nai capital 2011 southern california year-end market report

NAI CAPITALMarket Report | Year-End 2011

NAI Capital is pleased to provide the followingeconomic outlook to our clients. We understandthe importance of timely, accurate data whenmaking significant financial decisions. As such,we have taken every measure to verify the accu-racy of the data contained in this report. We hopethat this information is helpful to you

Economically speaking, 2011 was an interesting year forCalifornia. Gross Domestic Product (GDP), the most compre-hensive economic variable, increased each quarter. In fact, theState’s GDP increased each of the past nine quarters. However,GDP growth was not robust. It failed to exceed 2 percent duringthe first three quarters. 2011 was much different than 2010 whenGDP growth was 2 percent or higher during three of four quar-ters.

The slow growth gave the impression that California was not real-ly improving. Unemployment, although falling, is still high. Thesame goes for foreclosures. Wage and salary growth has beenminimal and the housing market is still a mess. In general, it wasdifficult to believe that California had turned the corner.

As 2012 begins optimism is beginning to spread. Our 2011 Q4forecast for GDP growth is 2.3 percent. If we are correct this willrepresent the highest growth rate since Q2 2010. Our forecastfor the first half of 2012 is not as robust but it is better than ourprevious forecast. As we update our forecast every quarter thedata support a higher GDP growth rate. This is what we mean byoptimism. New economic data continue to reinforce the idea thatCalifornia’s economy is improving.

Although we are optimistic for 2012 we do have some concerns.As usual the State’s budget is short of money. Early estimates putthe shortfall at $9 billion. This is smaller than previous years butit is still a shortfall. Thus, once again we can expect more cuts toeducation and perhaps even new or higher taxes and fees.

Regardless of how the shortfall is remedied, the annual budgetshortfall continues to wreak havoc on certain sectors ofCalifornia’s economy. From a business perspective Californiaremains a risky state. Businesses want stability not an annualbudget deficit. Businesses, rightly so, are concerned about high-er business taxes. California is already a business unfriendlystate. If business taxes increase more companies will decide toleave the State.

From a jobs perspective the annual budget shortfall is a disaster.State and local government jobs are disappearing. This is partic-ularly true in the education sector. Class sizes are increasing,teachers are frustrated, tuition is increasing and students are suf-fering. California needs to stabilize its budget before this trendcan be reversed. Sadly, it does not appear that policy makers areready to do this. We expect more partisan politics that will exac-erbate the problem. We fully expect this to happen again nextyear. Hopefully, the shortfall will be smaller.

Our second concern has to do with oil prices. Iran continues todefy the rest of the world as it threatens to close the Strait of

Hormuz. According to the Energy Information Administration ofthe Department of Energy, approximately 17 million barrels of oilpass through the Strait of Hormuz daily! Any disruption of thismagnitude will negatively impact oil prices.

Will Iran follow through on its threat? That is a difficult questionto answer. As economic forecasters we tend to shy away frompolitical games. Nonetheless, the answer to that question maybe mute. If the world believes the threat is credible oil prices willincrease. In fact, this has already happened. Oil prices roseimmediately after the December 27th announcement by Iran.Prices have retreated some but are still above the December 27thprice.

Our last concern is sovereign debt issues in Europe. TheEuropean Union has yet to find a solution to this problem. Until itdoes economic uncertainty will rise. Political and economic pun-dits fear that the Eurozone may fall apart. Although U.S. banksare not terribly exposed to European debt problems the impacton world financial markets will be severe if one or more of thesecountries defaults on its debt or if the single currency Eurozonedisintegrates.

The data on wage and salary growth was mixed during 2011. Thegood news is that wage and salary income grew during the firstthree quarters of 2011. The bad news is core inflation, the infla-tion rate minus volatile food and energy prices, grew faster thanwages in Q2 and Q3. As a result, real income fell in each of thesequarters.

Over the next three quarters we forecast the opposite will occur.Wage and salary income will grow faster than inflation. This willbode well for the consumer. After accounting for higher pricesconsumers will have more money in their pockets to spend.

Despite the growth in real wages we are concerned that wagesare not growing fast enough. The forecast calls for moderateincreases in wages and salary not robust increases. We expectwages and salary to grow between 2 and 3 percent on a season-ally adjusted annual rate.The good news is inflation will be lessthan 2 percent over the next three quarters.

Economic Trends

1

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2010 2011 2012

California GDPSeasonally Adjusted Annual Growth Rate

Per

cent

age

Source: CERF (dark blue indicates forecasted numbers)

California’s official unemployment rate remains high. At the end ofQ3 2011 12 percent of Californians were unemployed. Going for-ward we expect the unemployment rate will fall significantly in Q42011 due to a robust holiday season. Starting in Q1 2012 weanticipate the unemployment rate will fall but the declines will bemuch smaller. At the end of Q2 2012 we anticipate the unem-ployment rate will be 11.4 percent. This is still high but it is mov-ing in the right direction.

The slow decline in unemployment is due to our concerns regard-ing the public sector and the construction sector. As mentionedabove, California’s $9 billion budget shortfall will not bode well forpublic sector employment. In regards to construction, an over-supply of both residential and commercial properties will limit theneed for new construction. We anticipate that only the multifami-ly market will experience significant construction in 2012.

After rising during the summer months employment rates through-out the Basin are declining. Thanks to this decline unemploymentrates in the Los Angeles Basin are better than the State with oneexception. The Inland Empire continues to experience a higherunemployment rate relative to California. Unemployment rates inLos Angeles, Orange and Ventura County are below the Stateunemployment rate. More importantly, unemployment rates inOrange and Ventura County are below 10 percent.

The change in number of unemployed persons in the Basin isaccelerating. From November 2010 to November 2011 the num-ber of unemployed persons in the Basin declined 133,000. Thisis nearly three times the amount we reported in May 2011.Furthermore, this represents a significant improvement over lastyear in which the number of unemployed persons increased63,900.

2

Los Angeles Orange Inland Empire Ventura

Oct-1

1

Sep-

11

Aug-

11

Jul-1

1

Jun-

10

May

-10

Apr-1

0

Mar-

10

Feb-

10

Jan-

10

Dec-1

0

Nov-1

0

Nov-1

1

8%

9%

10%

11%

12%

13%

14%

15%

16%Unemployment Rate by County

Source: California Employment Development Department

10.8%

11.0%

11.2%

11.4%

11.6%

11.8%

12.0%

12.2%

12.4%

12.6%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q22010 2011 2012

California Unemployment RateSeasonally Adjusted Rate

Source: CERF

Per

cent

age

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q22010 2011 2012

California Core Inflation RateYear-on-Year Percentage Change

Source: CERF

Change in Unemployed Persons

Nov 2010 - Nov 2011 Nov 2009 - Nov 2010

Number % Change Number % Change

Los Angeles (71,000) -11.2% 57,100 9.9%

Orange (21,000) -14.1% 300 0.2%

Inland Empire (34,900) -13.6% 5,100 2.0%

Ventura (6,100) -13.0% 1,400 3.1%

Total/Average (133,000) -13.0% 63,900 3.8%


Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q22010 2011 2012

California Wage and Salary IncomeSeasonally Adjusted Annual Growth Rate

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Source: CERF

Construction

Manufacturing

Wholesale Trade

Retail Trade

Transportation, Warehousing & Utilities

Information

Financial Activities

Professional & Business Services

Educational & Health Services

Leisure & Hospitality

Other Services

Government

-2 0 2 4

Los Angeles Basin Job GrowthNovember 2010 to November 2011


This is a positive sign that the labor market is improving. Theincreasing pace at which unemployed persons is falling bodes wellfor the local labor market. More importantly, this is all private sec-tor hiring. As we discuss below, the public sector continues tolose jobs.

In terms of industries, job losses have not been spread evenly.Budget problems at the state, county and city level have taken atoll on government employment. Given the budget problemsfaced by governments throughout the Basin and the State, weexpect more public jobs to vanish in 2012.

The already-decimated Construction industry continues to losejobs. The over-supply in the residential and commercial real estatemarkets does not bode well for this sector. We expect construc-tion to remain weak throughout the foreseeable future.

The gains in Education & Health Services are solely due to HealthServices. Jobs in the Education Sector are declining.Furthermore, budget cuts to the State’s K-12 and University sys-tems are likely to lead to more education sector job losses.

Retail sales, a primary source of revenue for governments, havegrown seven consecutive quarters. The increases in the last six

quarters have been impressive with growth rates above 4 percent.We expect retail sales to continue growing, but at slower rates.Consumers are still too leveraged, and uncertainty is still too high,to generate sustained consumption gains.

After growing for most of 2010, California median home prices fellfrom Q4 2010 to Q3 2011. While the declines are not what theywere in 2008 and 2009, they are troubling. This is evidence thatthe housing market still has some hurdles to overcome.

Credit markets remain frozen to many buyers. Consumers remainburdened with high loan-to-value ratios. In many cases the loan-to-value ratios exceeds 100 percent. Persistent high unemploy-ment, weak labor market conditions and declining real wages arenot conducive to home buying. We believe that California’s econ-omy is too weak to sustain a robust recovery in the housing mar-ket at this time.

Going forward we expect home prices to essentially remain flat.What little growth we forecast is below 5 percent. Conditions fora robust housing recovery are not present at this time. Given theproblems mentioned above we expect conditions in the housingmarket to remain as they are. We expect very little growth and alot of frustrated home owners and buyers.

3

-5%

-10%

0%

5%

10%

15%

20%

25%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q22010 2011 2012

California Median Home PriceYear-to-Year Percent Change

Source: CERF

Los Angeles Orange Riverside San Bernardino Ventura

Oct-1

1

Sep-

11

Aug-

11

Jul-1

1

Jun-

11

May

-11

Apr-1

1

Mar-

11

Feb-

11

Jan-

11

Dec-1

0

Nov-1

0

Nov-1

1

Median Home PriceYear-on-Year % Change

-8%

-10%

-4%

-6%

-2%

0%

2%

4%

Source: California Association of Realtors

0%

1%

2%

3%

4%

5%

6%

7%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q22010 2011 2012

California Retail SalesYear-on-Year Percent Change

Source: CERF

As we move from California to the Basin the picture does notimprove. The median price for all homes in the Basin decreasedduring 2011. As with the State, the declines were not as steep asthey were in 2008 and 2009. Nonetheless, the declines point to aweak housing market.

At the risk of sound redundant, the issues that plague theCalifornia market also plague the local markets. We do not antic-ipate a quick recovery in the local housing market. At best weanticipate prices to modestly increase in 2012.

Foreclosures continue to plague the California residential market.Although the foreclosure rate has fallen it remains well above itshistorical average. Unfortunately, we do not expect the rate to fallto its historical average in the near future. We expect the foreclo-sure rate to fall modestly from Q4 2011 to Q2 2012. High unem-ployment combined with too many upside-down mortgages sug-gests that foreclosures are not going away any time soon.

The persistently high foreclosure rate will continue to plagueCalifornia’s residential real estate markets. Our expectationregarding foreclosures plays a key role in our forecast of median

home prices. As long as foreclosures remain high home prices willsuffer.

After peaking in the first quarter of 2009, Notices of Default (NODs)began declining in the Los Angeles Basin. Unfortunately, the rateof decline has slowed in recent quarters. In fact, the number ofNODs increased throughout the Basin in Q3 2011. This is anoth-er sign of a weak housing market.

Sadly, the local housing market is likely to drag along at its currentlevel. All the data point to another poor year in the residential mar-ket.

A slightly different pattern emerges for foreclosures. Los Angeles,Riverside and San Bernardino County’s all experienced a declinein foreclosures from Q3 2009 to Q3 2011 while Orange andVentura County’s remained flat over the same time period. Thedecline in the three markets is certainly good news. However, thepersistent rate in Orange and Ventura County’s is troubling.

Going forward we expect foreclosures to rise in the Basin. This isdue to the increase in NODs mentioned above. We do not expect

4

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

2010 2011 2012

3.00

3.50

4.00

4.50

5.00

5.50

Per

cent

age

California Foreclosure Rate

Source: CERF


Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q32009 2010 2011

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000Foreclosures

Source: DataQuick


0

5,000

10,000

15,000

20,000

25,000

Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q32009 2010 2011

Notices of Default

Source: DataQuick

Los Angeles and Long Beach PortsYear-to-Year Percent Change

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q32009 2010 2011

Source: Pacific Maritime Association

the increase to be significant. However, the last thing any of thesehousing markets need is an increase in foreclosures.

Total inbound and outbound traffic at Los Angeles and LongBeach ports increased from Q1 2010 to Q2 2011 then declined inQ3 2011. On the surface this decline seems like bad news. Wehave a different take. We believe the decline simply reflects thefact that Q3 2010 was so good. We cannot expect 20 percentincreases every quarter.

This is important because we do not believe that activity at theports is declining. This is simply a comparison issue and is notlinked to a structural decline in activity. There may be a few morequarters of small decreases as we compare to Q4 2010 and Q12011, as both of these quarters experienced growth of 10 percentor higher.

Overall, we expect activity at the ports to remain robust.However, there is one caveat. As mentioned above, the potentialdisruption of oil from the Strait of Hormuz may negatively impactworld trade.

The news is not quite as good for the Port of Hueneme. Totalinbound and outbound traffic increased every quarter of 2010 but

fell from Q1 2011 to Q3 2011. It is true that 2011 is being com-pared to 2010, in which activity increased significantly. However,the declines of 10 – 20 percent are too large to attribute to a com-parison issue.

The entertainment industry slowed during 2011. Box Office Mojoreports that gross receipts for 2011 declined 3.8 percent com-pared to 2010. The decline was solely due to a decline in ticketssold. For the year ticket sales declined 4.7 percent. The declinein ticket sales relative to gross receipts is due to an increase inaverage ticket prices. Ticket prices increased $0.07 from 2010 to2011.

The Los Angeles Basin’s on-location production of movies, televi-sion shows, commercials and other related entertainment prod-ucts increased 4.2 percent in 2011 according to Film LA, Inc.Permits for television shows declined 2.7 percent but were offsetby gains in feature films, commercials and other production relat-ed activities.

The Retail MarketThanks in large part to improving retail sales the retail market isshowing signs of improvement. Compared to Q4 2010 vacancyrates are essentially unchanged. For the Basin as a whole vacan-cy rates increased from 7.1 to 7.2 percent. Relative to the size of

5

Port HuenemeYear-to-Year Percent Change

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q32009 2010 2011

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

Source: Pacific Maritime Association

Q4 2011 Los Angeles County Retail Vacancy Rates

Antelop

e Valle

y

Downto

wn

Mid-Citie

s

Mid W

ilshire

Santa

Clarita

San Fe

rnand

o Valle

y

San G

abrie

l Valle

y

South

Bay

Southe

ast L

.A.

Tri-C

ities

Wes

t L.A

.

L.A. C

ounty

8.9%

4.9%

7%

3.4%

8.4%

5.8%

7.7%

4.4%

5.6%

3.9%

5.8% 5.7%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

Source: Costar

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

OCAirport

OCCentral

OCNorth

OCSouth

OCWest

OrangeCounty

Q4 2011 Orange County Retail Vacancy Rates

4.7%

8.3% 8.4%

6.5%6.9% 6.8%

Source: Costar

IE East IE West Inland Empire0%

2%

4%

6%

8%

10%

12%

Q4 2011 Inland Empire Retail Vacancy Rates

11.2%

9.1%

10.5%

Source: Costar

6

the market this small change is insignificant. Unfortunately leaserates continue to decline. However, the rate of decline has slowedand the Inland Empire experienced an increase in lease rates.

Going forward we expect this trend to continue but at a slower

pace. We expect vacancy rates to remain constant or slightlyimprove. As mentioned above we expect retail sales to grow butat lower rates. Although improving, unemployment remains prob-lematic in the Basin. On a positive note, real incomes are expect-ed to increase.

Ventura North Ventura South Ventura County

Q4 2011 Ventura County Retail Vacancy Rates

6.5%

6.2%

6.3%

6.0%

6.1%

6.1%

6.2%

6.2%

6.3%

6.3%

6.4%

6.4%

6.5%

6.5%

6.6%

Source: Costar

Antelop

e Valle

y

Downto

wn

Mid-Citie

s

Mid W

ilshire

Santa

Clarita

San Fe

rnand

o Valle

y

San G

abrie

l Valle

y

South

Bay

Southe

ast L

.A.

Tri-C

ities

Wes

t L.A

.

Q4 2011 Los Angeles County Retail Net Absorption

86,131

304,753

88,200

(6,068)

10,279

59,287

(149,080)

(37,555)

53,508

184,276

(6,026)

(200,000)

(150,000)

(100,000)

(50,000)

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

Source: Costar

OC Airport OC Central OC North OC South OC West

Q4 2011 Orange County Retail Net Absorption

168,036

(37,638)

(79,916)

161,761

(153,391)(200,000)

(150,000)

(100,000)

(50,000)

0

50,000

100,000

150,000

200,000

Source: Costar

IE East IE West

Q4 2011 Inland Empire Retail Net Absoption

(166,970)

156,091

(200,000)

(150,000)

(100,000)

(50,000)

0

50,000

100,000

150,000

200,000

Source: Costar

Ventura North Ventura South

Q4 2011 Ventura County Retail Net Absorption

7,060

43,927

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

Source: Costar

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

Q4 2011 Los Angeles County Retail Rental Rates

Antelop

e Valle

y

Downto

wn

Mid-Citie

s

Mid W

ilshire

Santa

Clarita

San Fe

rnand

o Valle

y

San G

abrie

l Valle

y

South

Bay

Southe

ast L

.A.

Tri-C

ities

Wes

t L.A

.

L.A. C

ounty

$1.40

$2.06

$1.52

$2.99

$1.92 $1.69

$1.53 $1.74

$1.52

$1.94

$3.23

$1.95

Source: Costar

For the Basin as a whole, retail vacancy rates are now 7.2 percent.This represents a small and insignificant decline of 0.1 percentagepoints. Essentially, vacancy rates are constant relative to last year.

At 10.5 percent the Inland Empire has the highest vacancy ratewhile Los Angeles County has the lowest rate, 5.7 percent.Ventura County experienced the largest decline in vacancy rates,0.4 percentage points.

Net absorption in the Basin was positive during the fourth quarter.In total, 687,000 square feet was absorbed during the quarter. Ina market as large as the Basin’s this amount was not significant.Hence, the minimal impact on vacancy rates.

All markets experienced positive net absorption with the exceptionof the Inland Empire. Thankfully, the 10,000 square feet returnedto the market in the Inland Empire was insignificant. At 588,000square feet, Los Angeles County had the highest net absorption.

Lease rates continue to decline. The average lease rate for retailspace declined $.06 per square foot from a year ago. At $1.40per square foot per month the Inland Empire has the lowest leaserates in the Basin. Los Angeles County experienced the largestdecline as lease rates fell from $2.07 to $1.95.

Here we mention a few of the larger transactions.

Leasing Transactions1) 24 Hour Fitness leased 17,065 square feet in the Palmdale

Town Square. The estimated lease rate was $6.60 per squareper year NNN. NAI Capital represented both the leasing com-pany and the tenant.

2) Macy’s rented 103,000 square feet at the Mall of Victor Valley.The estimated lease rate was not provided.

3) The Empire Academy of Makeup leased 12,118 square feet inthe Brookhollow Business Park. The estimated lease rate is$9.00 per square per year NNN.

4) Shani Clinic leased 2,606 square feet in Gelsons’ WestlakeMarket Plaza. The estimated lease rate is $30.00 per squarefoot per year NNN.

Sales Transactions1) The Monterey Marketplace in Rancho Mirage was sold on

12/5/2011. The sales price was $11,000,000 or $82.84 persquare foot.

2) The 218,530 square foot Culver Center was sold on11/16/2011. The sales price was $115,000,000 or $526.24per square foot.

3) The 25,046 square foot Northgate Gonzalez Shopping Centerin Anaheim was sold on 11/17/2011. The sales price was$3,750,000 or $149.72 per square foot.

4) The 8,654 square foot Village Commons in Camarillo was soldon 12/19/2011. The sales price was $1,540,000 or $177.95per square foot.

7

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

OCAirport

OCCentral

OCNorth

OCSouth

OCWest

OrangeCounty

Q4 2011 Orange County Retail Rental Rates

$2.11

$1.56 $1.59

$2.04

$1.86 $1.85

Source: Costar

IE East IE West Inland Empire

Q4 2011 Inland Empire Retail Rental Rates

$1.37

$1.47

$1.40

$1.32

$1.34

$1.36

$1.38

$1.40

$1.42

$1.44

$1.46

$1.48

$1.50

Source: Costar


Q4 2011 Ventura County Retail Rental Rates

$1.62

$1.83

$1.76

$1.50

$1.55

$1.60

$1.65

$1.70

$1.75

$1.80

$1.85

$1.90

Source: Costar

8

Los Angeles Basin Retail Market n Fourth Quarter 2011

Vacancy Rate Average Asking Rental Rate1

2011 2010 Difference Net Absorption (SF) 2011 2010 Difference

Antelope Valley 8.9% 10.7% -1.9% 86,131 $1.40 $1.45 $(0.04)

Downtown 4.9% 4.9% 0.0% 304,753 $2.06 $1.98 $0.08

Mid Cities 7.0% 6.8% 0.2% 88,200 $1.52 $1.57 $(0.06)

Mid Wilshire 3.4% 3.1% 0.2% (6,068) $2.99 $3.04 $(0.05)

Santa Clarita 8.4% 8.0% 0.4% 10,279 $1.92 $2.09 $(0.17)

San Fernando Valley 5.8% 5.5% 0.3% 59,287 $1.69 $1.96 $(0.27)

San Gabriel Valley 7.7% 7.0% 0.7% (149,080) $1.53 $1.61 $(0.09)

South Bay 4.4% 4.1% 0.4% (37,555) $1.74 $1.81 $(0.07)

Southeast LA 5.6% 6.8% -1.2% 53,508 $1.52 $1.68 $(0.16)

Tri Cities 3.9% 4.7% -0.9% 184,276 $1.94 $2.22 $(0.28)

West LA 5.8% 6.0% -0.2% (6,026) $3.23 $3.30 $(0.07)

Los Angeles County 5.7% 5.7% 0.0% 587,705 $1.95 $2.07 $(0.12)

OC Airport 4.7% 5.3% -0.7% 168,036 $2.11 $2.05 $0.05

OC Central 8.3% 7.7% 0.7% (37,638) $1.56 $1.61 $(0.05)

OC North 8.4% 8.7% -0.3% (79,916) $1.59 $1.61 $(0.02)

OC South 6.5% 6.0% 0.5% 161,761 $2.04 $2.06 $(0.02)

OC West 6.9% 5.5% 1.4% (153,391) $1.86 $1.80 $0.06

Orange County 6.8% 6.6% 0.2% 58,852 $1.85 $1.85 $(0.00)

IE East 11.2% 10.8% 0.4% (166,970) $1.37 $1.44 $(0.07)

IE West 9.1% 9.1% -0.1% 156,091 $1.47 $1.30 $0.18

Inland Empire 10.5% 10.3% 0.2% (10,879) $1.40 $1.39 $0.01

Ventura North 6.5% 6.9% -0.4% 7,060 $1.62 $1.59 $0.03

Ventura South 6.2% 6.6% -0.4% 43,927 $1.83 $1.91 $(0.08)

Ventura County 6.3% 6.7% -0.4% 50,987 $1.76 $1.80 $(0.04)

Total LA Basin 7.2% 7.1% 0.1% 686,665 $1.78 $1.84 $(0.06)

1 Per SF per month, NNN. Total is weighted by available space.Data is for all Class A, B and C buildings 20,000 SF or larger. Excludes owner-occupied.

Source: CoStar

9

As we reported several months ago, California is losing business-es to other states. Unfortunately, the trend continues today.California has become a business unfriendly state. Other states aretaking advantage of this and actively recruiting California business-es to relocate.

One of the unfortunate outcomes of California’s budget crisis is thattax incentives for new businesses have all but disappeared.Historically, programs such as these have been effective in encour-aging startup companies. Small companies are the backbone ofthe American economy. They supply the bulk of jobs in this coun-try. Sadly, California is doing very little for them during a time whenthey are desperately needed.

The lack of incentives was particularly hard on California and theBasin. California has been a hot-bed of startups. The Silicon Valleyis a prime example. The state has a phenomenal venture capitalsystem that provides the necessary capital for new companies.Human capital produced at the University of California has provid-ed the employees for startups.

California’s ability to encourage new businesses is fading. Potentialnew environmental regulation will not help. High business taxesand over regulation are encouraging companies to leave the statenot stay.

The bottom line is that all of these issues are negatively impactingthe office market. Vacancy rates for office space in the Los AngelesBasin average 16.1 percent. Ventura County’s 19.9 percentvacancy rate is slightly above the Inland Empire’s 19 percent rate.Los Angeles County has the lowest vacancy rate, 15.2 percent.

Although high, vacancy rates in Orange County and the InlandEmpire have fallen from last year’s numbers. The Inland Empire’s 2percent point decline in vacancy rates was the largest in the Basin.Vacancy rates in Los Angeles County were essentially unchanged

from the prior year. Ventura County experienced an increase of 0.9percentage points from last year.

Antelop

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Santa

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South

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Southe

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Tri-C

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L.A. C

ounty

0%

5%

10%

15%

20%

25%

Q4 2011 Los Angeles County Office Vacancy Rates

15.5%

13.2%

10.6%

14.8%

21.1%

16.3%

11.5%

19.5%

9%

15.2% 15.4% 15.2%

Source: Costar

OCAirport

OCCentral

OCNorth

OCSouth

OCWest

OrangeCounty

0%

5%

10%

15%

20%

25%

Q4 2011 Orange County Office Vacancy Rates

17.6%

15.4%

19.8%

16.1%15.3%

16.9%

Source: Costar


Q4 2011 Inland Empire Office Vacancy Rates

18.4%

20.5%

19%

17.0%

17.5%

18.0%

18.5%

19.0%

19.5%

20.0%

20.5%

21.0%

Source: Costar

0%

5%

10%

15%

25%


20%

Q4 2011 Ventura County Office Vacancy Rates

16.2%

20.7%19.9%

Source: Costar

The Office Market

Net absorption was a positive 846,046 million square feet duringthe fourth quarter. The positive net absorption helped reducevacancy rates from 16.6 to 16.1 percent. Every county with theexception of Ventura experienced positive net absorption duringthe quarter.

Although small, the positive impact of net absorption should notbe overlooked. Before vacancy rates can fall and lease rates riseexcess inventory must be absorbed. The office market has aways to go but at least it is pointed in the right direction.

For the first time in a long time we can report that lease rates forthe entire Basin are holding steady. Lease rates in Los AngelesCounty actually increased relative to last year. The increase is notsignificant but at least they are increasing. Furthermore, leaserates in Ventura County are unchanged from last year.

The same is not true in the Inland Empire and Orange County.Once again these markets experienced further declines in leaserates. The decline in Orange County was small as lease rates fell$0.04 per square foot per month from last year. The $0.12 per

square foot per month decline in the Inland Empire was the largestdecline in the Basin and is due to the fact that vacancy rates in theregion are 19 percent.

Q4 2011 Los Angeles County Office Net Absorption

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Santa

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Wes

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.

29,100

(70,681)

100,244 110,283

1,384

34,942 55,574

(178,010)

(25,509)

183,652

(44,348)

(200,000)

(150,000)

(100,000)

(50,000)

0

50,000

100,000

150,000

200,000

250,000

Source: Costar


Q4 2011 Orange County Office Net Absorption

452,058

123,719

32,270

123,986

(83,289)

(200,000)

(100,000)

0

100,000

200,000

300,000

400,000

500,000

Source: Costar

IE East IE West

Q4 2011 Inland Empire Office Net Absoption

29,594

3,253

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

Source: Costar


Q4 2011 Ventura County Office Net Absorption

27,109

(59,285)(70,000)

(60,000)

(50,000)

(40,000)

(30,000)

(20,000)

(10,000)

0

10,000

20,000

30,000

40,000

Source: Costar

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

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Q4 2011 Los Angeles County Office Rental Rates

$1.87

$2.50

$1.93 $2.08

$2.43

$2.03 $1.86

$1.99 $1.75

$2.55

$3.18

$2.42

Source: Costar

10

11

Leasing Transactions1) Southern California Schools Risk Management, JPA leased

9,785 square feet of space at the Hospitality Executive Centerin San Bernardino. The lease rate is estimated to be $18.60per square foot per year.

2) International Rectifier Corporation renewed a lease for128,532 square feet in El Segundo. The estimated lease rateis $28.20 per square foot per year.

3) The Ocean View School District leased 42,246 square feet inHuntington Beach. The estimated lease rate is $13.80 persquare foot per year.

4) The County of Ventura leased 48,500 square feet in theMission Oaks Business Park in Camarillo. The estimatedlease rate is $17.40 per square feet per year.

Sales Transactions1) The 144,818 square foot Summit Business Center in Riverside

was sold on 11/22/2011. The price was $6,500,000 or$44.88 per square feet.

2) Two buildings totally 127,141 square feet at 150 S. El CaminoDrive in Beverly Hills were sold on 12/9/2011. The price was$47,800,000 or $375.96 per square foot.

3) A 314,074 square foot class A office building at 2050 MainStreet in Irvine was sold on 11/29/2011. The price was$108,500,000 or $345.36 per square foot.

4) A 2,789 square foot class B office building located at 1174Amazon Way in Simi Valley was sold on 10/12/2011. Theprice was $795,000 or $285.05 per square foot.

OCAirport

OCCentral

OCNorth

OCSouth

OCWest

OrangeCounty

$1.75

$1.70

$1.65

$1.80

$1.85

$1.90

$1.95

Q4 2011 Orange County Office Rental Rates

$1.94

$1.75

$1.81

$1.92 $1.91

$1.88

Source: Costar


Q4 2011 Inland Empire Office Rental Rates

$1.58

$1.67

$1.61

$1.52

$1.54

$1.56

$1.58

$1.60

$1.62

$1.64

$1.66

$1.68

Source: Costar


$1.84

$1.96

$1.94

Q4 2011 Ventura County Office Rental Rates

$1.76

$1.78

$1.80

$1.82

$1.84

$1.86

$1.88

$1.90

$1.92

$1.94

$1.96

$1.98

Source: Costar

12

Los Angeles Basin Officel Market n Fourth Quarter 2011



Antelope Valley 15.5% 12.4% 3.0% 29,100 $1.87 $1.93 $(0.05)

Downtown 13.2% 12.9% 0.3% (70,681) $2.50 $2.42 $0.07

Mid Cities 10.6% 12.0% -1.4% 100,244 $1.93 $1.95 $(0.02)

Mid Wilshire 14.8% 14.4% 0.4% 110,283 $2.08 $2.12 $(0.05)

Santa Clarita 21.1% 23.0% -2.0% 1,384 $2.43 $2.47 $(0.04)

San Fernando Valley 16.3% 17.4% -1.1% 34,942 $2.03 $2.05 $(0.02)

San Gabriel Valley 11.5% 11.6% -0.2% 55,574 $1.86 $1.90 $(0.04)

South Bay 19.5% 17.2% 2.3% (178,010) $1.99 $1.97 $0.02

Southeast LA 9.0% 8.1% 0.8% (25,509) $1.75 $1.85 $(0.10)

Tri Cities 15.2% 16.4% -1.2% 183,652 $2.55 $2.48 $0.07

West LA 15.4% 15.9% -0.6% (44,348) $3.18 $3.12 $0.06

Los Angeles County 15.2% 15.2% 0.0% 196,631 $2.42 $2.39 $0.03

OC Airport 17.6% 20.0% -2.4% 452,058 $1.94 $2.00 $(0.06)

OC Central 15.4% 16.0% -0.6% 123,719 $1.75 $1.81 $(0.06)

OC North 19.8% 21.9% -2.1% 32,270 $1.81 $1.79 $0.02

OC South 16.1% 19.5% -3.4% 123,986 $1.92 $1.92 $0.00

OC West 15.3% 13.0% 2.3% (83,289) $1.91 $1.88 $0.04

Orange County 16.9% 18.9% -2.0% 648,744 $1.88 $1.92 $(0.04)

IE East 18.4% 18.8% -0.4% 29,594 $1.58 $1.71 $(0.13)

IE West 20.5% 20.9% -0.4% 3,253 $1.67 $1.79 $(0.12)

Inland Empire 19.0% 19.4% -0.4% 32,847 $1.61 $1.73 $(0.12)

Ventura North 16.2% 16.8% -0.7% 27,109 $1.84 $1.85 $(0.02)

Ventura South 20.7% 19.4% 1.3% (59,285) $1.96 $1.96 $0.00

Ventura County 19.9% 19.0% 0.9% (32,176) $1.94 $1.94 $(0.00)

Total LA Basin 16.1% 16.6% -0.4% 846,046 $2.20 $2.20 $(0.00)


Source: CoStar

Net absorption exceeded 2 million in the Inland Empire. For theBasin as a whole net absorption was a positive 3.3 million squarefeet. Vacancy rates for the entire basin declined 0.9 percent pointsfrom a year ago. More importantly, lease rates increased $.01 persquare foot compared to last year.

The improvement in the Inland Empire industrial market has a lotto do with an increase in world trade. This market is particularlyreliant on this industry. To the extent trade continues to improvewe expect the Inland Empire industrial market to improve as well.

Improved conditions were felt in all the markets. Vacancy rates inOrange County declined 1.1 percentage points from last yearwhile vacancy rates in the Inland Empire fell 2.7 percentage points.Vacancy rates rose by a paltry 0.3 percentage points in LosAngeles County but lease rates were unchanged. Ventura Countywas the only market that experienced a significant increase invacancy rates. Due to the decline in activity at Port Hueneme

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0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Q4 2011 Los Angeles County Industrial Vacancy Rates

4.8%

5.7% 5.6%

1.9%

6.4%6.8%

8.3%

7.1%7.5%

4.9%

7.6%

6.8%

Source: Costar


Q4 2011 Inland Empire Industrial Vacancy Rates

9.8%

8.7%

9.2%

8.0%

8.2%

8.4%

8.6%

8.8%

9.0%

9.2%

9.4%

9.6%

9.8%

10.0%

Source: Costar


Q4 2011 Ventura County Industrial Vacancy Rates

10.5%

7.4%

8.5%

0%

2%

4%

6%

8%

10%

12%

Source: Costar

OCAirport

OCCentral

OCNorth

OCSouth

OCWest

OrangeCounty

Q4 2011 Orange County Industrial Vacancy Rates

7.7% 7.5%

6.2%

8.2%

5.2%

7%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

Source: Costar

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Wes

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-200,000

-300,000

-400,000

-500,000

-100,000

0

100,000

200,000

300,000

400,000

500,000

600,000

Q4 2011 Los Angeles County Industrial Net Absorption

23,587

(8,481)

105,021 107,150

(147,036)

37,043

(417,498)

466,549

59,772 23,061

(46,724)

Source: Costar

13

The Industrial Market

vacancy rates in Ventura County rose 0.8 percentage points fromlast year.

For the Basin as a whole, net absorption in the second quarterwas a positive 3.3 million square feet. Most of this was due to the

Inland Empire. Los Angeles, Orange and Ventura Counties all hadpositive net absorption for the quarter as well but the amountswere much less than the Inland Empire.

Lease rates for the Basin increased slightly in the fourth quarter as

Q4 2011 Orange County Industrial Net Absorption


262,774

192,598

(235,148)

158,874

(130,084)

(300,000)

(200,000)

(100,000)

0

100,000

200,000

300,000

Source: Costar

$0.00

Q4 2011 Los Angeles County Industrial Rental Rates

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L.A. C

ounty

$0.38 $0.48

$0.54

$1.70

$0.45 $0.58

$0.41

$0.64

$0.46

$0.78

$1.57

$0.55

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20

$1.40

$1.60

$1.80

Source: Costar

$0.00

$0.10

$0.20

$0.30

$0.40

$0.50

$0.60

$0.70

$0.80

$0.90

OCAirport

OCCentral

OCNorth

OCSouth

OCWest

Q4 2011 Orange County Industrial Rental Rates

OrangeCounty

$0.61

$0.52 $0.50

$0.78

$0.61 $0.59

Source: Costar


Q4 2011 Inland Empire Industrial Rental Rates

$0.33

$0.35

$0.34

$0.32

$0.32

$0.33

$0.33

$0.34

$0.34

$0.35

$0.35

Source: Costar

IE East IE West

Q4 2011 Inland Empire Industrial Net Absoption

3,109,596

(334,022)

(1,000,000)

(500,000)

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

Source: Costar


Q4 2011 Ventura County Industrial Net Absorption

(192,612)

307,730

(300,000)

(200,000)

(100,000)

0

100,000

200,000

300,000

400,000

Source: Costar

14

compared to last year. The average lease rate for industrial spaceis now $.49 per square foot, a meager $0.01 increase from Q42010. Orange County was the only region to experience a furtherdecline in lease rates. Thankfully, the decline was very small aslease rates fell from $0.60 to $0.59.

Leasing Transactions1) Kenco Logistic Services renewed its 170,671 square foot

lease at the Centerpointe Building in Chino. The lease rate is$4.20 per square foot per year.

2) Meatco Provisions, Inc. leased 191,270 square feet of spacein the Los Angeles Food Center. The lease rate is $9.96 persquare foot per year.

3) Berry Plastics Corporation leased 117,857 square feet in theFullerton Industrial Complex. The estimated lease rate is$5.88 per square foot per year.

4) Jet Air leased 12,880 square feet in building located at 1756Eastman Avenue in Ventura. The lease rate is $9.60 persquare foot per year.

Sales Transactions1) The 327,084 square foot Mountain View Industrial Center in

Redlands was sold on 11/22/2011. The sales price was$21,000,000 or $64.20 per square foot.

2) A 445,767 square foot class B building in Commerce sold for$54,000,000 on 12/29/2011. The price per square foot was$121.14.

3) An 80,890 square foot building in the Irvine Spectrum sold on10/28/2011. The sales price was $9,950,000 or $123.01 persquare foot.

4) An 85,430 square foot self storage building in Moorpark soldon 10/27/2011. The sales price was $10,500,000 or $122.91per square foot.

15


Q4 2011 Ventura County Industrial Rental Rates

$0.56

$0.67

$0.63

$0.50

$0.52

$0.54

$0.56

$0.58

$0.60

$0.62

$0.64

$0.66

$0.68

Source: Costar



Antelope Valley 4.8% 5.9% -1.1% 23,587 $0.38 $0.21 $0.17

Downtown 5.7% 3.9% 1.8% (8,481) $0.48 $0.51 $(0.03)

Mid Cities 5.6% 6.1% -0.4% 105,021 $0.54 $0.50 $0.04

Mid Wilshire 1.9% 4.6% -2.7% 107,150 $1.70 $1.77 $(0.07)

Santa Clarita 6.4% 7.6% -1.2% (147,036) $0.45 $0.45 $0.01

San Fernando Valley 6.8% 5.5% 1.2% 37,043 $0.58 $0.60 $(0.01)

San Gabriel Valley 8.3% 6.0% 2.3% (417,498) $0.41 $0.45 $(0.03)

South Bay 7.1% 6.7% 0.4% 466,549 $0.64 $0.66 $(0.02)

Southeast LA 7.5% 8.2% -0.7% 59,772 $0.46 $0.44 $0.02

Tri Cities 4.9% 6.0% -1.1% 23,061 $0.78 $0.82 $(0.04)

West LA 7.6% 8.7% -1.1% (46,724) $1.57 $1.61 $(0.04)

Los Angeles County 6.8% 6.4% 0.3% 202,444 $0.55 $0.55 $0.00

OC Airport 7.7% 9.2% -1.4% 262,774 $0.61 $0.63 $(0.03)

OC Central 7.5% 6.8% 0.8% 192,598 $0.52 $0.56 $(0.04)

OC North 6.2% 8.0% -1.7% (235,148) $0.50 $0.48 $0.02

OC South 8.2% 9.2% -1.0% 158,874 $0.78 $0.81 $(0.04)

OC West 5.2% 6.1% -1.0% (130,084) $0.61 $0.59 $0.03

Orange County 7.0% 8.0% -1.1% 249,014 $0.59 $0.60 $(0.01)

IE East 9.8% 15.1% -5.3% 3,109,596 $0.33 $0.31 $0.02

IE West 8.7% 9.0% -0.3% (334,022) $0.35 $0.33 $0.02

Inland Empire 9.2% 12.0% -2.7% 2,775,574 $0.34 $0.32 $0.02

Ventura North 10.5% 6.3% 4.2% (192,612) $0.56 $0.59 $(0.03)

Ventura South 7.4% 8.5% -1.1% 307,730 $0.67 $0.60 $0.07

Ventura County 8.5% 7.7% 0.8% 115,118 $0.63 $0.60 $0.03

Total LA Basin 7.7% 8.5% -0.9% 3,342,150 $0.49 $0.48 $0.01

Los Angeles Basin Industrial Market n Fourth Quarter 2011

16


Source: CoStar

Welcome to our new multifamily section. The data for this seg-ment is limited. However, due to the growing importance of mul-tifamily properties we felt that adding this section was in ourclients’ best interest. We hope you find this information timelyand useful.

Of all the markets we track, the multifamily market is performingthe best. Problems in the housing segment are creating oppor-tunities in the multifamily market. Vacancy rates throughout theBasin are extremely low and we expect them to remain low forthe foreseeable future.

As we noted above, foreclosures and notices of default remainhigh. As a result, consumers are losing their homes in recordnumbers and shifting to the multifamily market. The lack of cred-it is also creating more demand for multifamily housing as poten-tial home buyers are not able to secure financing. Since weexpect these conditions to remain in effect for the foreseeablefuture we anticipate that the demand for multifamily housing willremain high.

Increased demand is creating a boom in new construction. Quitefrankly, the multifamily market is the only segment in which con-struction is occurring. We expect construction to continue aslong as demand remains.

Despite all the new construction, prices for multifamily buildingsare increasing. Below we list some of the major sales transac-tions that took place in Q4 2011.

Sales Transactions1) The 430 unit Pierce Park apartment community in Pacoima

was sold on 11/4/2011. The sales price was $68,500,000 or$159,302 per unit.

2) The 420 unit Waterstone at Murrieta sold on 11/30/2011.The sales price was $49,500,000 or $117,857 per unit.

3) The 131 unit Jacaranda complex in Fullerton sold on10/19/2011. The sales price was $32,200,000 or $245,802per unit.

4) The 30 unit Mountain Shadow Apartments in Newbury Parksold on 12/1/2011. The sales price was $5,105,000 or$170,167 per unit.

17

Multifamily Market

Regional Offices

WESTLAKE VILLAGE(805) 446-2400

WEST LOS ANGELES(310) 440-8500

VENTURA COUNTY(805) 278-1400

TEMECULA VALLEY(951) 491-7590

SOUTH BAY(866) 716-5208

SIMI VALLEY(805) 522-7132

SANTA CLARITA(661) 705-3550

RIVERSIDE(866) 906-9979

PASADENA(866) 716-5209

PALM DESERT(760) 346-1566

ONTARIO(909) 945-2339

ORANGE COUNTY(866) 739-9315

ENCINO-Corporate Office(800) 468-2618

COMMERCE(866) 739-9314

www.naicapital.comCommitted to Southern California. Connected to the World.

Find us online:

CAL LUTHERAN UNIVERSITYKirk M. Lesh, Senior EconomistCenter of Economic Research andForecasting n 805 493 3788www.clucerf.org

nai capital 2011 southern california year-end market report

Documents

higher gdp growth rate

slow growth

salary growth

whengdp growth

business taxes

highest growth rate

annual budget shortfall

higher taxes