Key Takeaways. > Delivery momentum continued in the third quarter as Hud- son Pacific delivered the 92,000 square foo
Research & Forecast Report
Central Los Angeles | OFFICE Q3 2017
Accelerating success.
>> Rents Register Slight Drop in Central Los Angeles Key Takeaways
> Delivery momentum continued in the third quarter as Hudson Pacific delivered the 92,000 square foot (SF) CUE building at 5800 Sunset Blvd. to the market. This leaves 60,500 SF of office product under construction and 811,000 SF of expected proposed construction in the Hollywood submarket. > The average rent for Class A buildings in Central Los Angeles is $3.38 per square foot (PSF) full service gross (FSG), a 2.9% decrease year-over-year. > Vacancy increased 50 basis points from one quarter ago recording 18.5%. > Leasing activity slid from last quarter's 273,300 SF total to record 151,500 SF. > Investment activity consisted of Klaff Realty LP acquiring 1360-1370 N. St. Andrews Pl. for $20.7 million ($321 PSF).
Market Indicators | Relative to prior period Q3 2017
Forecast
Vacancy Net Absorption Construction Rental Rate
Summary Statistics | Central Los Angeles, Q3 2017 Class A
Class B
All Classes
13.9%
22.9%
18.5%
+170
-20
+50
Net Absorption*
-29.3
11.6
-11.4
Construction Completions*
92.0
0.0
92.0
Under Construction*
0.0
60.5
60.5
Vacancy Rate Change from Q2 ‘17 (Basis Points)
*SF, Thousands
Central Los Angeles Office Market
The Central Los Angeles market saw demand taper during the third quarter with vacancy increasing by 50 basis points from last quarter and absorption closing at -11,400 SF for the quarter. There is currently 60,500 SF of office product under construction along with 811,000 SF of additional proposed product scheduled to break ground in 2018. This additional inventory will be attractive to both office tenants seeking new product in a high-image location and creative content producers looking for integrated office/production space in the creative center of Los Angeles. Strong leasing activity in 2016 has kept demand steady through late 2016 and early 2017. Increasing rents reversed for the first time in three years, as rents dipped by $0.01 PSF FSG. Overall rents are still up 3.6% from the same time last year.
Asking Rents | Central Los Angeles, Q3 2017 Class A
Class B
All Classes
$3.38
$2.42
$2.74
-$0.04
-$0.06
-$0.01
-2.9%
8.9%
3.6%
Average Asking Rent Change from Q2 ‘17 ($)
Y.O.Y. Change (%)
Labor Force | Los Angeles County, August 2017 Total Nonfarm
Prof. & Business Services
Financial Activities
12-mo Employment Growth (%)
0.8%
0.8%
0.1%
12-mo Actual Employment Change
37,200
4,900
300
Central Los Angeles | OFFICE
> Mid-Wilshire Class A properties saw the largest delta in vacancy, rising by 180 basis points to 11.9% from 10.1% last quarter. > Vacancy in Hollywood dropped from 16.7% to 14.6% yearto-date. > Forecast: Central Los Angeles should tighten slightly through the end of 2017 as leasing activity in the past yearand-a-half absorbs.
Historical Vacancy v. Rents | Central Los Angeles Market
Q3 ‘13-’17
RENTS
VACANCY
$3.00
24% 22%
$2.50
20% 18%
$2.00 16%
% VACANT (TOTAL)
> Central Los Angeles vacancy increased by 50 basis points to 18.5% in the third quarter. The 290-basis-point decrease year-over-year indicates steady demand for the glut of new construction that has come to market.
$ PSF FSG PER ANNUM (WEIGHTED)
Vacancy
Q3 2017
14%
$1.50
12% $1.00
10% 3Q13
Absorption and Leasing Activity
3Q14
3Q15
3Q16
3Q17
> Absorption for the quarter totaled -11,400 SF. > Among the move-ins that drove demand this quarter was Netflix occupying the entirety of Hudson Pacific's CUE at 5808 Sunset Blvd. (92,000 SF).
Net Absorption by Submarket | Central Los Angeles Market Q3 ’17
60,000
> Leasing activity totaled 152,500 SF for the quarter. Movie trailer design house Buddha Jones signed a 29,400 SF lease at 1741 Ivar Ave. in Hollywood, while Asiana Airlines renewed 11,100 SF at 3530 Wilshire Blvd.
40,000 20,000
SF
> Forecast: With most of Hollywood's larger projects having been delivered, absorption through the rest of 2017 will be hard pressed to match the first half of the year.
45,400
0
(20,000) (40,000)
> The average asking rental rate for the market slid $0.01 from the previous quarter. > This quarter saw the first decrease in rents since the third quarter of 2014 ($1.88 PSF FSG). Since then, rents have increased by 45.7%. > Although rents in Hollywood regressed, the difference in rates between Mid-Wilshire and Hollywood continues to be stark as Mid-Wilshire remains a steady alternative for priceaverse tenants. > Forecast: Rents currently stand 25.1% higher than their pre-recession peak. That, combined with fewer projects in the pipeline, could lead to limited room for rental growth going forward.
(60,000)
(56,800)
(80,000) MID WILSHIRE
HOLLYWOOD
Historical Leasing Activity | Central Los Angeles Market Q3 ‘13 - ‘17
600,000
500,000
400,000
SF
Rental Rates
300,000
200,000
100,000
0 3Q13
2
3Q14
3Q15
3Q16
3Q17
Central Los Angeles | OFFICE
> Central Los Angeles accounts for 3% of all properties under construction in Los Angeles County. The remaining project currently under construction is 7007 Romaine St. (60,500 SF). > Despite CUE's delivery, Hudson Pacific continues to be a player in the Hollywood development market. Construction will begin on EPIC, located at 5901 W. Sunset Blvd. (274,000 SF), in early 2018.
Historical Net Absorption & Construction Completions Central Los Angeles Office Market Q3 ‘13-’17 NET ABSORPTION
400,000 300,000 200,000 100,000 0
> Forecast: Construction deliveries through 2017 will be lower in volume compared to the previous year, but Central Los Angeles continues to be one of the major development centers in the Greater Los Angeles Basin.
Investment Trends
> Investment activity for properties over 25,000 SF registered one property trading for a total of $20.7 million dollars.
(100,000) (200,000) 3Q13
3Q14
3Q15
3Q16
3Q17
Investment Trends Chart
Central Los Angeles Office Market ‘11-’17 AVERAGE PRICE PSF
CAP RATE
$500.00
> Chicago-based Klaff Realty LP acquired 1360-1370 N. St. Andrews Pl. for $321 PSF. The property, which is the buyer's first office asset in California, was sold by Chinese investor GAW Capital Partners, LLC.
7
$450.00 6 $400.00 5
$350.00 $300.00
$/PSF
> Forecast: Investors remain bullish in the Central Los Angeles market, targeting not only Class A trophy buildings, but also value-add and redevelopment opportunities.
CONSTRUCTION COMPLETIONS
500,000
4
$250.00 3
$200.00 $150.00
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. As the current development rush, highlighted by projects from Hudson Pacific, J.H. Snyder and Kilroy, comes to a close, the market will look to its proposed construction pipeline in 2018 and beyond to continue fulfilling demand for high quality creative and headquarter spaces.
2
$100.00 1 $50.00 $-
0 2011
2012
2013
2014
2015
2016
2017
Unemployment Rate | U.S., CA & Los Angeles County | August 2017 5.2%
5.1%
5.0% 4.8%
4.8% 4.6% 4.4%
4.4%
4.2% 4.0%
3
Cap Rate
> Hudson Pacific's CUE at Sunset Bronson (92,000 SF) delivered 115,600 SF to the Hollywood submarket. The property was fully leased and occupied at time of delivery by Netflix.
SF
Construction
Q3 2017
United States
California
Los Angeles County
Central Los Angeles | OFFICE
Q3 2017
Market Description
Central Los Angeles is an office market comprised of 14.1 million SF, representing 6% of 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 2017
SALES ACTIVITY PROPERTY ADDRESS
SIZE SF
SALE PRICE
PRICE PSF
BUYER
SELLER
1360-1370 N. St Andrews Pl., Hollywood
64,400 SF
$20,700,000
$321 PSF
Klaff Realty, LP
GAW Capital Advisors USA, LLC
LEASING ACTIVITY PROPERTY ADDRESS
LEASED SF
LEASE TYPE
BLDG CLASS
LESSEE
LESSOR
1741 Ivar Ave., Hollywood
29,400 SF
Direct-New
B
Buddha Jones
Doubletree LLC
3530 Wilshire Blvd., Los Angeles
11,100 SF
Renewal
A
Asiana Airlines
Jamison Properties
3699 Wilshire Blvd., Los Angeles
3,700 SF
Direct-New
A
Videotech Services
Jamison Properties
SIZE SF
MAJOR DEVELOPMENTS PROJECT
DEVELOPER
SUBMARKET
STATUS
ESTIMATED COMPLETION
7007 Romaine St., Hollywood
1001 N Orange La Llc 60,500 SF
Hollywood
Under Construction
Q4 2017
5901 W. Sunset Blvd., Hollywood
Hudson Pacific
300,000 SF
Hollywood
Proposed
TBD
Crossroads (2 bldgs), Hollywood
Harridge
138,500 SF
Hollywood
Proposed
TBD
1311 N Cahuenga Blvd., Hollywood
Cal Coast
352,000 SF
Hollywood
Proposed
TBD
4
Central Los Angeles | OFFICE
Q3 2017
oFFICE OVERVIEW
Central Los Angeles Office Market Q3 2017 EXISTING PROPERTIES Submarket /Class
Bldgs
Total Inventory SF
VACANCY Direct Vacancy
Sublease Vacancy
ACTIVITY
Total Vacancy
Total Vacancy Prior Qtr
Leasing Leasing Activity Activity YTD Current Qtr SF SF
ABSORPTION Net Absorption Current Qtr SF
CONSTRUCTION
Net Absorption YTD SF
Completions Current Qtr SF
Under Construction
RENTS Weighted Avg Asking Lease Rate
MARKET TOTAL A
36
6,543,300
13.8%
0.1%
13.9%
12.2%
79,100
341,100
(29,300)
512,000
92,000
0
$3.38
B
60
6,939,200
22.7%
0.1%
22.9%
23.1%
61,200
185,200
11,600
(16,400)
0
60,500
$2.42
C
22
1,218,000
18.9%
0.0%
18.9%
19.4%
1,100
10,500
6,300
13,700
0
0
$2.39
Total
118
14,700,500
18.4%
0.1%
18.5%
18.0%
141,400
536,800
(11,400)
509,300
92,000
60,500
$2.74
0.1%
11.9%
10.1%
24,700
127,400
(69,200)
(36,700)
0
0
$2.33 $2.25
MID-WILSHIRE A
16
3,691,900
11.9%
B
39
5,811,800
24.4%
0.1%
24.5%
24.8%
29,600
120,100
12,600
(13,300)
0
0
C
9
693,400
29.3%
0.0%
29.3%
29.3%
1,100
3,000
(200)
(9,200)
0
0
$2.27
Subtotal
64
10,197,100
20.2%
0.1%
20.3%
19.7%
55,400
250,500
(56,800)
(59,200)
0
0
$2.27
A
20
2,851,400
16.4%
0.1%
16.5%
15.2%
54,400
213,700
39,900
548,700
92,000
0
$4.36
B
21
1,127,400
13.9%
0.2%
14.1%
14.0%
31,600
65,100
(1,000)
(3,100)
0
60,500
$3.94
C
13
524,600
5.2%
0.0%
5.2%
6.4%
0
7,500
6,500
22,900
0
0
$3.29
Subtotal
54
4,503,400
14.5%
0.1%
14.6%
13.8%
86,000
286,300
45,400
568,500
92,000
60,500
$4.21
HOLLYWOOD
Note: revisions to the inventory base were made effective Q3 2017, 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, PSF basis. 6
Q3 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.
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: Downtown LA Office TEL: +1 213 627 1214 License No. 01908231 865 S. Figueroa St., Ste. 3500 FAX: +1 213 327 3200 Los Angeles, CA 90017
HANS MUMPER
Executive Managing Director Greater Los Angeles
CHRIS WONG
Regional Research Analyst Research Services
CAITLIN MATTESON Research Director Research Services
