square foot (PSF) Full Service Gross (FSG), marking an 18.4% since first quarter of 2013. > The first quarter of 2016
Research & Forecast Report
DOWNTOWN L.A. | OFFICE Q1 2016
Accelerating success.
>> Rents Continue to Ascend While Vacancy Drops Key Takeaways
> Vacancy continued its gradual descent for the fourth straight quarter, recording at 17.5%, down 40 basis points from the previous quarter. > Net absorption more than doubled from last quarter’s total of 61,700 square feet (SF) to 135,600 SF. > The overall asking rental rate increased $0.61 to $38.43 per square foot (PSF) Full Service Gross (FSG), marking an 18.4% since first quarter of 2013. > The first quarter of 2016 lacked large leases as smaller transactions fueled leasing activity throughout all classes. Leasing activity totaled 531,000 SF for the quarter. > Investment activity consisted of Lincoln Property Company reacquiring 915 Wilshire Blvd. for $128.5 million ($329 PSF).
Market Indicators | Relative to prior period Q1 2016
Forecast
Vacancy Net Absorption Construction Rental Rate
Summary Statistics | DTLA, Q1 2016 Vacancy Rate
Class A
Class B
All Classes
16.7%
18.0%
17.5%
-100
+30
-40
185.1
-33.4
135.6
Change from Q4 ‘15 (Basis Points)
Net Absorption* Construction Completions* Under Construction*
0.0
0.0
0.0
356.1
866.6
1,222.7
*SF, Thousands
Downtown Los Angeles Office Market
For the first quarter of 2016, the Downtown Los Angeles office market remains at a post recession peak with historically high asking rates and four straight quarters of positive absorption despite a vacancy rate of 17.5%. The residential, hospitality and retail renaissance of the Downtown Los Angeles market continues to fuel office growth as more investors have bought into the expansion of the population and amenity base. Traditional tenants in finance, insurance and real estate continue to dominate the tenant base in the market, although the market has seen a fair amount of rightsizing. New construction will deliver to both the Financial District, Historic Core and the Arts District, but it remains to be seen if these will lease out before or after delivery.
Asking Rents | DTLA, Q1 2016 Average Asking Rent Change from Q4 ‘15
($)
Y.O.Y. Change (%)
Class A
Class B
Class C
All Classes
$41.07
$36.44
$29.58
$38.43
$0.23
$0.98
$1.48
$0.61
3.5%
6.1%
12.2%
4.3%
Labor Force | Los Angeles County, Q1 2016 Total Nonfarm
Prof. & Business Services
Financial Activities
12-mo Employment Growth (%)
2.5%
2.3%
1.9%
12-mo Actual Employment Change
107,300
13,800
4,100
DTLA | OFFICE
> Direct vacancy for the quarter was 17.0%, while sublease vacancy recorded at 0.5%.
Historical Vacancy v. Rents | DTLA Office Market Q1 ‘12-’16 RENTS
> Vacancy has dropped by 1.3% year-over-year, as numerous renewals have not translated into greater vacancy decreases.
Absorption and Leasing Activity
> The first quarter of 2016 lacked a signature large lease signing as smaller transactions fueled leasing activity throughout all classes. > The Financial District and South Park recorded negative absorption for the quarter, with tenants rightsizing or moving out of the market. Headlining these movements was law firm Milbank, Tweed, Hadley & McCloy completing their move from 601 S. Figueroa St. to Century City. > The majority of prominent move-ins occurred in Bunker Hill with AECOM and Nixon Peabody moving into 300 S. Grand Ave. and Doubleline Capital expanding by 12,100 SF at 333 S. Grand Ave. > Forecast: Shifts in workplace deisgn have contributed to tenants downsizing from the larger footprints of their previous leases. This has the potential to lower demand as more tenants are needed to match the “rightsizing” trend.
Rental Rates
> The overall average asking rate for direct space increased year-over-year by 4.3%, despite vacancy continuing to hover around 17.5-18.0%. > Class B and C properties saw the most substantial rental increases of $0.98 and $1.48 respectively, with landlords becoming more bullish as the market continues to tighten.
30%
$38
$ PSF FSG PER ANNUM (WEIGHTED)
> Forecast: Vacancy is expected to slowly decrease as demand from tenants surpasses new construction deliveries.
$39
$37
25%
$36 $35
20%
$34 $33
15%
$32 $31 $30
10% 1Q12
1Q13
1Q14
1Q15
1Q16
Net Absorption by Submarket | DTLA Office Market Q1 ’16 250,000
228,700
200,000 150,000 100,000
SF
> Bunker Hill saw the largest drop in vacancy as strong leasing activity throughout 2015 manifested as positive absorption in the first quarter.
VACANCY
% VACANT (TOTAL)
Vacancy
Q1 2016
47,300
50,000 0 (28,900)
(50,000) (100,000)
(111,500)
(150,000) BUNKER HILL
SOUTH PARK
GREATER DOWNTOWN
FINANCIAL DISTRICT
Historical Leasing Activity | DTLA Office Market Q1 ‘12-‘16
> Rents in trophy properties have pushed closer to $30.00 PSF FSG as landlords have marketed a combination of Class A amenities and creative buildouts to prospective tenants.
900,000 800,000
> Forecast: Rents are expected to rise in future quarters. Tenants who signed leases 5 years ago can expect their rent to increase roughly 15% on renewal.
700,000 600,000
SF
500,000 400,000 300,000 200,000 100,000 0 1Q12
2
1Q13
1Q14
1Q15
1Q16
DTLA | OFFICE
> Several projects in the Arts District constitute the majority of new construction. The Ford Factory (271,000 SF), 4th & Traction (150,000 SF) and the first phase of RowDTLA (415,900 SF) are all competing for the first major creative or tech lease in the much-hyped area. > 425 W. 11th St. delivered as an owner/user property fully occupied by AEG. 221 N. Figueroa St., which came out of renovations, will be a City of Los Angeles owner/user property going forward. > Forecast: Future construction will provide an abundance of high quality creative space to the market, as Downtown Los Angeles accounts for 39% of all new construction in Los Angeles County. Its effect on vacancy will depend on when a tenant ventures outside of the traditional borders of the CBD and the subsequent influx of tenants who follow.
Historical Net Absorption & Construction Completions DTLA Office Market Q1 ‘12-’16
NET ABSORPTION
150,000 100,000 50,000 0 (50,000) (100,000) (150,000) (200,000) (250,000) 1Q12
> Forecast: Capitalization rates are expected to continue to compress while sale prices rise as Los Angeles County remains an apparent safe haven for foreign and domestic money. Minimal interest rate increases will also spur investment activity throughout the year.
1Q14
1Q15
1Q16
DTLA Office Market Q1 ‘12-’16
Average Price PSF
> Investment activity for properties over 25,000 SF rose in the first quarter, recording $128.5 million in volume over 1 transaction, up from $113.6 million last quarter.
> Several properties in Downtown Los Angeles are currently on market or will be by year-end if they have not already sold as off-market transactions.
1Q13
Investment Trends Chart
Investment Trends
Cap Rate
$400.00
9
$350.00
8 7
$300.00
6
$250.00
$/PSF
> Lincoln Property Company, along with Rockwood Capital, reacquired 915 Wilshire Blvd. for $128.5 million ($329 PSF). Lincoln originally sold the property to Brickman Associates in 2007 for $117.0 million.
CONSTRUCTION COMPLETIONS
200,000
5 $200.00 4 $150.00
3
$100.00
2
$50.00
1
$-
0 2010
2011
2012
2013
2014
2015
2016
Unemployment Rate | U.S., CA & Los Angeles County | Feb. 2016 5.8%
Outlook
Even though vacancy in Downtown Los Angeles stands at 17.5%, the rental rate increases of the past year indicate the perception of a tightening market. High rents in trophy buildings are having a trickle down effect as landlords of Class B and C properties have become more agressive in raising their rents proportionally. While tenant demand has been steady in the past, continued rightsizing from existing tenants and the influx of potentially vacant creative properties on the CBD fringe could temper any major vacancy gains. 3
5.6%
5.6%
5.5%
5.4% 5.2% 5.0%
4.9%
4.8% 4.6% 4.4% United States
California
Los Angeles County
Cap Rate
> New construction projects remain concentrated in the Greater Downtown submarket, with only the office component (356,100 SF) at Korean Air’s Wilshire Grand project slated to deliver in the Financial District.
SF
Construction
Q1 2016
DTLA | OFFICE
Q1 2016
Market Description
Submarket Map
Downtown LA is a moderately large office market comprised of 32.3 million SF, representing 11% of the total office space over 25,000 SF in the LA Basin. Approximately 52% of the space in this market was built prior to 1980, and is considered relatively old by Southern California standards. Downtown Los Angeles is the most dense market in the region with only one percent of the space contained within low-rise buildings, while 24% and 75% of the space are in mid-rise and high-rise structures, respectively. Downtown includes a large concentration of firms from the legal, utilities, accounting and financial services sectors, and is home to many federal, state, and local government agencies as well.
RECENT TRANSACTIONS & MAJOR DEVELOPMENTS Downtown Los Angeles Office Market Q1 2016
SALES ACTIVITY PROPERTY ADDRESS
SIZE SF
SALE PRICE
PRICE PSF
BUYER
SELLER
915 Wilshire Blvd., Los Angeles
390,300 SF
$128,450,000
$329 PSF
Lincoln Property/Rockwood Capital
Brickman Associates
PROPERTY ADDRESS
LEASED SF
LEASE TYPE
BLDG TYPE
LESSEE
LESSOR
515 S. Flower St., Los Angeles
50,000 SF
Renewal/Expansion
A
RSM McGladrey
CommonWealth Partners, LLC
811 Wilshire Blvd., Los Angeles
37,300 SF
Direct-New
A
GSA
Jamison Services
777 S. Figueroa St., Los Angeles
10,700 SF
Sublease
A
Centerstone SBA Lending
March & McLennan Co.
1055 Wilshire Blvd., Los Angeles
7,400 SF
Direct-New
A
Picrow, Inc.
Jamison Services
633 W. 5th St., Los Angeles
6,200 SF
Direct-New
A
Thorofare Capital
OUE
PROJECT
DEVELOPER
SIZE SF
SUBMARKET
STATUS
ESTIMATED COMPLETION
767 S. Alameda St., Los Angeles
Atlas Capital Group, LLC
415,900 SF
Greater Downtown
Under Renovation
Q2 2016
900 Wilshire Blvd., Los Angeles
Hanjin International Corp
356,100 SF
Financial District
Under Construction
Q2 2017
2060 E. 7th St., Los Angeles
Shorenstein Properties, LLC
271,000 SF
Greater Downtown
Under Renovation
Q2 2016
963 E. 4th St., Los Angeles
Atlas Capital Group, LLC
150,000 SF
Greater Downtown
Under Renovation
Q2 2016
353 S. Broadway, Los Angeles
Flatiron Development Co LLC
29,700 SF
Greater Downtown
Under Renovation
Q2 2016
801 S. Broadway, Los Angeles
Waterbridge Capital LLC
500,000 SF
Greater Downtown
Proposed
TBD
LEASING ACTIVITY
MAJOR DEVELOPMENTS
4
DTLA | OFFICE
Q1 2016
oFFICE OVERVIEW
Downtown Los Angeles Office Market Q1 2016 EXISTING PROPERTIES Submarket/ Class
Bldgs
VACANCY
Total Inventory SF
Direct Vacancy
Sublease Vacancy
Total Vacancy
ACTIVITY
ABSORPTION
Leasing Total Leasing Activity Vacancy Activity YTD Current Qtr Prior Qtr SF SF
Net Absorption Current Qtr SF
CONSTRUCTION
RENTS
Net Absorption YTD SF
Completions Current Qtr SF
Under Construction SF
Weighted Avg Asking Lease Rate
$41.49
FINANCIAL DISTRICT A
9
9,732,700
15.0%
0.5%
15.5%
15.1%
132,900
132,900
(38,900)
(38,900)
0
356,100
B
25
8,388,400
19.2%
0.2%
19.4%
18.6%
231,500
231,500
(64,300)
(64,300)
0
0
$37.01
C
2
326,400
23.4%
0.0%
23.4%
20.9%
4,300
4,300
(8,300)
(8,300)
0
0
$29.44
Subtotal
36
18,447,500
17.1%
0.3%
17.4%
16.8%
368,700
368,700
(111,500)
(111,500)
0
356,100
$38.91
A
6
7,221,100
18.3%
1.1%
19.4%
22.6%
58,600
58,600
228,500
228,500
0
0
$40.84
B
4
537,800
12.8%
0.0%
12.8%
12.8%
0
0
0
0
0
0
$39.00
BUNKER HILL
C
1
370,200
34.1%
0.0%
34.1%
34.2%
18,000
18,000
200
200
0
0
$27.93
Subtotal
11
8,129,100
18.7%
1.0%
19.7%
22.5%
76,600
76,600
228,700
228,700
0
0
$39.68
SOUTH PARK A
2
1,144,200
10.0%
0.0%
10.0%
9.6%
2,000
2,000
(4,500)
(4,500)
0
0
$38.25
B
7
1,850,500
22.6%
0.0%
22.6%
21.8%
59,300
59,300
(15,600)
(15,600)
0
0
$34.73
C
2
266,400
20.3%
0.6%
21.0%
17.6%
1,200
1,200
(8,800)
(8,800)
0
0
$31.61
Subtotal
11
3,261,100
18.0%
0.1%
18.1%
17.2%
62,500
62,500
(28,900)
(28,900)
0
0
$35.13
$33.62
GREATER DOWNTOWN B
6
1,828,500
7.3%
0.8%
8.1%
10.7%
17,100
17,100
46,500
46,500
0
866,600
C
8
592,300
17.7%
0.0%
17.7%
17.8%
6,100
6,100
800
800
0
0
$30.61
Subtotal
14
2,420,800
9.9%
0.6%
10.5%
12.4%
23,200
23,200
47,300
47,300
0
866,600
$32.30
MARKET TOTAL A
17
18,098,000
16.0%
0.7%
16.7%
17.7%
193,500
193,500
185,100
185,100
0
356,100
$41.07
B
42
12,605,200
17.7%
0.2%
18.0%
17.7%
307,900
307,900
(33,400)
(33,400)
0
866,600
$36.44
C
13
1,555,300
23.2%
0.1%
23.4%
22.3%
29,600
29,600
(16,100)
(16,100)
0
0
$29.58
Total
72
32,258,500
17.0%
0.5%
17.5%
17.9%
531,000
531,000
135,600
135,600
0
1,222,700
$38.43
Note: revisions to the inventory base were made effective Q1 2016, historical data reported here reflect these revisions and may not match data reported in previous quarters.
5
DTLA | 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
Q1 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
UNITED STATES: Downtown LA Office License No. 01908231 865 S. Figueroa St., Ste. 3500 Los Angeles, CA 90017
HANS MUMPER
Executive Managing Director
CHRIS WONG
Regional Research Analyst Research Services
TEL: +1 213 627 1214 FAX: +1 213 327 3200
CAITLIN MATTESON Research Director Research Services
