Vacancy decreased 60 basis points from one quarter ago recording 21.4%. ... Media and tech companies continued to see th
Research & Forecast Report
Central Los Angeles | OFFICE Q3 2016
Accelerating success.
>> Leasing Velocity Rebounds While Rents Flatten Key Takeaways
> There is currently 610,400 square feet (SF) of office product under construction and 712,500 SF of expected proposed construction in the Hollywood submarket. > The average rent for Class A buildings in Central Los Angeles is $3.48 per square foot (PSF) Full Service Gross (FSG), a 42.6% increase year over year. > Vacancy decreased 60 basis points from one quarter ago recording 21.4%. > Leasing activity rebounded from last quarter's 165,000 total to record 289,700 SF of velocity. > Investment activity continued its slowdown in third quarter with no office properties more than 25,000 SF trading hands in the market.
Market Indicators | Relative to prior period Q3 2016
Forecast
Vacancy Net Absorption Construction Rental Rate
Summary Statistics | Central Los Angeles, Q3 2016 Class A
Class B
All Classes
19.4%
23.2%
21.4%
-30
-100
-60
17.4
70.5
86.2
Vacancy Rate Change from Q2 ‘16 (Basis Points)
Net Absorption* Construction Completions* Under Construction*
0
0
0
610.4
0
610.4
*SF, Thousands
Central Los Angeles Office Market
The Central Los Angeles market saw modest activity during third quarter with vacancy decreasing by 60 basis points from last quarter and absorption closing at 86,200 SF. There is currently 610,400 SF of office product under construction along with 712,500 SF of additional proposed product. This additional new inventory will bode well for the Hollywood market, opening options for tenants seeking new product in a preferred high-image location. Media and tech companies continued to see the Hollywood submarket as an attractive offering of high-image new Class A inventory and abundant production facilities. While large blocks have been the focus in past quarters, this quarter saw medium-sized transactions in the 10,000 SF to 30,000 SF range dominate leasing activity.
Asking Rents | Central Los Angeles, Q3 2016 Average Asking Rent Change from Q2 ‘16 ($)
Y.O.Y. Change (%)
Class A
Class B
All Classes
$3.48
$2.22
$2.64
$0.04
$0.04
$0.03
42.6%
3.7%
21.7%
Labor Force | Los Angeles County, Q3 2016 Total Nonfarm
Prof. & Business Services
Financial Activities
12-mo Employment Growth (%)
1.7%
3.1%
2.4%
12-mo Actual Employment Change
73,900
18,600
5,100
Central Los Angeles | OFFICE
> Mid-Wilshire Class B and C properties saw the largest changes in vacancy, with both seeing a 120 basis points drop. > Hollywood saw vacancy rise, as smaller move-ins and renewals dictated activity. > Forecast: Vacancy in Central Los Angeles should level out through the end of 2016 as demand catches up to fewer new product deliveries compared to a year ago.
Historical Vacancy v. Rents | Central Los Angeles Market
Q3 ‘12-’16
RENTS
VACANCY
$3.00
24% 22%
$2.50
20% 18%
$2.00 16% 14%
$1.50
12% $1.00
> Among the larger deals signed this quarter in Central Los Angeles were post-production company Formosa Group agreeing to occupy 30,000 SF at 6555 Barton Ave. in Hollywood and on-demand massage service Soothe, Inc. signing for 12,800 SF at 1800 N. Highland Ave. > Forecast: With continued demand in Central Los Angeles and several of Hollywood's larger projects having been delivered or about to deliver, absorption should be on par with or surpass 2015. Hollywood remains attractive to media and entertainment companies looking for headquarters space with production capabilities either on-site or nearby.
Rental Rates
> The average asking rental rate for the market jumped $0.03, or 1.1%, from second quarter of 2016.
> Forecast: Rents currently stand 19.2% higher than their pre-recession peak, which questions how much more rents will increase in the near future. The flattening of rental rates indicates the market may see a peak in the near future. 2
3Q14
3Q15
3Q16
Q3 ’16
120,000 98,200
100,000 80,000 60,000 40,000 20,000 0
(12,000)
(20,000) MID WILSHIRE
HOLLYWOOD
Historical Leasing Activity | Central Los Angeles Market Q3 ‘12 - ‘16
600,000
> The last 2 quarters have seen minimal increases in rents, averaging an increase of 1.2%. The 4 quarters prior averaged a 7.7% rent increase per quarter.
500,000
400,000
SF
> The differences in rates between Mid-Wilshire and Hollywood continue to be stark as the Hollywood pipeline continues to push rates higher, while Mid-Wilshire remains a steady alternative for price-averse tenants.
3Q13
Net Absorption by Submarket | Central Los Angeles Market
SF
> Absorption for the quarter totaled 86,200 SF, with MidWilshire carrying the market into positive territory. The submarket recorded 98,200 SF of positive absorption primarily through smaller transactions.
10% 3Q12
Absorption and Leasing Activity
> The largest deals during second quarter ranged between 10,000-30,000 SF.
% VACANT (TOTAL)
> Vacancy in Central Los Angeles decreased by 60 basis points to 21.4% from one quarter ago. While a longer historical perspective shows the current quarter trailing the vacancy rate of 19.2% two years ago, the market should see vacancy continue to drop as demand holds steady.
$ PSF FSG PER ANNUM (WEIGHTED)
Vacancy
Q3 2016
300,000
200,000
100,000
0 3Q12
3Q13
3Q14
3Q15
3Q16
Central Los Angeles | OFFICE
Construction
> No new office projects delivered to the market during third quarter.
Q3 2016
Historical Net Absorption & Construction Completions Central Los Angeles Office Market Q3 ‘12-’16
> Due to the flurry of deliveries the past two quarters, the construction pipeline has lessened in Hollywood. Projects such as Hudson Pacific's fully preleased ICON and J.H. Snyder's 1601 N. Vine projects are set to deliver in early 2017.
> Forecast: Construction deliveries have slowed in the second half of 2016 as the previous construction highs left nowhere to go but down. However, a few projects under construction are set to deliver early next year, while several proposed projects in the Hollywood submarket will break ground during the same time period.
CONSTRUCTION COMPLETIONS
400,000 300,000
SF
> Hudson Pacific continues to be a player in the Hollywood development market. Following ICON's delivery, CUE (97,700 SF), will deliver in late 2017. In addition, Hudson Pacific received approval from the city this quarter for 5901 W. Sunset Blvd. (274,000 SF) and will begin construction in early 2017.
NET ABSORPTION
500,000
200,000 100,000 0 (100,000) (200,000) (300,000) 3Q12
3Q13
3Q14
3Q15
3Q16
Investment Trends Chart
Central Los Angeles Office Market Q3 ‘12-’16
Investment Trends
Average Price PSF
> Investment activity for properties over 25,000 SF slowed in the third quarter, with no projects trading hands.
7
$350.00
> Investors remain bullish on the Central Los Angeles market, targeting not only Class A trophy buildings, but also value-add and redevelopment opportunities.
6
$300.00
5
4 $200.00 3 $150.00 2
$100.00
Outlook
The Hollywood submarket will continue to see strong demand for space from entertainment, media and technology firms as pre-leased properties are delivered to the market. With the surrounding submarkets mostly built-out and creative tenants passing on the burgeoning, but not fully-realized Downtown Los Angeles creative market, Hollywood has the opportunity to attract tenants desiring quality space at a lower price-point than the Silicon Beach cluster. That window, however, is closing due to the ascent of Hollywood rents, concurrent with a robust pre-leasing environment. With fewer large block options currently available and a current focus on medium sized opportunities, the market will look to its proposed construction pipeline in 2017 to continue fulfilling demand for high quality creative and headquarters spaces.
1
$50.00
$-
0 2010
2011
2012
2013
2014
2015
2016
Unemployment Rate | U.S., CA & Los Angeles County | Aug. 2016 5.6%
5.5%
5.4% 5.2% 5.0%
4.9%
4.9%
4.8% 4.6% 4.4% United States
3
Cap Rate
$250.00
$/PSF
> Forecast: While activity has slowed as of late, the Federal Reserve's interest rate increase at the end of 2015 will do little to dampen investment activity in 2016 and early 2017.
Cap Rate
$400.00
California
Los Angeles County
Central Los Angeles | OFFICE
Q3 2016
Market Description
Central Los Angeles is an office market comprised of 14.1 million SF, representing 6% of the total office space 25,000 SF and greater in the Los Angeles Basin. Mid-Wilshire is attractive to small, entrepreneurial, and often Pacific Rimowned businesses while Hollywood has a mix of firms from the professional services, high-tech and entertainment/ media sectors.
Submarket Map
RECENT TRANSACTIONS & MAJOR DEVELOPMENTS Central Los Angeles Office Market Q3 2016
SALES ACTIVITY PROPERTY ADDRESS
SIZE SF
SALE PRICE
PRICE PSF
BUYER
SELLER
LEASING ACTIVITY PROPERTY ADDRESS
LEASED SF
LEASE TYPE
BLDG CLASS
LESSEE
LESSOR
6555 Barton Ave., Hollywood
30,000 SF
Direct-New
A
Formosa Group
J.H. Snyder Company
1800 N. Highland Ave., Hollywood
12,800 SF
Direct-New
A
Soothe, Inc.
The Souferian Group
6464 Sunset Blvd., Hollywood
14,000 SF
Direct-New
A
Bold Films
J.H. Snyder Company
MAJOR DEVELOPMENTS PROJECT
DEVELOPER
SIZE SF
SUBMARKET
STATUS
ESTIMATED COMPLETION
Icon at Sunset Bronson Studios (2 bldgs)
Hudson Pacific
323,300 SF
Hollywood
Under Construction
Q1 2017
1601 N. Vine St.
J.H. Snyder Company128,600 SF
Hollywood
Under Construction
Q1 2017
7007 Romaine St.
1001 N Orange La Llc 60,500 SF
Hollywood
Under Construction
Q1 2017
CUE at Sunset Bronson Studios
Hudson Pacific
97,700 SF
Hollywood
Under Construction
Q3 2017
5901 W. Sunset Blvd.
Hudson Pacific
315,000 SF
Hollywood
Proposed
TBD
4
Central Los Angeles | OFFICE
Q3 2016
oFFICE OVERVIEW
Central Los Angeles Office Market Q3 2016 EXISTING PROPERTIES Submarket /Class
Bldgs
Total Inventory SF
VACANCY Direct Vacancy
Sublease Vacancy
Total Vacancy
ACTIVITY Total Vacancy Prior Qtr
Leasing Leasing Activity Activity YTD Current Qtr SF SF
ABSORPTION Net Absorption Current Qtr SF
Net Absorption YTD SF
CONSTRUCTION Completions Current Qtr SF
Under Construction
RENTS Weighted Avg Asking Lease Rate
MARKET TOTAL A
33
6,012,500
19.3%
0.0%
19.4%
19.7%
167,500
468,500
17,400
(20,700)
0
610,400
$3.48
B
59
6,909,200
22.8%
0.4%
23.2%
24.2%
120,900
233,400
70,500
249,600
0
0
$2.22
C
22
1,218,000
20.6%
0.8%
21.4%
21.2%
1,300
13,900
(1,700)
(11,100)
0
0
$1.45
Total
114
14,139,700
21.1%
0.3%
21.4%
22.0%
289,700
715,800
86,200
217,800
0
610,400
$2.64
12.3%
0.0%
12.4%
13.0%
24,600
128,900
21,100
(24,900)
0
0
$2.19 $2.07
MID-WILSHIRE A
16
3,691,900
B
39
5,811,800
24.9%
0.1%
25.1%
26.3%
113,700
168,900
68,600
128,200
0
0
C
9
693,400
30.5%
0.0%
30.5%
31.7%
1,300
9,000
8,500
7,000
0
0
$1.22
Subtotal
64
10,197,100
20.8%
0.1%
20.9%
21.8%
139,600
306,800
98,200
110,300
0
0
$2.01
A
17
2,320,600
30.4%
0.0%
30.5%
30.3%
142,900
339,600
(3,700)
4,200
0
610,400
$4.31
B
20
1,097,400
11.5%
1.7%
13.2%
13.4%
7,200
64,500
1,900
121,400
0
0
$3.91
C
13
524,600
7.5%
1.8%
9.3%
7.3%
0
4,900
(10,200)
(18,100)
0
0
$2.69
Subtotal
50
3,942,600
22.1%
0.7%
22.9%
22.5%
150,100
409,000
(12,000)
107,500
0
610,400
$4.18
HOLLYWOOD
Note: revisions to the inventory base were made effective Q3 2016, historical data reported here reflect these revisions and may not match data reported in previous quarters.
5
Central Los Angeles | 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. 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
Q3 2016 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.
554 offices in 66 countries on 6 continents United States: 153 Canada: 34 Latin America: 24 Asia Pacific: 231 EMEA: 112
> $2.5 billion in annual revenue > 2.0 billion square feet under management > Over 16,100 professionals
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Regional Research Analyst Research Services
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