In third quarter 2016, the Downtown Los Angeles office mar- ... Business. Services. Financial. Activities. 12-mo Employm
Research & Forecast Report
DOWNTOWN L.A. | OFFICE Q3 2016
Accelerating success.
>> Vacancy Continues to Decline While Rents Rise Key Takeaways
> Vacancy continued its gradual descent for the sixth straight quarter, recording at 18.2%, down 10 basis points from the previous quarter. > Net absorption fell from last quarter’s total of 108,500 square feet (SF) but remained positive at 45,000 SF. > The overall asking rental rate slightly increased by $0.02 to $38.43 per square foot (PSF) Full Service Gross (FSG), marking a 1.9% increase since the third quarter of 2015. > Midsize leases once again dominated velocity in both Class A and B product type. Leasing activity totaled 548,100 SF for the quarter. > Several properties traded hands in third quarter, highlighted by the LA Times building located at 202 W. 1st St. selling for $140 PSF from Tribune Media Company to Canadian investor/ developer Onni Group.
Market Indicators | Relative to prior period Q3 2016
Forecast
Vacancy Net Absorption Construction Rental Rate
Summary Statistics | DTLA, Q3 2016 Vacancy Rate
Class A
Class B
All Classes
15.4%
21.5%
18.2%
-20
-20
-10
22.4
20.3
45.0
Change from Q2 ‘16 (Basis Points)
Net Absorption* Construction Completions* Under Construction*
0.0
0.0
0.0
356.1
1,634.5
1,990.6
*SF, Thousands
Downtown Los Angeles Office Market
In third quarter 2016, the Downtown Los Angeles office market continued to see positive momentum. While the overall market recorded positive absorption, the Financial District submarket contributed the majority of negative demand due to Millbank Tweed, LLP’s relocation to Century City. However, leasing velocity recorded 548,100 SF, as a number of out-ofmarket tenants agreed to relocate to downtown, which bodes well for future demand. Asking rents continued to climb, recording growth of 1.9% year-over-year. Traditional tenants in the finance, insurance and real estate (FIRE) industries continue to dominate the tenant base in the market, although these sectors have seen a fair amount of rightsizing. As new construction deliveries in the Greater Downtown/Arts District are forthcoming shortly, the possibility of a large creative/tech/media tenant landing in one of those new properties will help solidify that submarket’s validity as a tenant destination.
Asking Rents | DTLA, Q3 2016 Average Asking Rent Change from Q2 ‘16
($)
Y.O.Y. Change (%)
Class A
Class B
Class C
All Classes
$41.30
$36.60
$30.35
$38.43
$0.25
-$0.07
$0.72
$0.02
1.2%
5.5%
6.3%
1.9%
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
DTLA | OFFICE
> Both Bunker Hill and South Park saw drops in vacancy, while vacancy in the Financial District increased by 70 basis points due to Millbank Tweed, LLP vacating approximately 80,000 SF as they completed their move from 601 S. Figueroa St. to Century City. > Renewals and relocations within the market helped contribute to lower vacancy deltas in third quarter compared to last quarter. > Forecast: Vacancy is expected to increase as new construction deliveries in both the Financial District and Greater Downtown/Arts District submarkets have the potential to surpass demand from tenants.
Historical Vacancy v. Rents | DTLA Office Market Q3 ‘12-’16 RENTS
VACANCY
$39
30%
$38 $37
25%
$36 $35
20%
$34 $33
% VACANT (TOTAL)
> Direct vacancy for the quarter was 17.6%, while sublease vacancy recorded at 0.5%.
$ PSF FSG PER ANNUM (WEIGHTED)
Vacancy
Q3 2016
15%
$32 $31 $30
10% 2Q12
2Q13
2Q14
2Q15
2Q16
Absorption and Leasing Activity
> The Financial District and Greater Downtown/Arts District recorded negative absorption with -123,700 SF and -4,200 SF respectively. Bunker Hill (119,900 SF) and South Park (53,000 SF) recorded positive net absorption at for the quarter. > The majority of prominent move-ins occurred in South Park and Bunker Hill with Allen Matkins moving into 49,500 SF at 865 S. Figueroa St. and LTL Attorneys occupying 24,600 SF of sublease space at 300 S. Grand Ave. > Forecast: Shifts in workplace design has led to tenants downsizing from their previous footprints, causing lower demand as more tenants are needed to offset the “rightsizing” trend.
Rental Rates
Net Absorption by Submarket | DTLA Office Market Q3 ’16 150,000 119,900 100,000
0 (4,200) (50,000)
(100,000)
GREATER DOWNTOWN
2
FINANCIAL DISTRICT
SOUTH PARK
BUNKER HILL
Historical Leasing Activity | DTLA Office Market Q3 ‘12-‘16 900,000 800,000 700,000
> Asking rental rates increased across all classes with Class properties seeing the largest increase of $0.25 PSF.
> Forecast: Rents are largely expected to remain flat with some minor positive/negative fluctuations. More generous concessions might help offset a lack of aggressiveness in asking rents and help keep occupancy levels high.
(123,700)
(150,000)
> The overall average asking rate for direct space increased year-over-year by 1.9% as vacancy continues to hover around 17.7-18.3%.
600,000 500,000
SF
> Rents in trophy properties have pushed closer to $40.00 PSF FSG as landlords have marketed a combination of Class A amenities and creative build-outs to prospective tenants.
53,000
50,000
SF
> The market saw some traction as out-of-market tenants signed leases this quarter. American Realty Advisors agreed to relocate from Glendale to 39,300 SF at 515 S. Flower St. Additionally, Real Office Centers signed a new lease at ROW DTLA for 27,000 SF and invite website Evite, Inc. jumped from West Hollywood into 18,900 SF at 600 Wilshire Blvd.
400,000 300,000 200,000 100,000 0 3Q12
3Q13
3Q14
3Q15
3Q16
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. > Forecast: Future construction will provide an abundance of high quality creative space to the market, as Downtown Los Angeles accounts for 48% of all new construction in Los Angeles County. Its effect on vacancy will depend on delivery timing and when a tenant ventures outside of the traditional borders of the CBD.
Investment Trends
> Investment activity for properties over 25,000 SF decreased in third quarter, recording $191.0 million in volume, up from $969.0 million last quarter.
Historical Net Absorption & Construction Completions DTLA Office Market Q3 ‘12-’16
NET ABSORPTION
150,000 100,000 50,000 0 (50,000) (100,000) (150,000) (200,000) (250,000) 3Q12
> 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 investment. The last quarter of 2016 will see some activity as 444 S. Flower St. is under contract to Coretrust Partners.
Outlook
The Downtown Los Angeles market activity is expected to remain on a steady path as vacancy is projected to remain relatively flat through the end of 2016. 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. Asking rental rates will remain stable as landlords aim to hold high occupancy rates by offering large concession packages.
3Q13
3Q14
3Q15
3Q16
Investment Trends Chart DTLA Office Market ‘10-’16
Average Price PSF
> Onni Group continued on its acquisition spree in the market, picking up the LA Times complex from Tribune Media Co. for $105 million. The developer plans to convert the property into a mixed use development, replete with creative office and retail.
Cap Rate
$400.00
9
$350.00
8 7
$300.00
6
$250.00
$/PSF
> 888 W. Sixth sold from the Somerset Group to a local private investment firm. The 109,300 SF property sold for $54.2 million dollars, or $495 PSF.
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 | August 2016 5.6%
5.5%
5.5% 5.4% 5.3% 5.2% 5.1% 5.0% 4.9%
4.9%
4.9%
4.8% 4.7% 4.6% 4.5% United States
3
California
Los Angeles County
Cap Rate
> New construction projects remain concentrated in the Greater Downtown/Arts District 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
Q3 2016
DTLA | OFFICE
Q3 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 ver 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 densest 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 highrise 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 Q3 2016
SALES ACTIVITY PROPERTY ADDRESS
SIZE SF
SALE PRICE
PRICE PSF
BUYER
SELLER
202 W. 1st St., Los Angeles
750,000 SF
$105,000,000
$140 PSF
Onni Group
Tribune Media Company
888 W. 6th St., Los Angeles
109,300 SF
$54,200,000
$457 PSF
Copperfield Investments
The Somerset Group
755 S. Los Angeles St., Los Angeles
81,200 SF
$17,550,000
$216 PSF
Urban Offerings
Safir LLC
200 S. San Pedro St., Los Angeles
39,800 SF
$14,250,000
$358 PSF
Tokyo East LLC
Pedro LLC
PROPERTY ADDRESS
LEASED SF
LEASE TYPE
BLDG TYPE
LESSEE
LESSOR
515 S. Flower St., Los Angeles
39,300 SF
Direct-New
A
American Realty Advisors
Commonwealth Partners
777 S. Alameda St., Los Angeles
27,000 SF
Direct-New
B
Real Office Centers
Atlas Capital Group
300 S. Grand Ave., Los Angeles
24,600 SF
Sublease
A
LTL Attorneys
Dentons LLP
523 W. 6th St., Los Angeles
22,900 SF
Direct-New
A
K-Swiss
Callahan Capital
1055 W. 7th St., Los Angeles
20,500 SF
Renewal
B
Harrington, Foxx
Jamison Services
PROJECT
DEVELOPER
SIZE SF
SUBMARKET
STATUS
ESTIMATED COMPLETION
801 S Broadway, Los Angeles
Waterbridge Capital LLC
500,000 SF
Greater Downtown
Under Construction
Q3 2017
767 S. Alameda St., Los Angeles
Atlas Capital Group, LLC
415,900 SF
Greater Downtown
Under Renovation
Q4 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
254,000 SF
Greater Downtown
Under Renovation
Q4 2016
963 E 4th St, Los Angeles
Atlas Capital Group, LLC
150,000 SF
Greater Downtown
Under Renovation
Q4 2016
555-581 Mateo St., Los Angeles
Blatteis & Schnur
53,400 SF
Greater Downtown
Under Construction
Q4 2016
537 S. Broadway, Los Angeles
Markwood Enterprises
49,500 SF
Greater Downtown
Under Renovation
Q1 2017
1111 S. Broadway, Los Angeles
Broadway Eleventh Owners LLC 116,000 SF
Greater Downtown
Under Renovation
Q4 2017
500 S. Santa Fe Ave., Los Angeles
Chalmers-Santa Fe LLC
95,700 SF
Greater Downtown
Under Construction
Q1 2018
747-757 S. Alameda St., Los Angeles
Atlas Capital Group, LLC
814,700 SF
Greater Downtown
Proposed
TBD
LEASING ACTIVITY
MAJOR DEVELOPMENTS
4
DTLA | OFFICE
Q3 2016
oFFICE OVERVIEW
Downtown Los Angeles Office Market Q3 2016 EXISTING PROPERTIES Submarket/ Class
Bldgs
Total Inventory SF
VACANCY Direct Vacancy
Sublease Vacancy
Total Vacancy
ACTIVITY Leasing Total Leasing Activity Vacancy Activity YTD Current Qtr Prior Qtr SF SF
ABSORPTION Net Absorption Current Qtr SF
Net Absorption YTD SF
CONSTRUCTION Completions Current Qtr SF
Under Construction SF
RENTS Weighted Avg Asking Lease Rate
FINANCIAL DISTRICT A
9
9,732,700
14.4%
0.4%
14.7%
13.7%
172,000
360,600
(101,000)
37,200
0
356,100
$41.51
B
25
8,365,200
25.5%
0.4%
25.8%
25.5%
182,100
448,900
(30,200)
(246,800)
0
0
$37.00
C
2
326,400
20.5%
0.0%
20.5%
22.8%
12,300
18,400
7,500
1,400
0
0
$30.78
Subtotal
36
18,424,300
19.5%
0.4%
19.9%
19.2%
366,400
827,900
(123,700)
(208,200)
0
356,100
$38.64
A
6
7,221,100
16.2%
1.1%
17.3%
18.9%
62,700
217,700
116,000
380,000
0
0
$41.31
B
4
537,800
12.3%
0.0%
12.3%
13.0%
0
6,500
3,900
2,500
0
0
$39.00
BUNKER HILL
C
1
370,200
31.7%
0.0%
31.7%
31.7%
0
18,000
0
9,100
0
0
$27.93
Subtotal
11
8,129,100
16.7%
1.0%
17.7%
19.1%
62,700
242,200
119,900
391,600
0
0
$40.04
$38.45
SOUTH PARK A
2
1,144,200
9.6%
0.0%
9.6%
10.2%
17,400
38,600
7,400
200
0
0
B
7
1,850,500
17.7%
0.0%
17.7%
20.1%
13,700
191,700
43,100
74,700
0
0
$35.31
C
2
266,400
21.2%
0.6%
21.9%
22.8%
26,800
29,900
2,500
(11,300)
0
0
$31.62
Subtotal
11
3,261,100
15.2%
0.1%
15.2%
16.8%
57,900
260,200
53,000
63,600
0
0
$35.58
GREATER DOWNTOWN / ARTS DISTRICT B
6
1,828,500
7.4%
0.9%
8.3%
8.5%
61,100
100,400
3,500
43,800
0
1,634,500
$32.22
C
8
592,300
18.1%
0.0%
18.1%
16.8%
0
22,000
(7,700)
(1,700)
0
0
$32.05
Subtotal
14
2,420,800
10.0%
0.7%
10.7%
10.5%
61,100
122,400
(4,200)
42,100
0
1,634,500
$32.14
MARKET TOTAL A
17
18,098,000
14.8%
0.6%
15.4%
15.6%
252,100
616,900
22,400
417,400
0
356,100
$41.30
B
42
12,582,000
21.1%
0.4%
21.5%
21.7%
256,900
747,500
20,300
(125,800)
0
1,634,500
$36.60
C
13
1,555,300
22.4%
0.1%
22.5%
22.6%
39,100
88,300
2,300
(2,500)
0
0
$30.35
Total
72
32,235,300
17.6%
0.5%
18.2%
18.3%
548,100
1,452,700
45,000
289,100
0
1,990,600
$38.43
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
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
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
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
