Renewals Dominate Downtown Los Angeles Activity as Vacancy Decreases

(1)

market report downtown LoS AnGELES

1Colliers International continuously refines its database. As a result, data reflected in this report may not be consistent with data reported in previous quarters.

MArkEt ovErviEw

the Downtown Los angeles market continued the year in third quarter 2015 with its highest leasing activity in recent memory with 856,200 square feet (SF) on the strength of major renewals within the market as has been the case for 2015. Subsequently, with not many relocations from out of market, net absorption recorded at 64,800 SF. the total overall vacancy rate decreased to 18.1% from 18.3% in the previous quarter. rental rates dipped slightly for the quarter, recording at a direct weighted average of $37.71 per square foot (pSF) full service gross (FSG).

Closed sales activity volume registered $354.5m for the quarter. rising realty partners sold the 446,000 SF pacmutual property at 523 W. 6th St. for $200m ($448 pSF) to Ivanhoe Cambridge after acquiring it 3 years ago for $60m. this represents the highest price on a square footage basis for a pure office building in the market. onni Group purchased 800 Wilshire Blvd from Lincoln property Company for $79.5m, or $360 pSF.

Jamestown made their first foray into the Downtown market with its acquisition of Brunswig Square for $60m ($429 pSF) from arenda Capital. Georgetown Company acquired the former Herald examiner building for

$15m from Hearst Communications and intends to renovate it into multi-tenant creative office space.

Renewals Dominate Downtown Los

Angeles Activity as Vacancy Decreases

VaCaNCY 18.1%

Net aBSorptIoN 68,400 SF CoNStrUCtIoN 1,042,900 SF reNtaL rate $37.71 pSF UNempLoYmeNt 6.9%

MArkEt indicAtorS - Q3 2015

10%

15%

20%

25%

30%

$30

$31

$32

$33

$34

$35

$36

$37

$38

3Q11 3Q12 3Q13 3Q14 3Q15

% VACANT (TOTAL)

$ PSF FSG PER ANNUM (WEIGHTED)

RENTS VACANCY

HiStoricAL vAcAncY vS rEntS

downtown Los Angeles office Market Q3 2011 - Q3 2015

HiStoricAL nEt AbSorption &

conStruction coMpLEtionS

>> total vacancy decreases to 18.1%

>> Weighted average asking rental rate

decreased to $37.71 pSF

>> Leasing activity at 856,200 SF

>> absorption of 68,400 SF recorded

>> Construction activity at

1,042,900 SF

MArkEt trEndS - Q3 2015

(400,000) (300,000) (200,000) (100,000) 0 100,000 200,000

3Q11 3Q12 3Q13 3Q14 3Q15

SF

NET ABSORPTION CONSTRUCTION COMPLETIONS

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vAcAncY

the total vacancy rate, including sublet space, decreased to 18.1% compared to 18.3% last quarter, a 20 basis point difference. a longer historical perspective of the total vacancy rate shows that the vacancy rate a year ago stood at 20.0%.

the Bunker Hill submarket posted the highest vacancy rate at 21.8%, while Greater Downtown had the lowest at 13.8%. Vacancy rates were highest for Class C space (20.9%) and lowest for Class a space (17.6%) with Class B space in- between (18.5%).

nEt AbSorption

Net absorption was positive for the quarter, recording 64,800 SF. among the major move- ins was Nordstorms occupying 44,000 SF at 700 S. Flower St., White & Case occupying 35,700 SF at 555 S. Flower St., Fragomen Del rey taking 13,200 SF at 444 S. Flower St. and Gordon rees expanding by 9,900 SF at 633 W.

5th St.

the Financial District recorded 99,400 SF of net absorption, followed by Bunker Hill (50,500 SF) and Greater Downtown (25,000 SF). South park

(-106,500 SF) recorded negative net absorption for the quarter.

unEMpLoYMEnt

august 2015 figures for nonfarm employment in Los angeles County showed continued recovery for the job market. over the past 12 months, Los angeles County has gained 76,300 jobs for an increase of 1.8%. this gain in employment led to unemployment lowering to 6.9% compared to 8.1% one year ago. Nine out of the eleven industries tracked by the eDD posted year-over- year gains. educational and Health Services (+22,500), trade, transportation, and Utilities (+17,100) and Leisure and Hospitality (+16,800) posted the largest gains. Government (+ 7,500), and professional and Business Services (+6,500) also increased year-over-year.

conStruction

No new projects were delivered to the market in third quarter; however, there is currently 1,042,900 SF of office space under construction/

renovation. this includes 221 N. Figueroa St.

(307,552 SF), which will deliver in late 2015 after being renovated for fire damage. also included is the 356,140 SF of Class a office that is part of the Wilshire Grand tower development.

vAcAncY bY SubMArkEt

downtown Los Angeles office Market Q3 2015

nEt AbSorption bY SubMArkEt

15.7%

13.0%

21.8%

17.2%

0.3%

0.9%

0.0%

0.2%

5%

10%

15%

20%

25%

% VACANT

SUBLEASE VACANCY DIRECT VACANCY

LoS AnGELES

dEMoGrApHicS

>>

popULatIoN:

10,136,509 (2015 estimate)

10,510,281 (2020 projection)

3.69% (Growth 2015-2020)

>>

HoUSeHoLD INCome:

$78,309 (average)

$54,514 (median)

>>

JoB GroWtH:

1.8% (past 12 months)

>>

UNempLoYmeNt rate:

6.9% (as of august 2015)

50,500

(106,500)

25,000

99,400

(100,000) (50,000) 0 50,000 100,000 150,000

SF

(3)

EXISTING PRoPERTIES VACANCY ACTIVITY ABSoRPTIoN CoNSTRUCTIoN RENTS

Submarket/

Class Bldgs total Inventory

SF

Direct

Vacancy Sublease Vacancy total

Vacancy

total Vacancy prior Qtr

Leasing activity Current Qtr

SF

Leasing activity YtD

SF

absorption Net Current Qtr

SF

absorption Net YtD

SF

Completions Current Qtr

SF

Under Construction

SF

Weighted avg asking Lease rate

FINANCIAL DISTRICT

a 9 9,732,700 15.2% 0.2% 15.5% 15.3% 307,700 620,000 (11,500) (26,000) 0 356,100 $41.59

B 25 8,388,400 19.4% 0.2% 19.7% 21.0% 205,400 639,500 110,900 212,700 0 0 $35.49

C 2 326,400 20.7% 0.0% 20.7% 20.7% 2,800 4,100 0 (2,600) 0 0 $26.81

SUBToTAL 36 18,447,500 17.2% 0.2% 17.5% 18.0% 515,900 1,263,600 99,400 184,100 0 356,100 $38.15 BUNKER HILL

a 6 7,221,100 22.2% 0.0% 22.2% 22.9% 248,100 940,100 50,500 143,800 0 0 $40.23

B 4 537,800 10.8% 0.0% 10.8% 10.8% 0 0 0 (1,400) 0 307,600 $39.00

C 1 370,200 29.6% 0.0% 29.6% 29.6% 0 3,800 0 (9,000) 0 0 $27.79

SUBToTAL 11 8,129,100 21.8% 0.0% 21.8% 22.4% 248,100 943,900 50,500 133,400 0 307,600 $39.42

SoUTH PARK

a 2 1,144,200 6.5% 0.7% 7.2% 7.0% 12,800 51,200 (2,300) (41,300) 0 78,500 $38.24

B 7 1,850,500 21.5% 0.0% 21.5% 15.8% 43,100 89,300 (105,700) (94,400) 0 0 $32.11

C 2 266,400 15.1% 0.6% 15.7% 16.3% 1,500 9,600 1,500 (10,300) 0 0 $30.00

SUBToTAL 11 3,261,100 15.7% 0.3% 16.0% 12.8% 57,400 150,100 (106,500) (146,000) 0 78,500 $32.83 GREATER

DoWNToWN

B 6 1,828,500 11.4% 1.1% 12.5% 13.2% 22,800 99,400 11,900 (13,600) 0 300,700 $32.33

C 8 592,300 17.8% 0.0% 17.8% 20.0% 12,000 64,200 13,100 7,500 0 0 $29.92

SUBToTAL 14 2,420,800 13.0% 0.9% 13.8% 14.9% 34,800 163,600 25,000 (6,100) 0 300,700 $31.52

MARKET ToTAL

a 17 18,098,000 17.5% 0.2% 17.6% 17.8% 568,600 1,611,300 36,700 76,500 0 434,600 $40.82

B 42 12,605,200 18.2% 0.3% 18.5% 18.7% 271,300 828,200 17,100 103,300 0 608,300 $34.70

C 13 1,555,300 20.8% 0.1% 20.9% 21.8% 16,300 81,700 14,600 (14,400) 0 0 $28.56

ToTAL 72 32,258,500 17.9% 0.2% 18.1% 18.3% 856,200 2,521,200 68,400 165,400 0 1,042,900 $37.71

oFFicE ovErviEw

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this is the largest project under construction in the market and will be operated by InterContinental Hotel & resorts. the development is expected to deliver in 2017.

Creative space conversions continue to accumulate, as the 78,500 SF office building at 425 W. 11th St. in South park and the 29,700 SF building at 353 S. Broadway in Greater Downtown are expected to deliver by the end of 2015. Shorenstein’s Seventh and Santa Fe redevelopment of the former Ford Factory also broke ground this quarter with 271,000 SF. For proposals, the Fourth and traction development at 963 e. 4th St. will be converted to 150,000 SF of creative office space, while work is expected to commence soon on the repositioning of the Broadway trade Center.

ActivitY

New leasing activity during third quarter totaled 856,200 SF compared to 793,200 SF in second quarter 2015. as has been the case for 2015, activity focused on renewals as tenants choose to improve their existing spaces over relocating out of the market. the Financial District led all submarkets with 515,900 SF of leasing activity.

the leasing highlights included Capital Group renewing 106,400 SF at 400 S. Hope St., GSa

renewing 94,400 SF at 725 S. Figueroa St., pillsbury Winthrop renewing 61,000 SF at 725 S. Figueroa St. and Wilson elser renewing for 41,400 SF at 555 S. Flower St.

the Downtown Los angeles market also landed its first large creative tenant as co-working company WeWork, already ensconced at 811 W.

7th St., signed a lease totaling 92,400 SF for their second Downtown location at 555 W. 5th St. Cross Campus also signed for 32,000 SF at 800 Wilshire Blvd., making them the second co- working tenant to take space this quarter.

rEntAL rAtES

rental rates saw a small decrease in the Downtown Los angeles market. overall annual average asking rental rates for third quarter recorded at $37.71 pSF, a 0.4% decrease from last quarter at $37.87 pSF. In some top-tier buildings, rates continue to reach as high as

$42.00 pSF.

average asking rates were highest in the Bunker Hill submarket ($39.42 pSF) and lowest in Greater Downtown submarket ($31.52 pSF).

Class a asking rents were $40.82 pSF compared to Class B at $34.70 pSF and Class C at $28.56 pSF.

wEiGHtEd AvErAGE ASkinG LEASE rAtES bY SubMArkEt

LEASinG ActivitY bY SubMArkEt

>> Leasing activity increased 7.9%

from second quarter 2015 to 856,200 SF

>> Co-working companies continue to lease locations in the market, a trend that will continue as companies move towards flexible work schedules and locations

>> owners of core properties, as well as creative office conversions on the fringes of the CBD, continue to court creative office tenants with smarter, more efficient space planning and amenities

$39.42 $38.15

$32.83

$31.52

$10

$15

$20

$25

$30

$35

$40

$ PSF PER ANNUM (FSG)

248,100

515,900

100,000 200,000 300,000 400,000 500,000 600,000

SF

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rEcEnt trAnSActionS & MAJor dEvELopMEntS

5.2%

6.1%

6.9%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

United States California Los Angeles County

unEMpLoYMEnt rAtE

united States, california & Los Angeles county August 2015

1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 3,500,000 4,000,000

4Q08 4Q09 4Q10 4Q11 4Q12

SF

0 100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000

3Q11 3Q12 3Q13 3Q14 3Q15

SF

HiStoricAL LEASinG ActivitY

outLook

the Downtown Los angeles market will continue to see decreased vacancy throughout the rest of 2015. thus far, Downtown has seen large renewals by prominent tenants and a lack of large move-outs to tighter sub-markets. relocations have primarily occurred within the market, as tenants committed to Downtown Los angeles have to weigh the cost of relocation against rising asking rents by some of the market’s landlords.

While vacancy rates continue to hover around 18% for traditional office inventory, buyers still see alternative investment opportunites in the form of creative office buildings and adaptive re-use projects.

MArkEt dEScription

Downtown La is a moderately large office market comprised of 32.5 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.

SALES ACTIVITY

PRoPERTY ADDRESS SIZE SF SALE PRICE PRICE PSF BUYER SELLER

523 W. 6th St., Los angeles 446,000 SF $200,000,000 $448 pSF Ivanhoe Cambridge/Callahan Capital rising realty parnters

800 Wilshire Blvd., Los angeles 220,800 SF $79,500,000 $360 pSF onni Group Lincoln property Company/aG

360 e. 2nd St., Los angeles 140,000 SF $60,000,000 $429 pSF Jamestown arenda Capital management LLC

LEASING ACTIVITY

PRoPERTY ADDRESS LEASED SF LEASE TYPE BLDG TYPE LESSEE LESSoR

400 S. Hope St., Los angeles 106,400 SF renewal a the Capital Group CBre Global Investors

725 S. Figueroa St., Los angeles 94,400 SF renewal a GSa Brookfield office properties

555 W. 5th St., Los angeles 92,400 SF New a WeWork Brookfield office properties

606 S. olive St., Los angeles 72,200 SF renewal B GSa 606 olive LLC

725 S. Figueroa St., Los angeles 61,000 SF renewal a pillsbury Winthrop Brookfield office properties

MAJoR DEVELoPMENTS

PRoJECT DEVELoPER SIZE SF SUBMARKET STATUS ESTIMATED CoMPLETIoN

900 Wilshire Blvd, Los angeles Hanjin International Corp 356,140 SF Financial District Under Construction Q2 2017

221 N Figueroa St, Los angeles the City of Los angeles 307,552 SF Greater Downtown Under renovation Q4 2015

2060 e 7th St, Los angeles Shorenstein properties, LLC 271,000 SF Greater Downtown Under renovation Q2 2016

425 W 11th St, Los angeles Lincoln property Company 78,500 SF South park Under renovation Q1 2016

353 S Broadway, Los angeles Flatiron Development Co LLC 29,700 SF Greater Downtown Under renovation Q3 2015

963 e 4th St, Los angeles atlas Capital Group, LLC 150,000 SF Greater Downtown proposed tBD

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total rentable Square Feet:

office space in buildings with 25,000 SF 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% or greater of medical or retail space, and space that is under- construction, under-renovation 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.

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

dEFinitionS oF kEY tErMS uSEd in tHiS rEport

accelerating success.

matteSoN, CaItLIN Research Director Research Services mUmper, HaNS Executive Managing Director WoNG, CHrIStopHer Regional Analyst Research Services

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