average of 1.5%, recording $2.92 per square foot (PSF) full service gross (FSG), a 6.3% gain over last year. > There
Research & Forecast Report
GREATER L.A. | OFFICE Q2 2017
Accelerating success.
>> Market Fundamentals Rebound in Second Quarter Key Takeaways
> The Greater Los Angeles Basin office market rebounded from negative demand last quarter to post 703,400 square feet (SF) of positive absorption. > Office market vacancy dropped by 10 basis points from last quarter to 14.6%. A longer historical perspective shows that the vacancy rate a year ago stood at 14.9%. > Asking rental rates continue to increase at a quarterly average of 1.5%, recording $2.92 per square foot (PSF) full service gross (FSG), a 6.3% gain over last year. > There is currently 7.9 million SF of new construction in the Los Angeles Basin office market, most of which is to be delivered in 2017 and early 2018. > The overall economy continued to see solid growth carry over from 2016. Los Angeles Basin unemployment rates have declined from 4.7% to 4.2% year-over-year.
Los Angeles County Office Market
The Los Angeles County office market recorded positive 611,000 SF of net absorption as the total vacancy rate decreased 20 basis points to 15.6%. This is a result of substantial tightening in West Los Angeles and moderate positive demand in most markets. The market displayed confidence as rental rates increased by $0.06 to $3.11 PSF FSG. Rents rose in all Los Angeles County submarkets except the San Gabriel Valley and the San Fernando Valley where rents held steady. Construction activity remains concentrated in Downtown Los Angeles and West Los Angeles, which accounts for 87% of construction in the county. Los Angeles County non-farm unemployment in May 2017 declined to 4.4% from 4.8% last quarter, a 9.0% decrease year-over-year. Over the past 12 months, Los Angeles County gained 100,500 non-farm jobs for an increase of 1.4%.
Market Indicators | Relative to prior period Q2 2017
Forecast
Vacancy Net Absorption Construction Rental Rate
Summary Statistics | GLA, Q2 2017 Vacancy Rate Change from Q1 ‘17 (Basis Points)
Net Absorption* Construction Completions* Under Construction*
Class A
Class B
All Classes
13.9%
15.5%
14.6%
-30
+20
-10
+649.3
+76.8
+703.4
115.6
130.0
245.6
5,439.7
2,489.9
7,990.6
Class A
Class B
All Classes
$3.52
$2.34
$2.92
+$0.02
+$0.07
+$0.06
5.7%
8.2%
6.5%
*SF, Thousands
Asking Rents | GLA, Q2 2017 Average Asking Rent (FSG) Change from Q1 ‘17
($)
Y.O.Y. Change (%)
GLA Labor Force | GLA, May 2017 Total Non-farm
Prof. & Business Services
Financial Activities
12-mo Employment Growth (%)
1.4%
1.9%
0.5%
12-mo Actual Employment Change
+100,500
+19,300
+2,000
GLA | OFFICE
RENTS
SFV & Ventura County
The San Fernando Valley and Ventura County office market recorded positive market absorption as net absorption recorded 129,500 SF and vacancy declined by 40 basis points during mid-year. Rents ended second quarter with a 1.8% year-over-year increase, as rental rate remain unchanged compared to last quarter. With no new construction seen in the future, the market will remain supply-constrained and absorption is expected to remain positive. Given these market conditions, the San Fernando Valley and Ventura County office market trends are expected to move in a slow, positive growth rate. 2
16.0%
$2.80
14.0%
$2.70
12.0%
$2.60
10.0% $2.50
8.0%
$2.40
6.0%
$2.30
4.0% 2.0% 0.0% 2Q14
2Q15
2Q16
2Q17
Net Absorption by Submarket | GLA Office Market Q2 ’17 400,000 341,300
350,000 300,000 250,000 200,000 150,000 100,000
112,200 129,500 61,100
63,300 49,900
50,000
14,300
29,100
0 (50,000) (100,000)
ORANGE COUNTY
SOUTH BAY
INLAND EMPIRE
CENTRAL LOS ANGELES
SFV & VENTURA CO
TRI CITIES
DOWNTOWN LOS ANGELES
(97,300)
(150,000)
SAN GABRIEL VALLEY
The West Los Angeles market is poised to add just under 2.1 million SF in the near future as construction and creative conversions deliver. However, only 8.9% of this space has been pre-leased. Leasing efforts for these projects will determine whether vacancy stabilizes in the West Los Angeles market.
18.0%
2Q13
SF
Vacancy in the West Los Angeles market dropped by 60 basis points as the market recovered from major relocations last quarter. Rents continued their ascent, rising by $0.02 to $4.46 PSF FSG. Leasing activity showed continued stability, recording 1,411,600 SF, up 7.2% from last quarter.
$2.90
$2.10
Future construction will provide an abundance of high quality creative space to the market, as Downtown Los Angeles accounts for 42% of all new construction in Los Angeles County.
West Los Angeles
20.0%
$2.20
Downtown Los Angeles
In second quarter 2017, the Downtown Los Angeles office market recorded negative absorption for the third straight quarter. The delivery of one vacant office building contributed to the uptick in vacancy. Leasing volume recorded 850,600 SF. Asking rents continued to climb, recording growth of 0.7% year-over-year. Class A rents slid by 0.3% from last year, as landlords cope with rightsizing and fewer tenants in the market.
VACANCY
$3.00
WEST LOS ANGELES
Demand from strong leasing activity in 2015 and 2016 has finally started to manifest. After a period of stagnation, rents rebounded, registering an average increase of 2.0% in the last 3 quarters. Class A rents, however, decreased by 0.7% from last year.
Historical Vacancy v. Rents | GLA Office Market Q2 ‘13-’17
Historical Leasing Activity | GLA Office Market Q2 ‘13-‘17
7,000,000
6,000,000
5,000,000
SF
The Central Los Angeles market saw moderate demand activity during second quarter with vacancy decreasing by 10 basis points from last quarter, and absorption closing at 112,200 SF for the quarter. There is currently 152,500 SF of office product under construction along with 811,000 SF of additional proposed product.
$ PSF PER MONTH (WEIGHTED)
Central Los Angeles
Q2 2017
4,000,000
3,000,000
2,000,000
1,000,000
0 2Q13
2Q14
2Q15
2Q16
2Q17
GLA | OFFICE
The South Bay market saw rental rates continue to rebound with positive growth for the fourteenth time in fifteen quarters. Vacancy made a modest drop from 17.5% to 17.4%. There were no construction deliveries, but 4 projects totaling 412,100 SF are expected to deliver in 2017 and early 2018. Leasing activity slid from last quarter to 443,100 SF. 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.
Historical Net Absorption & Construction Completions GLA Office Market Q2 ‘13-’17
NET ABSORPTION
2,000,000
1,500,000
1,000,000
500,000
0
San Gabriel Valley
The San Gabriel Valley office market experienced further compression in the second quarter of 2017, with vacancy dropping to 13.8% from 14.0% the previous quarter. Upward pressure on rents did not materialize, however, as the overall average asking rent remained at $2.22 PSF FSG. The most notable sale for the quarter was LA Corporate Center in Monterey Park trading to Omninet Capital for $81.0M ($205 PSF). The 4 building campus was the latest in Blackstone’s continued asset disposition, which constitutes 23 properties in Los Angeles over the past 2 years.
Tri-Cities
The market continued 2017 on a slight rebound as demand was positive for the second time in five quarters. Vacancy slid accordingly due to demand in Class A properties across the market. Glendale will see vacancy jump by midyear due to Nestle USA’s relocation. Sublease inventory will increase as a result of this relocation and others. Rents continued to rise, however, on the strength of Class A properties.
(500,000)
(1,000,000) 2Q13
The Orange County office market momentum flattened at mid-year 2017 as absorption recorded 29,100 SF. Vacancy remained at 12.3% from last quarter and dropped 70 basis points compared to one year ago. Absorption gains are expected to be limited as tenants seek right-size space options and new construction delivers during the second half of 2017. Moving into the second half of 2017, the Orange County market is expected to see signs of stabilization. Class A asking rental rates have plateaued as the Airport Area and South County markets have reached their historical rental rate peaks, while Central County, North County and West County remain below prior pricing peaks. 3
2Q14
2Q15
2Q16
2Q17
Investment Trends Chart GLA Office Market ‘11-’17 $400.00
8.0%
$350.00
7.0%
$300.00
6.0%
$250.00
5.0%
$200.00
4.0%
$150.00
3.0%
$100.00
2.0%
$50.00
1.0%
$0.00
2011
2012
Investment activity was widespread, with Glendale seeing its ninth and tenth Class A properties traded in the last 2 years.
Orange County
CONSTRUCTION COMPLETIONS
2,500,000
SF
South Bay
Q2 2017
2013
2014
$/PSF
2015
2016
2017
Cap Rate
Unemployment Rate | U.S., CA & LA | May 2017 4.8%
4.7%
4.7% 4.6% 4.5% 4.4% 4.3% 4.2% 4.1%
4.2% 4.1%
4.0% 3.9% 3.8%
United States
California
Los Angeles Basin
0.0%
GLA | OFFICE
Q2 2017
Inland Empire
In second quarter 2017, the total vacancy rate for the Inland Empire office market decreased 40 basis points from 13.9% last quarter to 13.5%. The vacancy rate has been steadily declining since peaking at 25.2% in late 2010. Second quarter closed on a positive note as net absorption recorded 63,300 square feet (SF) for the quarter. Leasing activity grew by 30,000 SF compared to last quarter recording 284,300 SF for the quarter.
Submarket Map
The weighted average asking rental rate slightly decreased during second quarter to $1.78 per square foot (PSF), full service gross (FSG). As a historical perspective, the asking rental rate recorded at $1.72 PSF FSG on year ago.
Market Description
The Los Angeles Basin office market is comprised of 304.9 million SF of multi-tenant office space in buildings 25,000 SF or larger. It ranks as the third largest office market in the nation, following New York City and the Greater Washington DC area. Most of its space, 55%, was built in or after 1985, making it a relatively young market. It is also relatively decentralized, with only 11% of the space located within Downtown Los Angeles and 89% dispersed throughout the region. 40% of the space is in low-rise buildings, followed by 31% in mid-rise buildings and 29% in high-rise structures.
RECENT TRANSACTIONS & MAJOR DEVELOPMENTS Greater Los Angeles County Office Market Q2 2017
SALES ACTIVITY PROPERTY ADDRESS
SIZE SF
SALE PRICE
PRICE PSF
BUYER
SELLER
1999 Avenue of the Stars, Los Angeles
825,200 SF
$860,000,000
$1,042 PSF
JMB Financial Advisors
The Blackstone Group
300 S. Grand Ave., Los Angeles
1,039,400 SF
$465,000,000
$448 PSF
Rising Realty/Colony Northstar
Beacon Capital Partners
1299 Ocean Ave., Santa Monica
205,700 SF
$285,000,000
$1,385 PSF
Douglas Emmett, Inc.
The Blackstone Group
1040 N. Las Palmas Ave., Hollywood
369,000 SF
$200,000,000
$542 PSF
Hudson Pacific Properties, Inc.
Studio Management Services,
1920 & 2010 Main St, Irvine
724,000 SF
$200,000,000
$276 PSF
Emmes Realty Services of CA LLC
Shorenstein Properties, LLC
PROPERTY ADDRESS
LEASED SF
LEASE TYPE
BLDG CLASS
LESSEE
LESSOR
400 Spectrum Center, Irvine
133,300 SF
Direct
A
Cylance
The Irvine Company
12200 W. Olympic Blvd., Los Angeles
79,000 SF
Expansion
A
Riot Games
Kilroy
4910 Rivergrade Rd., Irwindale
74,900 SF
Direct
B
City of Hope
MetLife
633 W. 5th St., Los Angeles
71,100 SF
Direct-New
A
Marsh & McLennan
OUE
1601 N. Vine St., Hollywood
64,800 SF
Direct-New
A
WeWork
J.H. Snyder Company
PROJECT
DEVELOPER
SIZE SF
SUBMARKET
STATUS
ESTIMATED COMPLETION
The Boardwalk, Irvine
Trammell Crow
537,200 SF
Airport Area
Under Construction
Q3 2017
801 S Broadway, Los Angeles
Waterbridge Capital 500,000 SF
Greater
Under Construction
Q1 2018
Broadcom Corporate Campus
DPR Construction,
South County
Under Construction
Q1 2018
LEASING ACTIVITY
MAJOR DEVELOPMENTS
4
440,000 SF
GLA | OFFICE
Q1 2017
oFFICE OVERVIEW
Greater Los Angeles County Office Market Q2 2017 EXISTING PROPERTIES Submarket/ Class
Bldgs
Total Inventory SF
VACANCY Direct Vacancy
Sublease Vacancy
Total Vacancy
ACTIVITY Leasing Total Leasing Activity Vacancy Activity YTD Current Qtr Prior Qtr SF SF
ABSORPTION Net Absorption Current Qtr SF
Net Absorption YTD SF
CONSTRUCTION Completions Current Qtr SF
Under Construction SF
RENTS Weighted Avg Asking Lease Rate
BUILDING CLASS A
874
161,891,391
13.1%
0.9%
13.9%
14.2%
3,569,300
7,401,900
649,300
-146,300
115,600
5,439,700
$3.52
B
1,849
125,706,800
14.9%
0.6%
15.5%
15.3%
2,194,800
4,603,800
76,800
744,200
130,000
2,489,860
$2.34
C
393
17,344,316
13.0%
0.5%
13.6%
13.5%
365,400
608,200
-26,900
-67,500
0
61,000
$1.74
17.9%
0.1%
18.0%
18.1%
273,300
395,400
112,200
520,700
115,600
152,500
$2.75
32,870,700
19.7%
0.7%
20.4%
19.8%
850,600
1,491,900
(97,300)
(254,500)
130,000
1,928,960
$3.22
436
56,314,200
12.4%
1.0%
13.4%
14.0%
1,411,600
2,729,000
341,300
(586,700)
0
2,094,400
$4.46
190
23,082,500
12.5%
0.8%
13.3%
13.5%
383,700
724,700
61,100
(61,600)
0
0
$2.99
CENTRAL LOS ANGELES Subtotal
116
14,578,600
DOWNTOWN LOS ANGELES Subtotal
75
WEST LOS ANGELES Subtotal TRI CITIES Subtotal
SAN FERNANDO VALLEY & VENTURA COUNTY Subtotal
427
33,778,000
13.8%
0.2%
14.0%
14.4%
721,000
1,474,500
129,500
206,600
0
0
$2.27
278
30,790,800
16.3%
1.0%
17.4%
17.5%
443,100
944,300
49,900
253,100
0
412,100
$2.39
10,258,900
13.4%
0.4%
13.8%
14.0%
222,300
499,000
14,300
65,800
0
32,000
$2.22
201,673,700
14.9%
0.7%
15.6%
15.8%
4,305,600
8,258,800
611,000
143,400
245,600
4,619,960
$3.11
82,902,607
11.4%
0.8%
12.3%
12.3%
1,539,600
3,812,600
29,100
183,300
0
3,205,200
$2.62
20,381,500
13.1%
0.4%
13.5%
13.9%
284,300
542,500
63,300
207,900
0
165,400
$1.78
0.7%
14.6%
14.7%
6,129,500
12,613,900
703,400
534,600
245,600
7,990,560
$2.92
SOUTH BAY Subtotal
SAN GABRIEL VALLEY Subtotal
157
LOS ANGELES COUNTY SUBTOTAL Total
1,679
ORANGE COUNTY Subtotal
1,013
INLAND EMPIRE Subtotal
424
GREATER LOS ANGELES BASIN TOTAL Total
3,116
304,957,807
13.8%
Note: revisions to the inventory base were made effective Q2 2017, historical data reported here reflect these revisions and may not match data reported in previous quarters.
5
GLA | OFFICE
Definitions of key terms in this report Total 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.
Q2 2017 Space Added (Net): Total 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.
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 Vacancy: 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). Total Vacancy: 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 SF basis. 6
396 offices in 68 countries on 6 continents United States: 153 Canada: 29 Latin America: 24 Asia Pacific: 79 EMEA: 111
> $2.6 billion in annual revenue > 2.0 billion square feet under management > Over 15,000 professionals
UNITED STATES: Greater Los Angeles Office License No. 01908231 865 S Figueroa St, Suite 3500 Los Angeles, CA 90017
HANS MUMPER Executive Managing Director. GLA CAITLIN MATTESON Research Director Research Services
TEL: +1 213 627 1214 FAX: +1 213 327 3200
ROBERT CAUDILL Regional Director/O.C.
