Demand Remains Strong As Vacancy Falls - Colliers International

Research & Forecast Report

ORANGE COUNTY | INDUSTRIAL Q2 2017

Accelerating success.

>> Demand Remains Strong As Vacancy Falls Key Takeaways

> The vacancy rate decreased by 20 basis points to 2.5% this quarter. Vacancy stood at 2.8% one year ago.

Market Indicators | Relative to prior period Q2 2017

Forecast

   

> Due to decreasing vacancy rates, asking rents increased to $0.84 PSF NNN, a 13.5% increase from one year ago.

Net Absorption Construction

  

> Industrial demand was positive, recording 305,100 square feet (SF) of net absorption.

Rental Rate



> One project completed construction with only 195,500 SF remaining under construction. > As market conditions remain tight and quality industrial space remains scarce, asking rental rates are expected to rise by another 10% to 15% by the end of 2018.

Orange County Industrial Market

The Orange County industrial market closed mid-year on a positive note as net absorption recorded positive 305,100 SF. There is a strong demand for new industrial buildings as developers are challenged with finding available infill sites. Industrial product is expected to continue depleting due to many properties being sold as land for multifamily redevelopment or converted to creative office space. The industrial market has evolved to handle niche technology hub industries and specialty retail. The market is focused on smaller value-add manufacturing buildings that have a large R&D component. As such, rents for industrial space tend to be higher in Orange County compared to neighboring markets.

Vacancy

Summary Statistics | Orange County, Q2 2017 Vacancy Rate

2.5%

Change from Q1 ‘17 (Basis Points)

-20 BPS

Net Absorption

305,100SF

Construction Completions

181,100 SF

Under Construction

232,600 SF

Asking Rents | Orange County, Q2 2017 Orange County Industrial Market Average Asking Rent

$0.84 NNN

Change from Q1 ‘17

$0.04

Y.O.Y. Change (%)

13.5%

Orange County Labor Force | Orange County, Q2 2017

12-mo Employment Growth (%) 12-mo Actual Employment Change

Construction

Manufacturing

Transportation, Trade & Utilities

3.8%

-2.2%

-1.1%

+3,700

-3,400

-3,000

ORANGE COUNTY | INDUSTRIAL

> In second quarter, total vacancy rate decreased 20 basis points from last quarter to 2.5%.

Historical Vacancy v. Rents | O.C. Market Q2 ‘13-’17 $0.90

> Space remains scarce in Orange County, with the availability rate hovering at 3.8%.

> FORECAST: With only 195,500 SF of space remaining under construction and strong industrial demand remains, vacancy rates are expected to remain at historic low levels.

6%

Vacancy

$0.85

5%

$0.80 $ PSF PER MONTH (NNN)

> Vacancy is tightest for buildings ranging between 1-9,999 SF at 1.5% and buildings 70,000 - 99,999 SF have the highest vacancy rate at 3.2%.

Rents

4%

$0.75 3% $0.70 2%

$0.65

1%

$0.60 $0.55

Absorption and Leasing Activity

% VACANT

Vacancy

Q2 2017

0% 2Q13

2Q14

2Q15

2Q16

2Q17

> The Orange County industrial market recorded positive net absorption of 305,100 SF.

> Among the direct new leases signed this quarter were Amazon taking another 238,270 SF at 6400 Valley View in Buena Park and Primary Color Systems signing 187,500 SF at 11130 Holder St in Cypress. > FORECAST: Net absorption is expected to flatten as new inventory remains scarce.

Net Absorption by Submarket | O.C. Market Q2 ‘13-’17 400,000 313,000

300,000 212,800

200,000

SQUARE FEET

> North County recorded the largest amount of positive net absorption at 313,000 SF while the West County reported the lowest amount at negative -269,300 SF of space this quarter. The negative absorption stems from iLad, Inc. moving from Cypress and relocating their operations to Fontana.

100,000

48,600

0 (100,000) (200,000)

Rental Rates

(300,000)

WEST

> The weighted average asking rental rate for Orange County recorded at $0.84 per square foot (PSF) NNN, up 13.5% from the $0.74 PSF NNN reported one year ago. > Rents have steadily risen over the past three years as industrial tenant supply options remain limited.

AIRPORT

SOUTH

NORTH

Historical Sales & Leasing Activity | O.C. Market Q2 ‘13-’17

> Average asking rates were highest in the South County submarket at $0.99 PSF NNN and lowest in the West County submarket at $0.79 PSF NNN.

5,500,000 5,000,000 4,500,000

SQUARE FEET

> FORECAST: Tenant demand for industrial space is strong and supply is limited. Asking rental rates will continue to trend upward by 10% to 15% by the end of 2018.

(269,300)

4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 2Q13

2

2Q14

2Q15

2Q16

2Q17


> During second quarter there was one project totaling 181,100 SF delivered to the market at 4150 N Palm St in Fullerton. > There are two buildings currently under construction totaling 232,600 SF. The projects are expected to be completed by the second half of 2017. > FORECAST: Industrial development is a challenge in Orange County as many industrial properties and development sites are converted to residential and other commercial uses.

Historical Net Absorption & Construction Completions Q2 ‘13-’17

Net Absorption

Completions

1,000,000 750,000 500,000 SQUARE FEET

Construction

Q2 2017

250,000 (250,000) (500,000)

Investment Trends

> Investment volume for industrial properties decreased by 3.8% compared to midyear 2016. Sales volume recorded at $143.5 million compared to $286.4 million last quarter. > Investors are expected to remain bullish in the Orange County market as available supply remains limited. > Investment sales prices have increased by 26% compared to this time last year currently averaging $184 PSF. > FORECAST: With minimal federal interest rate (1.16%) increases and investors looking for development opportunities, investment activity is expected to remain steady through 2017.

Outlook

The Orange County industrial market continues to move forward with positive momentum. With minimal increase in available supply, asking rental rates have climbed above 2008 peak values of $0.78-$0.80 PSF NNN. Despite positive market fundamentals, tenants are struggling to find future space options to meet their needs given the lack of available inventory.

(750,000) (1,000,000) 2Q13

2Q14

2Q15

2Q16

2Q17

Investment Trends Chart 2010-2017 $200.00

8.0%

$180.00

7.0%

$160.00

6.0%

$140.00 $120.00

5.0%

$100.00

4.0%

$80.00

3.0%

$60.00

2.0%

$40.00

1.0%

$20.00 $0.00

0.0% 2010

2011

2012

2013

2014

$/PSF

2015

2016

2017

Cap Rate

Unemployment Rate | U.S., C.A. & O.C. | May 2017 6.0%

4.0%

4.1%

4.2% 3.2%

2.0%

0.0% UNITED STATES

3

CALIFORNIA

ORANGE COUNTY


Q2 2017

Market Description

The Orange County industrial market is a large market comprised of 192.5 million SF representing 17% of the total industrial space in the greater Los Angeles Basin. Most of the space (68%) is in small to medium sized buildings, with the balance in big box space (100,00+ SF). The market includes many mid-sized manufacturers and distributors from a wide array of industries, including information, technology, electronics, food, apparel and communications. These firms pay a premium to be in the midst of Orange County's highly educated labor force and concentration of high-end firms and distributors.

Submarket Map

RECENT TRANSACTIONS & MAJOR DEVELOPMENTS Orange County Industrial Market Q2 2017

SALES ACTIVITY PROPERTY ADDRESS

SIZE SF

SALE PRICE

PRICE PSF

BUYER

SELLER

1650 Sunflower Ave, Costa Mesa

112,000 SF

$33.4 Million

$298 PSF

BLT Enterprises

Sovereign Capital

5455 E La Palma Ave, Anaheim

127,100 SF

$15.9 Million

$125 PSF

Calton Corporation

Clarion Partners

6388-6400 Artesia Blvd, Buena Park

103,400 SF

$15.0 Million

$145 PSF

Brumleu Investments

Henry Cohen

1654-1700 S Lewis St, Anaheim

135,600 SF

$24.7 Million

$182 PSF

Zuma

Forest Place Associates

1311 Orangethorpe, Fullerton

15,200 SF

$2.4 Million

$159 PSF

Mojave Capital Management

Gallrado LLC

PROPERTY ADDRESS

LEASED SF

LEASE TYPE

BLDG TYPE

LESSEE

LESSOR

6400 Valley View, Buena Park

238,270 SF

Direct - New

Distribution

Amazon

Catellus Development Group

11130 Holder St, Cypress

187,500 SF

Direct - New

Distribution

Primary Color Systems

Stockbridge

25892-25902 Towne Centre Dr, Foothill Ranch

130,700 SF

Direct - New

Distribution

SeneGence International

LBA Realty

2100 E Valencia Dr, Fullerton

112,700 SF

Direct - New

Distribution

California Hi-Lites

MetLife

6201-6221 Knott Ave, Buena Park

102,400 SF

Direct - New

Distribution

Flexport

MCDC

PROJECT

DEVELOPER

SIZE SF

SUBMARKET

STATUS

ESTIMATED COMPLETION

1710 S Anaheim Blvd, Anaheim

Panattoni Development

144,000 SF

Airport Area

Under Construction

4Q 2017

1675 Deere Ave, Irvine

West Wing Corporation

51,450 SF

Airport Area

Under Construction

3Q 2017

LEASING ACTIVITY

MAJOR DEVELOPMENTS

4


EXISTING PROPERTIES Submarket/ Building Size

Bldgs

Total Inventory SF

CONSTRUCTION

VACANCY

Completions Under Vacancy Current Qtr Construction Vacancy Prior Qtr SF SF

Q2 2017

AVAILABILITY

Availability

ACTIVITY

ABSORPTION

Total Gross Total Gross Net Sales Number of Lease Number Activity Current Activity Absorption Activity SF Sales Activity SF of Leases Qtr SF YTD SF Current Qtr SF

Net Absorption YTD SF

RENTS Weighted Avg Asking Lease Rates

AIRPORT 1 - 9,999

388

2,776,200

0

0

1.1%

0.7%

3.3%

11,500

3

21,125

4

32,625

85,625

(12,100)

800

$1.69

10,000 - 39,999

1,194

22,481,900

0

0

2.0%

2.0%

2.9%

100,200

5

295,800

15

396,000

832,400

(600)

(74,400)

$1.04

40,000 - 69,999

152

7,696,200

0

51,500

3.1%

2.3%

7.2%

0

0

55,100

1

55,100

224,900

(60,100)

(134,500)

$0.88

70,000 - 99,999

65

5,325,000

0

0

5.4%

6.2%

2.3%

0

0

51,100

1

51,100

153,000

11,400

(71,000)

$0.77

100,000 +

70

11,518,000

0

0

3.8%

4.7%

6.2%

0

0

0

0

0

170,700

110,000

(50,000)

$0.72

1,869

49,797,300

0

51,500

2.9%

3.1%

4.2%

111,700

8

423,125

21

534,825

1,466,625

48,600

(329,100)

$0.89

$0.87

SUBTOTAL NORTH 1 - 9,999

520

3,691,200

0

0

1.1%

0.7%

2.0%

27,900

5

15,300

3

43,200

114,000

(13,700)

(21,400)

10,000 - 39,999

1,800

33,233,500

0

0

2.1%

2.6%

2.4%

246,100

12

515,300

18

761,400

1,639,100

175,800

(105,000)

$1.00

40,000 - 69,999

245

12,795,100

0

0

1.7%

1.2%

2.9%

90,000

2

72,200

2

162,200

324,800

(57,700)

(85,200)

$0.73

70,000 - 99,999

87

6,888,800

0

0

2.2%

1.4%

2.7%

0

0

12,600

1

12,600

155,100

(53,400)

(53,400)

$0.84

100,000 +

148

30,776,900

181,100

144,000

2.8%

3.2%

4.0%

127,100

1

0

0

127,100

180,100

262,000

734,800

$0.65

2,800

87,385,500

181,100

144,000

2.2%

2.4%

3.0%

491,100

20

615,400

24

1,106,500

2,413,100

313,000

469,800

$0.78

1 - 9,999

226

1,458,200

0

0

2.4%

2.4%

4.4%

0

0

25,900

4

25,900

38,900

(1,500)

(19,400)

$1.24

10,000 - 39,999

392

7,529,200

0

0

3.2%

2.6%

5.0%

49,300

4

98,900

6

148,200

283,397

(57,300)

(61,200)

$1.23

40,000 - 69,999

46

2,303,900

0

0

2.8%

4.9%

7.4%

0

0

39,400

1

39,400

78,800

49,400

7,000

$0.94

SUBTOTAL SOUTH

70,000 - 99,999

18

1,483,700

0

0

5.2%

10.6%

20.0%

83,600

1

0

0

83,600

83,600

79,400

79,400

$0.77

100,000 +

43

8,389,700

0

0

1.9%

4.0%

2.1%

0

0

0

0

0

45,600

142,800

34,200

$0.80

SUBTOTAL

725

21,164,700

0

0

2.7%

3.9%

5.1%

132,900

5

164,200

11

297,100

530,297

212,800

40,000

$0.99

WEST 1 - 9,999

285

2,066,500

0

0

2.1%

2.1%

2.3%

34,600

8

28,800

5

63,400

189,850

1,800

3,300

$0.92

10,000 - 39,999

710

12,247,400

0

0

1.9%

1.6%

2.2%

106,300

8

129,500

5

235,800

647,000

(42,700)

(16,200)

$0.92

40,000 - 69,999

99

5,158,200

0

0

2.4%

2.1%

4.0%

0

0

14,200

1

14,200

18,960

(19,500)

(62,700)

$0.76

70,000 - 99,999

32

2,636,800

0

0

0.6%

0.0%

0.9%

0

0

24,000

1

24,000

112,500

(19,800)

(19,800)

$0.73

100,000 +

54

11,754,000

0

0

3.8%

0.4%

8.0%

103,400

1

0

0

103,400

110,132

(189,100)

(230,000)

$0.76

1,180

33,862,900

0

0

2.6%

1.2%

4.4%

244,300

17

196,500

12

440,800

1,078,442

(269,300)

(325,400)

$0.79

SUBTOTAL MARKET TOTAL 1 - 9,999

1,419

9,992,100

0

0

1.5%

1.3%

2.5%

74,000

16

91,125

16

165,125

428,375

(25,500)

(36,700)

$1.18

10,000 - 39,999

4,096

75,492,000

0

0

2.2%

2.3%

2.8%

501,900

29

1,039,500

44

1,541,400

3,401,897

75,200

(256,800)

$1.04

40,000 - 69,999

542

27,953,400

0

51,500

2.3%

2.0%

4.7%

90,000

2

180,900

5

270,900

647,460

(87,900)

(275,400)

$0.83

70,000 - 99,999

202

16,334,300

0

0

3.2%

3.6%

3.8%

83,600

1

87,700

3

171,300

504,200

17,600

(64,800)

$0.79

100,000 +

315

62,438,600

181,100

144,000

3.1%

3.0%

4.9%

230,500

2

0

0

230,500

506,532

325,700

489,000

$0.71

181,100

195,500

2.5%

2.7%

3.8%

980,000

50

1,399,225

68

2,379,225

5,488,464

305,100

(144,700)

$0.84

TOTAL

6,574 192,210,400

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


Q2 2017

Definitions of key terms in this report Total Rentable Square Feet: Industrial space in buildings with 1 SF or more of industrial space. Includes speculative as well as owner-occupied buildings. Excludes Research & Development (R&D) buildings (industrial buildings with at least 30% office build-out, 3/1000 parking ratio and a high level of finish). Excludes space that is under-construction or renovation. Vacancy: Space in existing buildings that is vacant and immediately available during the quarter for direct lease, for sublease or for sale, plus space that is vacant but not available for direct lease or sublease. Availability: All space that is being currently marketed for occupancy, includes space which may be currently occupied or which may be under construction or renovation. 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). Gross Activity: Square feet sold and leased for all known transactions completed during the quarter. Excludes lease renewals. Excludes investment sale transactions. Weighted Average Asking Rental Rates: Weighted by square feet available for direct lease. Data is based on triple net rents, and excludes expenses such as taxes, insurance, maintenance, janitorial service and utilities. Reported on a monthly, per SF basis. Construction Completions: 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.

6

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.

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