Research & Forecast Report South Bay OFFICE Q3 2017 Accelerating success. >> Drops As Rents Continue To Rise Key Takeaways > Leasing activity fell year-over-year by 17.8%, the third consecutive quarter of negative activity after eleven straight quarters of positive growth. > Average asking rents for the overall market rose from last quarter, climbing to $2.43 per square foot (P) full service gross (FSG) from $2.38 P FSG. > Class A and B vacancy decreased for the quarter, registering drops of 80 and 110 basis points, respectively. > The 73,400 Trisonic campus delivered as an owner-user property. The South Bay market still has 349,100 of inventory under construction, due to deliver in late 2017 and early 2018. > Sales activity in the second quarter was highlighted by Starwood Capital Group acquiring 300-400 Continental Blvd. in El Segundo for $168.9 million ($345 P) from DivcoWest. Market Indicators Relative to prior period Q3 2017 Forecast Net Absorption Construction Rental Rate Summary Statistics South Bay, Q3 2017 Rate Class A Class B All Classes 13.6% 18.2% 15.6% -80-110 -90 101.7 187.7 300.2 Change from Q2 17 (Basis Points) Net Absorption* Construction Completions* 0.0 0.0 0.0 339.1 10.0 349.1 Class A Class B All Classes $2.89 $2.25 $2.43 +$0.08 +$0.03 +$0.05 6.6% 3.8% 5.2% Under Construction* *, Thousands Asking Rents South Bay, Q3 2017 South Bay Office Market The South Bay market saw rental rates continue to rebound with positive growth for the fifteenth time in sixteen quarters. made a modest drop from 16.5% to 15.6%. There was one owner-user construction delivery, and three projects totaling 349,100 are expected to deliver in late 2017 and early 2018. Leasing activity held relatively steady from last quarter, recording 484,100. The South Bay market continues to be a desirable destination for tenants seeking alternatives to the higher-priced submarkets to the north, as well as companies that have grown organically within the market. Future demand, high-quality traditional and creative space, and moderately increasing rental rates will continue to attract a variety of media, technology and consumer product tenants. Average Asking Rent Change from Q2 17 ($) Y.O.Y. Change (%) Labor Force Los Angeles County, August 2017 Nonfarm Prof. & Business Services Financial Activities 12-mo Employment Growth (%) 0.8% 0.8% 0.1% 12-mo Actual Employment Change 37,200 4,900 300
> The overall vacancy rate for the South Bay market saw a 90 basis-point decrease in the third quarter of 2017 to 15.7%. > Year-over-year, vacancy dropped by 270 basis points in the South Bay as robust demand drove vacancies down. > The sublease vacancy rate moved minimally from the second quarter, dropping to 0.9% from 1.0%. > Forecast: Sliding velocity and new construction deliveries through early 2018 will temper major vacancy gains in the South Bay market. Absorption and Leasing Activity > Absorption for the South Bay recorded at 300,200, a moderate rebound from last quarter s sub-100,000 total. > Among the major move-ins for the quarter were fashion ecommerce company Just Fab expanding in El Segundo by 55,000 at 2221 Park Pl., Tesoro opening its new 17,900 office at Shoreline Square in Long Beach and Edge Systems taking 15,000 at 2165 E. Spring St. in Long Beach. > Leasing activity for the quarter comprised 484,100. Major leases signed included Barrett Business Services signing for 11,300 at 330 Golden Shore in Long Beach, as well as Panasonic NA renewing 9,400 at 20000 Mariner Ave. in Torrance. > Forecast: With leasing velocity holding steady, look for demand to stabilize through the end of 2017. Rental Rates > Class A and B rents increased in the third quarter by $0.08 and $0.03, respectively. Class C rents dropped by $0.04. > The overall asking rent of $2.43 P FSG is up 5.2% yearover-year. Class A and B rents recorded 6.6% and 3.8% over the same time period. > All but two submarkets recorded rent increases. El Segundo/Beach Cities (+$0.11) and Central Torrance (+$0.08) posted the largest deltas. > Forecast: South Bay rental growth has been steady through 2017 and should continue along the same trajectory into 2018. Historical v. Rents South Bay Office Market Q3 13-17 $ P FSG PER MONTH (WEIGHTED) Net Absorption by Submarket South Bay Office Market Q3 17 $2.50 $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) (100,000) RENTS VACANCY 3Q13 3Q14 3Q15 3Q16 3Q17 51,200 LONG BEACH AIRPORT/LAKEWOOD 126,300 LAX/LOS ANGELES/WESTCHESTER 12,900 190TH STREET CORRIDOR (61,200) CENTRAL TORRANCE 95,800 DOWNTOWN LONG BEACH 24% 22% 20% 18% 16% 14% 12% 10% % VACANT (TOTAL) 75,200 Historical Leasing Activity South Bay Office Market Q3 13-17 1100000 1000000 900000 800000 700000 600000 EL SEGUNDO/BEACH CITIES 500000 400000 300000 200000 100000 3Q13 3Q14 3Q15 3Q16 3Q17 2
Construction > There are currently three projects constituting 349,100 under construction in the South Bay market. All three are located in the El Segundo/Beach Cities submarket. > The largest property is 555 S. Aviation Blvd., a new 259,100 creative office complex being developed by Tishman Speyer. > The sole delivery for the quarter was the Trisonic Campus in El Segundo. The 73,400 property will be occupied by owner/user NantHealth. > Forecast: Construction will lag behind the boom the market saw in the past few years. However, all current projects, which account for 10% of all construction activity in the county, are due to deliver within a year. Investment Trends > Investment activity for properties over 25,000 rose from the second quarter, recording over $247.6 million in volume over five transactions, up from $123.8 million. > This quarter marks the second time Continental Grand has sold in the past four years. The property, which is currently 80.4% occupied, sold to DivcoWest in 2014 for $271 P. > Investment activity will continue through the end of 2017 as Torrance Technology Campus goes to market at 91.0% occupied. L3 Technologies leased the vast majority of that occupancy, which doesn t expire until 2031. > Forecast: Value-add properties still comprise 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 the end of 2017, although movement will be incremental due to lessened leasing activity in 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 Q3 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 3Q13 3Q14 3Q15 3Q16 3Q17 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 August 2017 5.2% 5.0% 4.8% 4.6% $- Average Price P 5.1% Cap Rate 2011 2012 2013 2014 2015 2016 2017 4.8% 10 9 8 7 6 5 4 3 2 1 0 Cap Rate 4.4% 4.4% 4.2% 3 4.0% United States California Los Angeles County
Market Description The South Bay office market is comprised of 33.2 million, representing 11% of the total office space in buildings 10,000 and greater in the Los Angeles Basin. Most of the space (64%) was built in the 1980s, and only 8% was built after 1989. Nearly half (49%) of its space is contained within mid-rise buildings (5 13 stories), followed by 32% in low-rise buildings and 19% in high-rise. It has a large concentration of firms in aerospace (although many fewer 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 Q3 2017 SALES ACTIVITY PROPERTY ADDRESS SIZE SALE PRICE PRICE P BUYER SELLER 300-400 Continental Blvd., El Segundo (2 Bldgs.) 489,800 $168,881,500 $345 P Starwood Capital Group DivcoWest 20770-20810 Madrona Ave., Torrance 211,400 $48,750,000 $231 P Continental Development Corporation Dominguez Investment Company 1899 Western Way, Torrance 75,700 $19,000,000 $251 P Miramar Property Group, LLC Continental Development LEASING ACTIVITY PROPERTY ADDRESS LEASED LEASE TYPE BLDG CLASS LESSEE LESSOR 330 Golden Shore, Long Beach 11,300 Direct A Barrett Business Services Colony Northstar 20000 Mariner Ave., Torrance 9,400 Renewal B Panasonic NA Maricich Trust 37601 Kilroy Airport Way, Long Beach 6,400 Direct A Alaska Airlines Kilroy Realty 340 Golden Shore, Long Beach 4,000 Renewal A Manson Construction Colony Northstar MAJOR DEVELOPMENTS PROJECT DEVELOPER SIZE SUBMARKET STATUS ESTIMATED COMPLETION 555 S. Aviation Blvd., El Segundo Tishman Speyer 259,100 El Segundo/ Under Construction Q1 2018 2330 Utah Ave., El Segundo NSB Associates 80,000 El Segundo/ Under Construction Q4 2017 123 Nevada St., El Segundo Smoky Hollow LLC 10,000 El Segundo/ Under Construction Q4 2017 Douglas Park Sares-Regis Group 67,000 Long Beach Proposed TBD 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 11.2% 2.3% 13.6% 14.4% 197,700 667,400 101,700 (62,600) 0 339,100 $2.89 Subtotal 60 12,676,000 11.2% 2.3% 13.6% 14.4% 197,700 667,400 101,700 (62,600) 0 339,100 $2.89 B 10,000-24,999 87 1,387,100 5.9% 0.1% 6.0% 7.0% 15,100 39,100 14,300 37,200 0 10,000 $2.32 25,000 + 183 16,172,100 19.2% 0.1% 19.2% 20.3% 224,200 582,500 173,400 642,000 0 0 $2.25 Subtotal 270 17,559,200 18.1% 0.1% 18.2% 19.3% 239,300 621,600 187,700 679,200 0 10,000 $2.25 c 10,000-24,999 76 1,202,100 4.9% 0.0% 4.9% 6.0% 26,300 51,900 13,100 28,300 0 0 $2.00 25,000 + 35 1,942,700 12.6% 0.0% 12.6% 12.5% 20,800 137,100 (2,300) (53,500) 0 0 $1.93 Subtotal 111 3,144,800 9.7% 0.0% 9.7% 10.0% 47,100 189,000 10,800 (25,200) 0 0 $1.94 SUBMARKET/BUILDING SIZE LAX/LOS ANGELES/WESTCHESTER 10,000-24,999 10 162,500 11.2% 0.0% 11.2% 15.5% 8,000 17,400 6,900 9,300 0 0 $2.45 25,000 + 25 4,191,300 33.3% 0.1% 33.4% 36.3% 43,800 198,000 119,400 144,900 0 0 $1.87 Subtotal 35 4,353,800 32.4% 0.1% 32.6% 35.5% 51,800 215,400 126,300 154,200 0 0 $1.88 EL SEGUNDO/BEACH CITIES 10,000-24,999 41 581,600 0.8% 0.3% 1.1% 3.3% 9,500 15,000 13,100 14,600 0 10,000 $3.03 25,000 + 82 10,950,200 10.7% 1.3% 12.0% 12.6% 96,700 395,900 62,100 201,200 0 339,100 $3.30 Subtotal 123 11,531,800 10.2% 1.3% 11.5% 12.1% 106,200 410,900 75,200 215,800 0 349,100 $3.30 CENTRAL TORRANCE 10,000-24,999 60 1,030,400 9.4% 0.0% 9.4% 9.4% 12,700 26,500 (400) 8,900 0 0 $2.16 25,000 + 52 3,249,000 12.4% 0.1% 12.5% 10.7% 72,200 156,700 (60,800) (46,500) 0 0 $2.76 Subtotal 112 4,279,400 11.7% 0.1% 11.8% 10.4% 84,900 183,200 (61,200) (37,600) 0 0 $2.64 190TH STREET CORRIDOR 10,000-24,999 12 178,000 4.2% 0.0% 4.2% 3.7% 400 2,500 (800) (5,000) 0 0 $1.61 25,000 + 35 3,369,000 22.3% 2.9% 25.2% 25.6% 109,900 207,700 13,700 76,200 0 0 $2.14 Subtotal 47 3,547,000 21.4% 2.8% 24.2% 24.5% 110,300 210,200 12,900 71,200 0 0 $2.13 LONG BEACH AIRPORT/LAKEWOOD 10,000-24,999 24 387,000 3.1% 0.0% 3.1% 4.3% 6,400 20,000 4,600 23,000 0 0 $2.11 25,000 + 53 4,402,700 8.8% 0.7% 9.5% 10.6% 51,500 130,200 46,600 59,500 0 0 $2.13 Subtotal 77 4,789,700 8.4% 0.6% 9.0% 10.1% 57,900 150,200 51,200 82,500 0 0 $2.13 DOWNTOWN LONG BEACH 10,000-24,999 16 249,700 0.6% 0.0% 0.6% 2.2% 4,500 9,700 4,000 14,700 0 0 $1.70 25,000 + 31 4,628,600 14.2% 0.5% 14.7% 16.7% 68,500 298,400 91,800 90,600 0 0 $2.43 Subtotal 47 4,878,300 13.5% 0.5% 14.0% 16.0% 73,000 308,100 95,800 105,300 0 0 $2.43 MARKET TOTAL 441 33,380,000 14.7% 0.9% 15.6% 16.5% 484,100 1,478,000 300,200 591,400 0 349,100 $2.43 Note: revisions to the inventory base were made effective Q3 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 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): added during the quarter via construction completions, including renovated space returned to market, less total 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 HANS MUMPER 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