Industrial Rents Continue Upward - Colliers International

Chris Shepard. LeaSING actIVIty. PRoPeRty aDDReSS. LeaSeD SF ..... Greater Los Angeles. THOMAS GALVIN. Research Analyst. Research Services.
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Research & Forecast Report

South Bay | INDUSTRIAL Q3 2017

Accelerating success.

>> Industrial Rents Continue Upward Key Takeaways

Market Indicators | Relative to prior period

> Industrial rents increased $0.02 per square foot (PSF) triple net (NNN) over the quarter to $0.81. Rents increased 9.4% over the last 12 months and are at their highest point ever.

Vacancy

> Net absorption was 11,300 square foot (SF) this quarter, essentially flat. Future quarters will likely see positive absorption as new buildings are leased.

Rental Rate

> Sales and leasing activity totaled 1,741,500 SF, which breaks down into eight sales (196,700 SF) and 43 leases (1,544,800 SF). > New space totaling 776,500 SF is currently under construction and will finish in the next 12 months. > Vacancy increased 20 basis points on vacant construction completions this quarter but still remained near historic lows.

South Bay Industrial Market

Q3 2017

Forecast

   

   

Net Absorption Construction

Summary Statistics | South Bay, Q3 2017 Vacancy Rate

1.0% 20 BPS

Change from Q2 ‘17 (Basis Points) Net Absorption

11,300 SF

Construction Completions

478,100 SF

Asking Rents | South Bay, Q3 2017 South Bay Industrial Market Average Asking Rent

South Bay remains the premier market for distribution companies and cargo-centered sea-and-air industrial users. It is nearly fully developed, so land is incredibly scarce. Tight market conditions and a lack of larger modern space continue to be deterrents that drive tenants to neighboring markets, primarily to the east.

$0.81 PSF NNN

Change from Q2 ‘16

+$0.07 PSF NNN

Y.O.Y. Change (%)

+9.4%

Labor Force | South Bay, Q3 2017

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

Construction

Manufacturing

Transportation, Trade & Utilities

8.1%

-0.8%

-0.7%

+11,000

-2,800

-6,200

South Bay | INDUSTRIAL

Historical Vacancy v. Rents | South Bay | Q3 ‘13-’17

> The vacancy rate rose 20 basis points to 1.0% and remains near historic lows.

RENTS

0.85

> Vacancy was tightest in the LAX/El Segundo/Hawthorne submarket at 0.4% and highest in the Torrance market at 1.3%

Absorption and Leasing Activity

4%

0.8

$PSF PER MONTH (NNN)

> Forecast: New supply may bring some relief for vacancy rates. Vacancy may increase as 977,500 SF of space under construction is brought to market.

VACANCY

0.75

3%

0.7 0.65

2%

0.6 0.55

% VACANT (TOTAL)

Vacancy

Q3 2017

1%

0.5

> Industrial demand reported 11,300 SF of positive net absorption this quarter and 890,700 SF for the year to date.

3Q14

3Q15

3Q17

Net Absorption by Submarket | South Bay | Q3 ’17

150,000

124,400

100,000 50,000

9,900

26,800

0

SF

Rental Rates

3Q16

LB/HARBOR CITIES

> Forecast: Absorption is likely to be flat for 2017 as there is little new supply hitting the market and further gains will be hard to achieve.

0% 3Q13

GARDENA/HARBOR FWY

> Sales and leasing activity totaled 1,741,500 SF this quarter. This was broke down into eight sales (196,700 SF) and 43 leases (1,544,800 SF).

0.45

(12,700)

(50,000) (100,000) (150,000)

(137,100)

> Forecast: Rents will continue to rise in future quarters and tenants can expect to pay a premium for all types of industrial space. Tenants who signed leases five years ago can expect to their rents to increase roughly 45% upon renewal.

CARSON/COMPTON/RD

> Even marginal space in the South Bay is getting multiple offers and tenants are having to expand their search criteria in order to find suitable space.

LAX/ES/HAWTHORNE

(200,000)

TORRANCE

> Average asking rents increased $0.02 PSF NNN over the quarter to end at $0.81. Asking rents reached their highest levels ever and will continue to rise.

Historical Leasing Activity | South Bay | Q3 ‘13 - ‘17

5000000

4000000

SF

3000000

2000000

1000000

0 3Q13

2

3Q14

3Q15

3Q16

3Q17

South Bay | INDUSTRIAL

Construction

Q3 2017

Historical Net Absorption & Construction Completions South Bay | Q3 ‘13-’17

> New supply this quarter totaled 277,100 SF across multiple projects.

NET ABSORPTION

> Only 977,500 SF of space remains under construction, an incredibly small amount for a 212.5 million SF industrial market.

> Forecast: We are at the tail end of a construction boom, and new supply will trickle in for the rest of 2017. Development will continue to be limited to build-to-suit projects or creative rehabilitation of underperforming space.

2500000 2000000

SF

> Development is exceedingly difficult in the South Bay, where raw land, if available, sells for a premium.

CONSTRUCTION COMPLETIONS

3000000

1500000 1000000 500000 0 3Q13

Investment Trends > Capitalization rates remained tight in Los Angeles County, averaging 5% in the third quarter of 2017.

3Q14

3Q15

3Q16

3Q17

Investment Trends Chart

Los Angeles County | Q3 ‘13-’17

> Class A product in the South Bay traded at a lower cap rate than the Los Angeles County average near 4%, while Class B product was in the low 5% range.

Average Price Per sf

Average Cap Rate

7.0%

$180 $160

6.0%

> Forecast: Investor focus on fully leased industrial assets has increased in prime infill locations.. Consequently, we expect further demand to drive up sales prices, further compressing cap rates.

$140 5.0%

$120

4.0%

$100

3.0%

$80 $60

2.0%

Outlook

$40 1.0%

$20

0.0%

> Tight market conditions are expected to persist in the South Bay industrial market with vacancy rates below single digits expected in future quarters. Rents are at their highest-ever levels, prompting many users to consider buying their properties. However the available inventory is insufficient to meet demand. > Land is incredibly scarce and many industrial users are having to get creative or face paying a premium to secure land for truck, car or trailer storage.

$0 3Q13

3Q14

3Q15

3Q16

3Q17

Unemployment Rate | Los Angeles County | August 2017 4.8%

4.7%

4.7% 4.6% 4.5%

4.4%

4.4% 4.3% 4.2% 4.1%

4.1%

4.0% 3.9% 3.8%

3

United States

California

Los Angeles County

South Bay | INDUSTRIAL

Q3 2017

Market Description

Submarket Map

The South Bay industrial market includes 212.3 million square feet, representing 16 percent of the total space in the Los Angeles Basin for buildings 10,000 square feet and greater. The market has a high concentration of firms oriented toward international trade at the Ports of Los Angeles and Long Beach, as well as with LAX airport. The South Bay is a relatively mature market, with 63 percent of its space built prior to 1980. There is a good mix of product types, with nearly half of the space (45%) in big-box buildings (100,000 SF+) and the balance (55%) in small- and medium-sized buildings.

RECENT TRANSACTIONS & MAJOR DEVELOPMENTS South Bay Industrial Market Q3 2017

SALES ACTIVITY PROPERTY ADDRESS

SIZE SF

SALE PRICE

PRICE PSF

BUYER

SELLER

2301 Pacifica, Rancho Dominguez

1,170,800 SF

$210.5 Million

$180 PSF

Rexford Industrial

CBRE Global Investors

1700 El Segundo, Gardena

42,100 SF

$10.2 Million

$245 PSF

Thunderbird Valley LTD

Garbo Holdings LLC

17171 Western, Gardena

12,500 SF

$2.2 Million

$180 PSF

Natalie Kwon

South Bay Appliance

1208 Gaviota, Long Beach

20,000 SF

$2.2 Million

$112 PSF

James Kao

Chris Shepard

PROPERTY ADDRESS

LEASED SF

LEASE TYPE

BLDG TYPE

LESSEE

LESSOR

20100 Alameda, Compton

222,000 SF

Sublease

Distribution

Simmons Mattress

Ronald Bloom

2130 Del Amo, Carson

54,000 SF

Direct New

Light

Shoes West

IDI Gazeley

15902 Main, Gardena

53,000 SF

Direct New

Light

Marmoa Group

Fontana Sierra Corp.

40000 Redondo Beach, Redondo Beach

41,300 SF

Sublease

Distribution

Doe and Go

AEW Capital Management

PROJECT

DEVELOPER

SIZE SF

SUBMARKET

STATUS

ESTIMATED COMPLETION

20333 Normandie, Torrance

Bridge Development

512,500 SF

Torrance

Under Construction

Q2 2018

11600 Alameda, Lynwood

Duke Realty

201,000 SF

Carson / Compton / RD

Under Construction

Q4 2017

1420 McKinley, Compton

Prism Realty

136,700 SF

Carson / Compton / RD

Completed

Q3 2017

LEASING ACTIVITY

MAJOR DEVELOPMENTS

4

South Bay | INDUSTRIAL

Q3 2017

INDUSTRIAL OVERVIEW South Bay Industrial Market Q3 2017

EXISTING PROPERTIES Submarket/ Building Size

Bldgs

CONSTRUCTION

Total Inventory SF

VACANCY

Completions Under Current Qtr Construction Vacancy SF SF

AVAILABILITY

Vacancy Prior Qtr

Availability

ACTIVITY Sales Activity SF

ABSORPTION

RENTS

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

Weighted Avg Asking Lease Rates

LAX/ES/HAWTHORNE 10,000 - 19,999

383

5,250,700

0

0

0.2%

0.3%

0.8%

0

0

44,600

3

44,600

96,300

700

27,000

20,000 - 39,999

281

7,746,500

0

0

1.9%

0.9%

4.1%

0

0

54,600

3

54,600

231,900

-75,800

-53,800

$1.20 $1.15

40,000 - 69,999

93

4,824,300

0

0

0.0%

0.0%

3.6%

0

0

11,900

1

11,900

79,100

0

20,100

$1.10

70,000 - 99,999

38

3,032,200

0

0

0.0%

0.7%

2.1%

0

0

21,100

1

21,100

21,100

21,100

0

$1.10

100,000- 249,999

35

5,431,600

0

0

0.0%

0.0%

0.0%

0

0

0

0

0

210,300

0

149,000

N/A

250,000 - 499,999

8

2,664,000

0

0

0.0%

1.5%

0.0%

0

0

63,200

2

63,200

134,400

41,300

71,200

N/A

500,000+

7

7,048,600

0

0

0.0%

0.0%

0.0%

0

0

0

0

0

0

0

0

N/A

Subtotal

845

35,997,900

0

0

0.4%

0.4%

1.6%

0

0

195,400

10

195,400

773,100

-12,700

213,500

$1.17

$0.80

GARDENA/HARBOR FWY 10,000 - 19,999

511

7,115,900

0

0

0.3%

0.2%

2.1%

72,300

5

13,100

1

85,400

186,900

-10,200

22,900

20,000 - 39,999

308

8,166,000

0

147,100

0.9%

0.6%

4.1%

0

0

70,000

4

70,000

124,800

-22,000

-5,500

$0.79

40,000 - 69,999

167

8,492,900

0

0

0.5%

1.0%

4.1%

40,000

1

40,700

1

80,700

228,800

42,100

42,100

$0.80

70,000 - 99,999

46

3,760,400

0

41,100

0.0%

0.0%

2.5%

0

0

20,200

1

20,200

50,100

0

0

N/A

100,000- 249,999

41

5,498,300

0

0

2.4%

2.4%

3.3%

0

0

272,600

2

272,600

473,800

0

-28,900

$0.63 N/A

250,000 - 499,999

1

256,000

0

0

0.0%

0.0%

0.0%

0

0

0

0

0

0

0

0

500,000+

0

0

0

0

0.0%

0.0%

0.0%

0

0

0

0

0

0

0

0

N/A

Subtotal

1074

33,289,500

0

188,200

0.8%

0.8%

3.3%

112,300

6

416,600

9

528,900

1,064,400

9,900

30,600

$0.69

TORRANCE 10,000 - 19,999

202

2,739,000

0

0

0.4%

0.4%

1.2%

0

0

0

0

0

0

0

-11,200

$0.85

20,000 - 39,999

173

4,854,800

0

0

4.2%

4.2%

4.5%

26,700

1

59,900

2

86,600

223,400

0

3,400

$0.76

40,000 - 69,999

76

3,837,800

0

0

3.6%

0.0%

3.6%

0

0

0

0

0

24,700

-137,100

-112,400

$0.75

70,000 - 99,999

34

2,778,000

0

0

0.0%

0.0%

3.0%

0

0

0

0

0

36,300

0

31,500

$0.75

100,000- 249,999

47

6,420,400

0

0

0.0%

0.0%

1.8%

0

0

12,600

1

12,600

283,800

0

38,400

$0.91

250,000 - 499,999

14

4,883,300

0

0

0.0%

0.0%

8.0%

0

0

0

0

0

156,800

0

0

$0.72

500,000+

4

1,914,200

0

512,500

0.0%

0.0%

0.0%

0

0

0

0

0

0

0

0

N/A

Subtotal

550

27,427,500

0

512,500

1.3%

0.8%

3.6%

26,700

1

72,500

3

99,200

725,000

-137,100

-50,300

$0.80

$0.89

CARSON/COMPTON/RD 10,000 - 19,999

256

3,585,200

0

0

0.3%

0.0%

1.9%

0

0

17,900

1

17,900

83,500

-10,600

2,800

20,000 - 39,999

330

9,349,200

0

0

0.3%

0.0%

2.3%

0

0

75,900

4

75,900

399,300

-30,000

32,000

$0.75

40,000 - 69,999

235

12,245,300

0

0

0.5%

1.2%

2.7%

57,700

1

32,800

1

90,500

545,800

90,500

48,300

$0.76

70,000 - 99,999

132

10,876,500

0

0

1.7%

1.7%

3.5%

0

0

71,800

1

71,800

405,200

0

-34,500

$0.65

100,000- 249,999

222

33,745,400

136,700

201,000

1.5%

1.3%

4.2%

0

0

319,500

3

319,500

1,716,500

74,500

42,500

$0.82

250,000 - 499,999

32

10,196,700

0

0

0.0%

0.0%

0.6%

0

0

130,000

1

130,000

880,100

0

464,300

$0.78

500,000+

2

1,047,300

0

0

13.9%

1.4%

13.9%

0

0

0

0

0

0

0

-145,200

$0.69

Subtotal

1209

81,045,600

136,700

201,000

1.2%

1.1%

3.2%

57,700

1

647,900

11

705,600

4,030,400

124,400

410,200

$0.75

LB/HARBOR CITIES 10,000 - 19,999

563

7,764,700

0

0

0.6%

0.9%

2.3%

0

0

41,400

3

41,400

148,700

17,600

16,600

$0.81

20,000 - 39,999

316

8,302,400

0

32,000

0.5%

0.9%

3.7%

0

0

92,000

5

92,000

209,600

36,300

-10,900

$0.76

40,000 - 69,999

93

4,567,500

0

43,800

1.2%

0.9%

2.3%

0

0

0

0

0

20,000

-15,000

-37,000

$0.65

70,000 - 99,999

28

2,287,300

0

0

0.5%

0.0%

2.5%

0

0

54,000

1

54,000

152,500

-12,100

-12,200

$0.83

100,000- 249,999

37

5,466,400

140,400

0

3.4%

0.8%

3.4%

0

0

25,000

1

25,000

355,200

0

330,200

$0.85

250,000 - 499,999

8

2,460,400

0

0

0.0%

0.0%

0.0%

0

0

0

0

0

0

0

0

N/A

500,000+

5

3,905,800

0

0

0.0%

0.0%

0.0%

0

0

0

0

0

0

0

0

N/A

Subtotal

1050

34,754,500

140,400

75,800

1.0%

0.7%

2.4%

0

0

212,400

10

212,400

886,000

26,800

286,700

$0.83

10,000 - 19,999

1915

26,455,500

0

0

0.4%

0.4%

1.8%

72,300

5

117,000

8

189,300

515,400

-2,500

58,100

$0.92

20,000 - 39,999

1408

38,418,900

0

179,100

1.3%

1.0%

3.6%

26,700

1

352,400

18

379,100

1,189,000

-91,500

-34,800

$0.88

MARKET TOTAL

40,000 - 69,999

664

33,967,800

0

43,800

0.9%

0.8%

3.2%

97,700

2

85,400

3

183,100

898,400

-19,500

-38,900

$0.85

70,000 - 99,999

278

22,734,400

0

41,100

0.9%

0.9%

3.0%

0

0

167,100

4

167,100

665,200

9,000

-15,200

$0.80

100,000- 249,999

382

56,562,100

277,100

201,000

1.4%

1.1%

3.3%

0

0

629,700

7

629,700

3,039,600

74,500

531,200

$0.81

250,000 - 499,999

63

20,460,400

0

0

0.0%

0.2%

2.2%

0

0

193,200

3

193,200

1,171,300

41,300

535,500

$0.79

13,915,900

0

500,000+ Total

5

18 4728

212,515,000 277,100

512,500

1.0%

1.0%

1.0%

0

0

0

0

0

0

0

-145,200

$0.69

977,500

1.0%

0.8%

2.9%

196,700

8

1,544,800

43

1,741,500

7,478,900

11,300

890,700

$0.81

South Bay | INDUSTRIAL

Q3 2017

Definitions of key terms in this report Total Rentable Square Feet: Industrial space in buildings with 10,000 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.

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

> Over 15,000 professionals

UNITED STATES: South Bay Office License No. 01908231 2121 Rosecrans Ave, Suite 3301 El Segundo, CA 90245

HANS MUMPER

Executive Managing Director Greater Los Angeles

THOMAS GALVIN Research Analyst Research Services 6

> $2.6 billion in annual revenue > 2.0 billion square feet under management

TEL: +1 310 787 1000 FAX: +1 310 381 2500