Limited availability and stagnant lease rates slows momentum at year-end

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The Orange County industrial market has been tight throughout most of 2014, a sign that the region is in need of a healthy amount of new construction and development projects. The lack of available product in the market throughout the year has prompted tenants in the market to look elsewhere and brokers to use off-market properties to find space for their clients. The positive trends experienced in 2014, include increased demand for user sales, lower vacancy rates than adjacent markets and dwindling concessions due to the market being constricted and competitive. On a micro level, activity in buildings over 50,000 sq. ft. has slowed throughout the year when compared to smaller buildings. This is primarily a result of tenants downsizing, using technology and new business models to save money. Overall, the market has slowed throughout the year with move-outs during Q4 2014 causing net absorption to be negative for the first time in 14 quarters.

HIGH DEMAND LEADS TO HIGHER SALES PRICES

At year-end, the average asking sale price in Orange County stood at $152.35 per sq. ft., increasing 9% since Q1 2014 when the asking price was $139.36 per sq. ft. Smaller sized buildings, lesser than 50,000 sq. ft., continue to thrive driving sales up with each subsequent transaction. The driving force behind the increased activity can be attributed to low interest rates.

UNEMPLOYMENT CONTINUES TO FALL

The unemployment rate in Orange County continues to fall, standing at 5.0%, down 80 basis points (bps) since January. Year-over-year, Orange County added an additional 15,800 jobs, bringing the total non-farm employment to 1,501,700. According to CBRE EA, Orange County employment has grown by 2.0% and is expected to grow by an additional 2.0% over the next two years.

MOMENTUM SLOWS AT YEAR END

In 2014, the Orange County Industrial market generated over a 1.0 million sq. ft. of positive net absorption. However, in Q4 2014 the market generated 373, 623 sq. ft. of negative net absorption, ending 14 consecutive quarters of positive absorption. The dip in net absorption is due largely to a

combination of businesses downsizing and certain tenants vacating large blocks of space. However, CBRE Econometric Advisors (CBRE EA) predicts that net absorption levels will increase in 2015.

Orange County Industrial, Q4 2014

Limited availability and

stagnant lease rates slows

momentum at year-end

Vacancy Rate

2.7% Net Absorption-374,000 SF Construction502,612 SF Lease Rate$0.68 Unemployment5.0%

Figure 1: Available Space Distribution

41%

14% 27%

18%

North Orange County West Orange County Greater Airport Area South Orange County Source: CBRE Research, Q4 2014

Page 1 – Figure 1: Vacant Space Distribu6on Source: CBRE Research, Q4 2014

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Q4 2014 CBRE Research © 2014 CBRE, Inc. | 2 Figure 2: Unemployment 0 5 10 15 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 OC CA US

Source: U.S. Bureau of Labor Statistics, Q4 2014

Page 2 – Figure 2: Unemployment (%) Source: U.S. Bureau of Labor Sta6s6cs, Q4 2014

Figure 3: Year-Over-Year Job Growth

(1) 0 1 2 3 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014

Source: U.S. Bureau of Labor Statistics, Q4 2014

Page 2 – Figure 3: Year-‐Over-‐Year Job Growth (%) Source: U.S. Bureau of Labor Sta6s6cs, Q4 2014

Figure 4: Asking Lease Rate

$0.35 $0.40 $0.45 $0.50 $0.55 $0.60 $0.65 $0.70 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014

Overall Lease Rate

Source: CBRE Research, Q4 2014

Page 2 – Figure 4: Asking Lease Rate ($PSF/MO/NNN) Source: CBRE Research, Q4 2014

Figure 5: Year-Over-Year Rent Growth

(10) (5) 0 5 10 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014

Page 2 – Figure : Year-‐Over-‐Year Rent Growth (%) Source: CBRE Research, Q4 2014

UNEMPLOYMENT

The unemployment rate in Orange County stands at 5.0% as of November, unchanged since October and 80 bps since January. In the same time span, Orange County added over 9,000 jobs, bringing the region’s total of non-farm employment to

1,511,300. Year-over-year, Orange County has added 32,200 jobs with educational and health services recording the largest gain, combining to net 10,900 jobs. On a micro level, industrial employment for distribution and warehouse trade stands at 88,200 workers and 154,700 workers, respectively. According to CBRE EA, over the last 12 months distribution employment and

manufacturing employment has dropped by 0.7% and 1.5%, respectively. However, CBRE EA predicts that industrial employment will rebound

significantly in 2015. LEASE RATE ANALYSIS

The average asking rate at the end of Q4 2014 was $0.68 per sq. ft., unchanged since Q3 2014 and up one cent since Q1 2014. Lease rates have yet to gain traction in the market with rates hardly changing from quarter to quarter. The Manufacturing and Warehouse (M&W) and Research and Development (R&D) sectors closed Q4 2014 at $0.62 and $0.89 per sq. ft., respectively, unchanged since Q3 2014. Though overall asking lease rates have not yet started to increase, concessions have decreased and have, in turn, made the leases more expensive with the lack of free rent and tenant improvement allowances. Average asking sales prices have continued to trend upward, ending the year at $152.35 per sq. ft., a 9% increase from the $139.36 per sq. ft. posted in Q1 2014, due to low interest rates. It has also become apparent that due to low interest rates, users are buying while market conditions are advantageous. As a result, the increased sales activity has slowed leasing activity, keeping rates stagnant. Furthermore, CBRE EA predicts that lease rates will follow the same upward trend as sale prices in the coming quarters.

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Figure 6: Overall Vacancy Rate 0 1 2 3 4 5 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014

Page 3 – Figure 6: Overall Vacancy (%) Source: CBRE Research, Q4 2014

Figure 7: Vacancy Rate by Center Type

0 5 10 15

Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014

M&W R&D ALL

Page 3 – Figure 7: Availability Rate (%) Source: CBRE Research, Q4 2014

Figure 8: Net Absorption

0 2,000 4,000 6,000 8,000 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Th ou sa nd s

M&W R&D Rolling 4Q Avg 000’s

Page 3 – Figure 8: Gross Ac6vity (SF) Source: CBRE Research, Q4 2014

Figure 9: Under Construction

0 200 400 600 800 1,000 1,200 1,400 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Th ou sa nd s 000’s

Page 3 – Figure 9: Under Construc6on (SF) Source: CBRE Research, Q4 2014

VACANCY

The overall vacancy rate in Orange County finished the year at 2.7%, up 30 bps from Q3 2014 and down 20 bps year-over-year. North Orange County posted the largest change from Q3 2014 as the vacancy rate increased 70 bps. This was largely due in part to completions at the Anaheim Concourse

Distribution Center and Yokohama Tires vacating a large block of space in Fullerton. This activity alone added 1.0 million sq. ft. of vacant space back to the market. Furthermore, vacancies are expected to remain low due to proximity to the ports and the lack of industrial development. The availability rate in Q4 2014 was 4.7%, down 60 bps since Q3 2014 and 40 bps since the start of the year. The M&W sector decreased 60 bps to a rate of 4.5% and the R&D sector decreased 30 bps to 5.5% from Q3 2014. According to CBRE EA, availability is expected to continue its downward trend well into 2015, as rental rates grow.

NET ABSORPTION & ACTIVITY

In 2014, the market generated 10.3 million sq. ft. of gross activity, falling slightly short of surpassing 2013’s activity of 11.9 million sq. ft. Orange County generated 373,623 sq. ft. of negative net absorption in Q4 2014, the first negative net absorption recorded since Q4 2012. However, the market still generated over 1.0 million sq. ft. of positive net absorption in 2014. The food, home product and furniture industries lead the way in leasing, contributing immensely to the net absorption recorded in 2014. For example, in Q4 2014 Blue Line Food Services Distribution leased over 121,000 sq. ft. in Anaheim.

DEVELOPMENT

In 2014, the Orange County industrial market has delivered 958,241 sq. ft. of new supply, surpassing the 501,780 sq. ft. recorded in 2013. However, pre-leases and the lack of substantial new construction in the pipeline have undermined efforts to add adequate supply for tenants desiring quality product. CBRE EA predicts that absorption will continue to outpace completions well into 2015, even as several developments are schedule to complete in the up-coming year.

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Submarket Bldg Sq. Ft. Overall Vacancy % Overall Availability

% Current Net Absorption Current Gross Activity Under Constrcution Construction Deliveries Avg Asking Lease Rate

North Orange County 110,773,792 2.5% 4.0% (113,624) 962,840 357,858 626,404 $0.59

West Orange County 40,619,622 2.3% 5.3% (67,938) 551,205 144,754 0 $0.64

Greater Airport Area 68,924,980 2.6% 4.6% 8,529 661,590 0 0 $0.73

South Orange County 33,279,406 3.8% 6.5% (200,590) 339,997 0 0 $0.84

Orange County 253,597,800 2.7% 4.7% (373,623) 2,515,632 502,612 626,404 $0.68

Source: CBRE Research, Q4 2014.

Figure 11: Key Transactions

Occupier Industry Sector Location Total Sq. Ft.

Engineered Floorings Manufacturing North Orange County 127,375

Earth Friendly Products Manufacturing West Orange County 124,894

Blue Line Food Distribution Distribution North Orange County 121,225

CustomFab, Inc Manufacturing West Orange County 75,911

*The Paper Company Manufacturing Greater Airport Area 72,576

*Renewal

The outlook for Orange County's industrial market continues to remain positive. Availability levels are projected to fall at a steady pace over the next 12 months, falling into the 3.0% range by Q4 2015. The overall average asking lease rate remained stagnant in Q4 2014 at $0.68 per sq. ft.; however, is projected to trend upwards. CBRE EA projects rents to grow 8.3% over the next 12 months, reaching $0.74 per sq. ft.

12-Month ForecastPage 4 – Figure 12: Market Outlook Source: CBRE Econometric Advisors, Q4 2014

0.00 0.20 0.40 0.60 0.80 0 2 4 6 8 10 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015

Availability Rate ( L ) Lease Rate ( R ) Forecast

Availability Rate (%) Asking Rate ($/SF)

Source: CBRE Econometric Advisors, Q4 2014

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DEFINITIONS

Average Asking Lease Rate Rate determined by multiplying the asking net lease rate for each building by its available space, summing the products, then dividing by the sum of the available space with net leases for all buildings in the summary. Net Leases Includes all lease types whereby the tenant pays an agreed rent plus most, or all, of the operating expenses and taxes for the property, including utilities, insurance and/or maintenance expenses. Net Absorption The change in occupied square feet from one period to the next. Building Area Total floor area of the building, typically taken at the “drip line” of the building.

Occupied Square Feet Building area not considered vacant. Available Square Feet

Available Building Area which is either physically vacant or occupied. Availability Rate Available Square Feet divided by the Net Rentable Area. Vacant Square Feet Existing Building Area which is physically vacant or immediately available.

Vacancy Rate Vacant Building square footage divided by the Net Rentable Area.

Normalization Due to a reclassification of the market, the base, number and square footage of buildings of previous quarters have been adjusted to match the current base. Availability and Vacancy figures for those buildings have been adjusted in previous quarters.

SURVEY CRITERIA

Includes all competitive industrial buildings 10,000 square feet and greater in size. Under construction buildings which have begun construction as evidenced by site excavation or foundation work.

CONTACTS

SOUTHERN CALIFORNIA RESEARCH Gary Baragona

Director, Southern California Research 400 S. Hope Street, 25th_Floor

Los Angeles, CA +1 213 613 3130

gary.baragona@cbre.com Nicole Moler

Lead, Orange County Research 3501 Jamboree Road, Suite 100 Newport Beach, CA

+1 949 725 8541

nicole.moler@cbre.com Jamil Harkness

Research Analyst

4141 Inland Empire Blvd, Suite 100 Ontario, CA

+1 909 418 2027

jamil.harkness@cbre.com

Please visit the Global Research Gateway

at www.cbre.com/researchgateway.