Traditional tenants in the finance, insurance and real estate ... design and new construction deliveries could temper de
Research & Forecast Report
DOWNTOWN L.A. | OFFICE Q1 2017
Accelerating success.
>> Vacancy Rises With New Deliveries Key Takeaways
> After seven consecutive quarters of declining or unchanged vacancy, the overall vacancy rate rose in first quarter of 2017, recording at 19.8% for the quarter. > Net absorption fell from last quarter’s total of -16,000 square feet (SF), ending at -157,200 SF. > The overall asking rental rate climbed by $0.02 to $38.51 per square foot (PSF) Full Service Gross (FSG), marking a 0.2% increase since the first quarter of 2016. > Midsized to small leases dominated velocity in both the Financial District and South Park submarkets. Leasing activity totaled 641,300 SF for the quarter. > No properties traded hands in first quarter, but investment activity in 2017 will not be muted with several buildings either under contract or on the market.
Downtown Los Angeles Office Market
In first quarter 2017, the Downtown Los Angeles office market recorded negative absorption for the second straight quarter. The delivery of 2 vacant office buildings contributed to the uptick in vacancy. Leasing volume recorded 641,300 SF. Asking rents continued to climb, recording growth of 0.2% year-overyear. While positive, growth was flatter than the previous 3 quarters, which saw growth rates of 1.5%, 1.9% and 1.4% respectively. Traditional tenants in the finance, insurance and real estate (FIRE) industries continue to dominate the tenant base in the market, although these sectors have seen a fair amount of rightsizing. This, combined with a wave of deliveries in the next year, will put pressure on the market as more space becomes vacant.
Market Indicators | Relative to prior period Q1 2017
Forecast
Vacancy Net Absorption Construction Rental Rate
Summary Statistics | DTLA, Q1 2017 Vacancy Rate
Class A
Class B
All Classes
15.6%
25.2%
19.8%
+30
+330
+160
-54.4
-88.2
-14.6
Change from Q4 ‘16 (Basis Points)
Net Absorption* Construction Completions* Under Construction*
0.0
446.2
446.2
356.1
1,702.9
2,059.0
*SF, Thousands
Asking Rents | DTLA, Q1 2017 Average Asking Rent Change from Q4 ‘16 ($)
Y.O.Y. Change (%)
Class A
Class B
Class C
All Classes
$41.81
$36.32
$32.99
$38.51
+$0.41
-$0.32
+$2.64
+$0.02
1.8%
-0.3%
11.5%
0.2%
Labor Force | Los Angeles County, February 2017 Total Nonfarm
Prof. & Business Services
Financial Activities
12-mo Employment Growth (%)
1.6%
1.5%
1.3%
12-mo Actual Employment Change
70,800
9,000
2,800
DTLA | OFFICE
> Vacancy in both Bunker Hill and the Financial District rose by 90 and 60 basis points, respectively. These were primarily due to re-tenanting and relocations/downsizes. > The Greater Downtown/Arts District vacancy rate rose disproportionately from absorption due to the addition of 2 vacant office buildings to the market: 767 S. Alameda St. and 537 S. Broadway. > 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 Q1 ‘13-’17 RENTS
$39
$37
> Bunker Hill demand recorded -76,800 SF, as Munger Tolles completed its relocation to 350 S. Grand Ave, and thereby downsizing by 35,000 SF from 355 S. Grand Ave. > Forecast: A concentrated focus on efficient workplace design and new construction deliveries could temper demand from future out of market relocations to Downtown.
25%
$36 $35
20%
$34 $33
15%
$32 $31 $30
10% 1Q13
1Q14
60,000
1Q17
47,800
40,000 20,000 0 (20,000) (21,400) (40,000) (60,000) (80,000)
(76,800)
(100,000) (106,800) GREATER DOWNTOWN
Rental Rates
FINANCIAL DISTRICT
SOUTH PARK
BUNKER HILL
Historical Leasing Activity | DTLA Office Market Q1 ‘13-‘17
> Asking rental rates increased for Class A and C properties, with Class B seeing rents slide to $36.32 PSF FSG.
1,000,000
> While rental growth has remained positive in Downtown Los Angeles, there has been a tapering of gains compared to past years.
900,000 800,000 700,000 600,000
SF
> Forecast: Rents are expected to flatten through 2017 with some minor positive/negative fluctuations. However, if vacancy stagnates or rises considerably, rents have the potential to slide.
1Q16
Net Absorption by Submarket | DTLA Office Market Q1 ’17
(120,000)
> The overall average asking rate for direct space increased year-over-year by 0.2%, although growth fell from 1.4% a quarter ago.
1Q15
SF
> South Park (47,800 SF) recorded positive net absorption on strength of move-ins by Lynberg Watkins (19,100 SF) and Simpson Gumperts & Heger (14,800 SF) at 1150 S. Olive St.
30%
$38
Absorption and Leasing Activity
> Midsized and small leases dominated leasing activity for the quarter. Among the major deals were TJ Maxx parent company TJX renewing for 43,100 SF at 888 S. Figueroa St., GSA signing a 36,000 SF lease at Gas Company Tower and Tokio Marine consolidating with recently acquired company HCC at 801 S. Figueroa St. in 32,200 SF of space.
VACANCY
% VACANT (TOTAL)
> Direct vacancy for the quarter was 19.2%, while sublease vacancy recorded at 0.6%.
$ PSF FSG PER ANNUM (WEIGHTED)
Vacancy
Q1 2017
500,000 400,000 300,000 200,000 100,000 0 1Q13
2
1Q14
1Q15
1Q16
1Q17
DTLA | OFFICE
> 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. > The first phase of RowDTLA at 767 S. Alameda St. and 537 S. Broadway delivered vacant to the market, adding a total of 446,200 SF to Greater Downtown/Arts District. > Forecast: Future construction will provide an abundance of high quality creative space to the market, as Downtown Los Angeles accounts for 51% of all new construction in Los Angeles County. Its effect on vacancy will depend on delivery timing and preleasing efforts of landlords.
Historical Net Absorption & Construction Completions DTLA Office Market Q1 ‘13-’17
NET ABSORPTION
CONSTRUCTION COMPLETIONS
200,000 150,000 100,000
SF
Construction
Q1 2017
50,000 0 (50,000) (100,000) (150,000) (200,000) 1Q13
> No properties over 25,000 SF traded in first quarter. > Investment activity in 2017 is forthcoming, as 811 W. 7th St. and 300 S. Grand Ave. are currently under contract. In addition, 355 S. Grand Ave. and 445 S. Figueroa St. are on the market, figuring prominently in activity for the latter half of 2017.
1Q14
1Q15
1Q16
1Q17
Investment Trends Chart DTLA Office Market ‘11-’17
Average Price PSF
> Forecast: Capitalization rates are expected to continue compressing while sale prices rise as Los Angeles County remains an favorable investment environment for foreign and domestic capital.
Cap Rate
$400.00
9
$350.00
8 7
$300.00
6
Outlook
Downtown Los Angeles market vacancy is expected to rise. Continued rightsizing and the delivery of speculative office space both in and on the fringe of the CBD will potentially outweigh interest from out of market tenants. Despite this, asking rental rates will remain stable as landlords and investors exercise cautious optimism about the local economy and real estate fundamentals for the time being. Investment activity will gain momentum through 2017 as properties under escrow close and few remain on the market.
$/PSF
$250.00
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 | February 2017 5.1%
5.0%
5.0% 5.0% 4.9% 4.9%
4.8%
4.8% 4.8% 4.7%
4.7%
4.7% 4.6% 4.6% United States
3
California
Los Angeles County
Cap Rate
Investment Trends
DTLA | OFFICE
Q1 2017
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 Q1 2017
SALES ACTIVITY PROPERTY ADDRESS
SIZE SF
SALE PRICE
PRICE PSF
BUYER
SELLER
PROPERTY ADDRESS
LEASED SF
LEASE TYPE
BLDG TYPE
LESSEE
LESSOR
888 S. Figueroa St., Los Angeles
43,100 SF
Renewal
B
TJX
JADE Enterprises
555 W. 5th St., Los Angeles
36,000 SF
Direct-New
A
GSA
Brookfield
801 S. Figueroa St., Los Angeles
32,200 SF
Direct-New
A
Tokio Marine HCC
Barings Real Estate Advisers LLC
555-581 Mateo St., Los Angeles
26,600 SF
Direct-New
B
Soylent
ASB Capital Management
725 S. Figueroa St., Los Angeles
23,400 SF
Renewal
A
JLT Worldwide Facilities
Brookfield
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
757 S. Alameda St., Los Angeles
Atlas Capital Group, LLC
425,100 SF
Greater Downtown
Under Construction
Q1 2018
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
257,000 SF
Greater Downtown
Under Renovation
Q3 2017
555-581 Mateo St., Los Angeles
Blatteis & Schnur
183,560 SF
Greater Downtown
Under Construction
Q2 2017
963 E 4th St, Los Angeles
Atlas Capital Group, LLC
130,000 SF
Greater Downtown
Under Renovation
Q2 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
91,200 SF
Greater Downtown
Under Construction
Q4 2017
747 S. Alameda St., Los Angeles
Atlas Capital Group, LLC
389,6700 SF
Greater Downtown
Proposed
TBD
LEASING ACTIVITY
MAJOR DEVELOPMENTS
4
DTLA | OFFICE
Q1 2017
oFFICE OVERVIEW
Downtown Los Angeles Office Market Q1 2017 EXISTING PROPERTIES Submarket/ Class
Bldgs
Total Inventory SF
VACANCY 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
Net Absorption YTD SF
Completions Current Qtr SF
Under Construction SF
RENTS Weighted Avg Asking Lease Rate
FINANCIAL DISTRICT A
9
9,732,700
14.4%
0.3%
14.7%
15.2%
190,100
190,100
52,600
52,600
0
356,100
$42.34
B
25
8,365,200
27.8%
0.7%
28.5%
26.6%
113,000
113,000
(158,700)
(158,700)
0
0
$36.84
C
2
326,400
19.3%
1.8%
21.2%
21.0%
1,900
1,900
(700)
(700)
0
0
$30.59
Subtotal
36
18,424,300
20.6%
0.5%
21.1%
20.5%
305,000
305,000
(106,800)
(106,800)
0
356,100
$38.77
A
6
7,221,100
16.8%
1.1%
17.9%
16.6%
130,400
130,400
(94,100)
(94,100)
0
0
$41.44
B
4
537,800
10.9%
0.0%
10.9%
10.9%
0
0
0
0
0
0
$40.06
BUNKER HILL
C
1
370,200
27.1%
0.0%
27.1%
31.7%
0
0
17,300
17,300
0
0
$32.00
Subtotal
11
8,129,100
16.8%
1.0%
17.8%
16.9%
130,400
130,400
(76,800)
(76,800)
0
0
$40.69
$38.55
SOUTH PARK A
2
1,144,200
8.2%
0.6%
8.8%
7.7%
64,200
64,200
(12,900)
(12,900)
0
0
B
7
1,850,500
15.1%
0.0%
15.1%
18.0%
52,200
52,200
54,400
54,400
0
0
$36.33
C
2
266,400
10.0%
1.5%
11.4%
13.8%
15,100
15,100
6,300
6,300
0
0
$33.24
Subtotal
11
3,261,100
12.3%
0.3%
12.6%
14.0%
131,500
131,500
47,800
47,800
0
0
$36.65
$33.83
GREATER DOWNTOWN / ARTS DISTRICT B
8
2,333,900
24.7%
0.0%
24.7%
7.8%
41,400
41,400
16,100
16,100
446,200
1,656,900
C
8
592,300
23.5%
3.2%
26.7%
20.4%
6,400
6,400
(37,500)
(37,500)
0
0
$34.73
Subtotal
16
2,926,200
24.5%
0.6%
25.1%
10.8%
47,800
47,800
(21,400)
(21,400)
0
1,656,900
$34.01
A
17
18,098,000
14.9%
0.7%
15.6%
15.3%
384,700
384,700
(54,400)
(54,400)
0
356,100
$41.81
B
44
13,087,400
24.7%
0.4%
25.2%
21.9%
206,600
206,600
(88,200)
(88,200)
446,200
1,656,900
$36.32
MARKET TOTAL
C
13
1,555,300
21.2%
1.8%
23.0%
22.1%
23,400
23,400
(14,600)
(14,600)
0
0
$32.99
Total
74
32,740,700
19.2%
0.6%
19.8%
18.2%
614,700
614,700
(157,200)
(157,200)
446,200
2,013,000
$38.51
Note: revisions to the inventory base were made effective Q1 2017, 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 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 License No. 01908231 865 S. Figueroa St., Ste. 3500 Los Angeles, CA 90017
HANS MUMPER
Executive Managing Director Greater Los Angeles
CHRIS WONG
Regional Research Analyst Research Services
TEL: +1 213 627 1214 FAX: +1 213 327 3200
CAITLIN MATTESON Research Director Research Services
