20-140 -60-34.1 288.8 206.8 Change from Q4 16 (Basis Points) Net Absorption* Construction Completions* 0.0 0.0 0.0 Under Construction* 80.0 73.0 173.9 Class A Class B All Classes $2.77 $2.19 $2.34 +$0.03 +$0.10 +$0.04 5.7% +0.8% 2.1% *, Thousands Asking Rents South Bay, Q1 2017 South Bay Office Market The South Bay market saw rental rates rebound with positive growth for the thirteenth time in fourteen quarters. made a modest drop from 17.4% to 16.8%. There were no construction deliveries, but 4 projects totaling 173,900 are expected to deliver in 2017. Leasing activity slid from last quarter to 517,400. Available sublease space almost doubled due to large blocks of space in El Segundo/Beach Cities and 190th Corridor. The South Bay continues to be a desired destination for tenants seeking alternatives to the higher-priced submarkets to the north, as well as companies that have grown organically within the market. Future demand, high-quality traditional and creative space, and rental rates that have seen steady, but not meteoric, increases will continue to attract a variety of media, technology and consumer product tenants. Average Asking Rent Change from Q4 16 ($) Y.O.Y. Change (%) Labor Force Los Angeles County, February 2017 Nonfarm Prof. & Business Services Financial Activities 12-mo Employment Growth (%) 1.6% 1.5% 1.3% 12-mo Actual Employment Change 70,800 9,000 2,800
> The overall vacancy rate for the South Bay market saw a 60 basis point decrease in first quarter of 2017. > Year-over-year, vacancy has dropped by 310 basis points in the South Bay as robust demand has driven vacancies down. > The sublease vacancy rate, almost doubled in first quarter jumping from 0.5% to 0.9%. > Forecast: With 3 out of 4 quarters in 2016 registering leasing activity of at least 600,000, vacancy should continue to decrease through early 2017. Absorption and Leasing Activity > Absorption for the South Bay recorded at 206,800, marking eight straight quarters of absorption in excess of 100,000. > Among the major move-ins for the quarter were Kite-Pharma expanding by 60,000 at Utah Campus, WeWork opening their new office (56,300 ) at Manhattan Towers and DTI Services relocating from Downtown to 101 N. Sepulveda Blvd. > Leasing activity for the quarter consisted of 517,400. Major leases signed included Molina Healthcare signing the largest lease in the county for 99,300 at 222 W. 6th St. in San Pedro, as well as Delta Airlines agreeing to occupy 25,200 at 6033 W. Century Blvd. > Forecast: Leasing velocity and demand has steadily increased in the South Bay market from both tenant migration and organic growth. This should continue at a measured pace throughout 2017. Rental Rates > Class B rents increased significantly to start the year, while Class A and C rents increased minimally. > The overall asking rent of $2.34 P FSG is up 2.1% yearover-year. Class A and B rents recorded 5.7% and 0.8% over the same time period. > Five of the submarkets recorded rent increases, with only Long Beach Airport/Lakewood holding flat at $2.06 P FSG. LAX/Los Angeles/Westchester (+$0.13) and El Segundo/ Beach Cities (+$0.10) posted the largest deltas. > Forecast: South Bay rental growth was steady throughout 2016 and will continue along the same trajectory in 2017, albeit with possible fluctuations and at a more level pace than before. Historical v. Rents South Bay Office Market Q1 13-17 $ P FSG PER MONTH (WEIGHTED) Net Absorption by Submarket South Bay Office Market Q1 17 $2.40 $2.30 $2.20 $2.10 $2.00 $1.90 $1.80 $1.70 $1.60 300,000 250,000 200,000 150,000 100,000 50,000 0 (50,000) RENTS VACANCY 1Q13 1Q14 1Q15 1Q16 1Q17 (32,300) LONG BEACH AIRPORT/LAKEWOOD 30,600 24,300 7,800 25,500 LAX/LOS ANGELES/WESTCHESTER 190TH STREET CORRIDOR CENTRAL TORRANCE DOWNTOWN LONG BEACH 24% 22% 20% 18% 16% 14% 12% 10% % VACANT (TOTAL) 150,900 Historical Leasing Activity South Bay Office Market Q1 13-17 1100000 1000000 900000 800000 700000 600000 EL SEGUNDO/BEACH CITIES 500000 400000 300000 200000 100000 1Q13 1Q14 1Q15 1Q16 1Q17 2
Construction > One new project broke ground in first quarter. Ascend will be part of NSB Associates Utah Campus and will consist of 80,000 over one story. > Construction continues to be concentrated in the El Segundo/Beach Cities submarket, which has 173,900 under construction. 73,000 of office space in the Trisonic office campus is slated to deliver second quarter of 2017. > Most construction in South Bay consists of renovation or conversions of functionally obsolescent industrial inventory and former aerospace/defense office buildings. > Forecast: Construction will lag behind the flourish the market saw in the past few years, but all current projects are due to deliver within the year. Investment Trends > Investment activity for properties over 25,000 dropped from fourth quarter, recording over $32.3 million in volume over 2 transactions, down from $214.8 million. > The aforementioned purchase of 2300 E. Imperial Hwy. is not included in the total investment volume for the quarter as the buyer intends to occupy the building as an owner/user. > ValueRock Realty Partners acquired a 76,900 office building in Long Beach from The Colton Company for $24.0 million ($312 P). > Forecast: Value-add properties still constitute a large portion of investment activity going forward, with sellers looking to trade out of completed projects and buyers acquiring conversion prospects. Outlook The outlook for the South Bay market remains positive. should continue to decrease through 2017 due to strong leasing activity in the past year and the beginning of this year. Steady rental growth throughout 2016 will continue along the same arc in 2017, but rates might see some fluctuations as higher priced space comes off the market. In addition to core investment properties, value-add and creative conversion projects will remain part of the investment environment as sellers divest completed projects and buyers seek opportunities to enter the market. Historical Net Absorption & Construction Completions South Bay Office Market Q1 13-17 400,000 300,000 200,000 100,000 0 (100,000) (200,000) (300,000) (400,000) (500,000) (600,000) NET ABSORPTION 1Q13 1Q14 1Q15 1Q16 1Q17 Investment Trends Chart South Bay Office Market 11-17 $/P $350.00 $300.00 $250.00 $200.00 $150.00 $100.00 $50.00 CONSTRUCTION COMPLETIONS Unemployment Rate U.S., CA & Los Angeles County February 2017 5.1% 5.0% 5.0% 4.9% 4.9% 4.8% 4.8% 4.7% 4.7% 4.6% 4.6% $- 4.7% Average Price P 5.0% Cap Rate 2011 2012 2013 2014 2015 2016 2017 4.8% United States California Los Angeles County 10 9 8 7 6 5 4 3 2 1 0 Cap Rate 3
Market Description The South Bay office market is comprised of 33.2 million, representing 11% of the total office space in buildings 10,000 square feet and greater in the Los Angeles Basin. Most of the space (64%) was built in the 1980s, and only 8% was built 1990 current. Nearly half (49%) of its space is contained within mid-rise buildings (5 13 stories), followed by 32 percent in low-rise buildings and 19% in high-rise. It has a large concentration of firms in aerospace (although much less than in the 1980s), automotive, telecommunications, information technology, healthcare and business services, and is served by a highly educated labor force. Submarket Map RECENT TRANSACTIONS & MAJOR DEVELOPMENTS South Bay Office Market Q1 2017 SALES ACTIVITY PROPERTY ADDRESS SIZE SALE PRICE PRICE P BUYER SELLER 2300 E. Imperial Hwy., El Segundo 157,700 $52,000,000 $330 P 2300 Imperial LLC V.C.I. Corporation 6700 E. Pacific Coast Hwy., Long Beach 76,900 $24,000,000 $312 P ValueRock Realty Partners The Colton Company 18701 S. Figueroa St., Gardena 29,000 $8,300,000 $286 P Myjojy LLC Song Ramboldt Trust LEASING ACTIVITY PROPERTY ADDRESS LEASED LEASE TYPE BLDG CLASS LESSEE LESSOR 222 W. 6th St., San Pedro 99,300 Direct A Molina Healthcare Jupiter Holdings LLC 6033 W. Century Blvd., Los Angeles 25,200 Direct A Delta Airlines LAWA 100 N. Sepulveda Blvd, El Segundo 25,100 Direct A Nativo Pacific Corporate Towers 101-111 N. La Brea Ave., Inglewood 24,300 Direct B Walsh/Shea Corridor Constructors 111 La Brea Plaza, LLC 2121 E. Park Pl., El Segundo 15,800 Sublease B Peer St Rocket Fuel MAJOR DEVELOPMENTS PROJECT DEVELOPER SIZE SUBMARKET STATUS ESTIMATED COMPLETION 2330 Utah Ave., El Segundo NSB Associates 80,000 El Segundo/ Under Construction Q4 2017 Trisonic-El Segundo Live Oak Properties, 73,000 El Segundo/ Under Construction Q2 2017 129-135 Sheldon St., El Segundo Smoky Hollow 10,900 El Segundo/ Under Construction Q2 2017 123 Nevada St., El Segundo Smoky Hollow LLC 10,000 El Segundo/ Under Construction Q3 2017 4
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 BUILDING CLASS/SIZE A 10,000-24,999 - - - - - - - - - - - - - 25,000 + 60 12,676,000 11.4% 1.9% 13.3% 13.1% 300,600 300,600 (34,100) (34,100) 0 80,000 $2.77 Subtotal 60 12,676,000 11.4% 1.9% 13.3% 13.1% 300,600 300,600 (34,100) (34,100) 0 80,000 $2.77 B 10,000-24,999 86 1,376,200 7.4% 0.0% 7.4% 8.0% 6,600 6,600 7,600 7,600 0 0 $2.10 25,000 + 183 16,172,100 21.2% 0.3% 21.5% 23.2% 167,700 167,700 281,200 281,200 0 73,000 $2.19 Subtotal 269 17,548,300 20.1% 0.3% 20.4% 22.0% 174,300 174,300 288,800 288,800 0 73,000 $2.19 c 10,000-24,999 76 1,202,100 7.6% 0.0% 7.6% 7.3% 9,600 9,600 (4,000) (4,000) 0 20,900 $1.93 25,000 + 35 1,942,700 12.1% 0.0% 12.1% 9.8% 32,900 32,900 (43,900) (43,900) 0 0 $2.01 Subtotal 111 3,144,800 10.4% 0.0% 10.4% 8.9% 42,500 42,500 (47,900) (47,900) 0 20,900 $1.99 SUBMARKET/BUILDING SIZE LAX/LOS ANGELES/WESTCHESTER 10,000-24,999 10 162,500 16.3% 0.0% 16.3% 16.9% 3,000 3,000 1,000 1,000 0 0 $1.94 25,000 + 25 4,191,300 36.2% 0.0% 36.2% 36.9% 85,900 85,900 29,600 29,600 0 0 $1.84 Subtotal 35 4,353,800 35.4% 0.0% 35.4% 36.1% 88,900 88,900 30,600 30,600 0 0 $1.84 EL SEGUNDO/BEACH CITIES 10,000-24,999 40 570,700 1.9% 0.0% 1.9% 1.7% 3,700 3,700 (900) (900) 0 20,900 $3.35 25,000 + 82 10,950,200 10.7% 1.7% 12.5% 13.9% 166,000 166,000 151,800 151,800 0 153,000 $3.18 Subtotal 122 11,520,900 10.3% 1.7% 12.0% 13.3% 169,700 169,700 150,900 150,900 0 173,900 $3.18 CENTRAL TORRANCE 10,000-24,999 60 1,030,400 10.4% 0.0% 10.4% 10.3% 4,300 4,300 (1,000) (1,000) 0 0 $1.98 25,000 + 52 3,249,000 10.8% 0.0% 10.8% 11.1% 43,500 43,500 8,800 8,800 0 0 $2.68 Subtotal 112 4,279,400 10.7% 0.0% 10.7% 10.9% 47,800 47,800 7,800 7,800 0 0 $2.52 190TH STREET CORRIDOR 10,000-24,999 12 178,000 0.4% 0.0% 0.4% 1.4% 500 500 1,700 1,700 0 0 $1.68 25,000 + 35 3,369,000 23.7% 3.1% 26.8% 27.5% 42,400 42,400 22,600 22,600 0 0 $2.11 Subtotal 47 3,547,000 22.6% 2.9% 25.5% 26.2% 42,900 42,900 24,300 24,300 0 0 $2.11 LONG BEACH AIRPORT/LAKEWOOD 10,000-24,999 24 387,000 10.9% 0.0% 10.9% 9.1% 1,000 1,000 (7,100) (7,100) 0 0 $1.80 25,000 + 53 4,402,700 11.5% 0.0% 11.5% 10.9% 30,300 30,300 (25,200) (25,200) 0 0 $2.08 Subtotal 77 4,789,700 11.4% 0.0% 11.4% 10.7% 31,300 31,300 (32,300) (32,300) 0 0 $2.06 DOWNTOWN LONG BEACH 10,000-24,999 16 249,700 2.5% 0.0% 2.5% 6.5% 3,700 3,700 9,900 9,900 0 0 $1.72 25,000 + 31 4,628,600 16.4% 0.0% 16.4% 16.7% 133,100 133,100 15,600 15,600 0 0 $2.36 Subtotal 47 4,878,300 15.6% 0.0% 15.6% 16.2% 136,800 136,800 25,500 25,500 0 0 $2.35 MARKET TOTAL 440 33,369,100 15.9% 0.9% 16.8% 17.4% 517,400 517,400 206,800 206,800 0 173,900 $2.34 Note: revisions to the inventory base were made effective Q1 2017, 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. 396 offices in 68 countries on 6 continents United States: 153 Canada: 29 Latin America: 24 Asia Pacific: 79 EMEA: 111 UNITED STATES: South Bay Office License No. 01908231 2121 Rosecrans Ave, Ste 3301 El Segundo, CA. 90245 JOHN HOLLINGSWORTH Executive Managing Director CHRIS WONG Regional Research Analyst Research Services > $2.6 billion in annual revenue > 2.0 billion square feet under management > Over 15,000 professionals TEL: +1 310 787 1000 FAX: +1 310 381 2500 CAITLIN MATTESON Research Director Research Services 6