Savills Studley Report Los Angeles office sector Q4 2018

Savills Studley Research Los Angeles

SUMMARYMarket Highlights

LEASING SPIKES

Several larger leases boosted quarterly totals. Quarterly leasing totaled 4.5 msf, jumping from 3.1 million square feet (msf) in the prior quarter. Tenants have leased 14.2 msf in the four most recent quarters.

AVAILABILITY RATES UP SLIGHTLY

The region’s overall availability rose by 40 basis points to 19.7%. The Class A availability rate was unchanged, remaining at 18.4%. The Westside's Class A availability rate fell by 70 basis points to 14.9%, though.

ASKING RENT INCREASES

Asking rent across the Greater Los Angeles area ended the year averaging $39.01, rising by 1.8% year-on-year. The average Class A asking rent increased by 3.1% to $42.35. SALES DROP

Office property sales during the first eleven months of 2018 totaled $5.9 billion, a 39% decrease compared to the same period of 2017.

"The last four quarters have brought steady demand from tech, media and entertainment firms. Challenged for both talent and space, these expanding sectors continue to fan out to new development and adaptive reuse projects across the region."

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Savills Studley Report | Los Angeles

Tech and Media Push Demand

Propelled by sustained growth among tech, media and entertainment firms, Greater Los Angeles’ overall economy and office market continued on a steady path of expansion during 2018. Area employment remained in positive territory with 58,000 jobs gained in the last 12 months, a 1.3% increase. The region added 22,000 office-using jobs (a 3.5% increase) during the same period. Both of the local growth rates exceeded national growth rates.

Los Angeles lost out on the Amazon HQ2 stakes, but it has benefitted from expansion by several Fortune 500 companies (Facebook, Netflix, Amazon Studios). Rapid growth among upstarts such as ByteDance has supplemented expansion by heavyweights. The region remains a magnet for tech and media companies due to the region’s massive economy and labor pool.

Media and Tech Fuel Competition

Leasing activity has been steady in Los Angeles, exceeding 3.0 msf four quarters in a row, and spiking to 4.5 msf in the final quarter of 2018. Steady demand for new properties and creative office space has kept leasing brisk.

As of year-end 2018, Los Angeles had 2.2 msf under construction, 43% pre-leased. Streaming media services, tech companies and coworking firms are taking the larger blocks of space. Netflix pre-leased 327,000 sf at Hudson Pacific Properties EPIC development and another 355,000 sf at Kilroy Realty Corporation’s Academy on Vine. Both Hollywood locations will be 100% occupied by Netflix and should be completed by 2020.

Not to be outdone by Netflix, social media giant Facebook signed a lease to occupy 260,000 sf at The Brickyard office development in Playa Vista. Over in Beverly Hills, events promotor and venue operator, Live Nation, signed a 100,000-sf lease at the recently constructed “The Post” project. Some foreign tech firms are also making significant inroads in Los Angeles. Bytedance, the billion-dollar Chinese tech startup, laid claim to 118,110 sf at C3 in Culver City.

Downtown Demand Still Suppressed

Activity among banks, law firms and general professional business services has been more sporadic. This has kept leasing volume in most of Downtown Los Angeles subdued.

Source: Bureau of Labor Statistics^

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

0.80

0.85

0.90

0.95

1.00

1.05

1.10Millions

L.A. Office Emp. L.A.(% Ann. Change) U.S.(% Ann. Change)

Office-Using Employment Trends

$42.35

$30.30 $36.71

$24.84

$0

$10

$20

$30

$40

$50

Q4 '18 Q4 '17 Q4 '16 Q4 '15 Q4 '14 Q4 '13

Rental Rate Trends

Class A Class B & C

Asking Rent Trends ($/sf)

18.4%

21.4%22.4%

18.5%

10%

13%

16%

19%

22%

25%

Q4 '18 Q4 '17 Q4 '16 Q4 '15 Q4 '14 Q4 '13

Availability Rate Trends

Class A Class B & C

Availability Rate Trends

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Q4 2018

Tenant Sq Feet Address Market AreaNetflix 327,900 5901 W Sunset Blvd Hollywood

Netflix 183,000 1355 Vine St Hollywood

Netflix 159,000 1375 Vine St Hollywood

Facebook 123,574 12105 W Waterfront Dr Fox Hills/Marina

Facebook 122,000 12126 W Waterfront Dr Fox Hills/Marina

Bytedance 118,000 5800 Bristol Pky Fox Hills/Marina

Technicolor 114,500 6040 W Sunset Blvd Hollywood

Live Nation 100,000 325 N Maple Dr Beverly Hills/West Hollywood

Chubb Insurance 77,450 555 S Flower St Downtown LA

Lockton Companies 72,127 777 S Figueroa St Downtown LA

Sum of Leases 1,397,551

In the last four quarters, only 15 leases over 10,000 sf have been signed by law firms, insurance companies and banks. Still, a few firms are deciding that they are long overdue for new space. Insurance broker Lockton signed a 70,000-sf lease at the 777 Tower in Downtown LA. Lockton will relocate from the Ernst & Young Plaza where they spent the previous 20 years.

With leasing activity relatively restrained, availability rates have slowly started to push higher. The region’s overall availability rate ended 2018 with a rate of 19.7%, up from 18.9% a year ago. Downtown LA continues to have a loftier availability rate than the Westside, ending 2018 with a 25.6% rate - compared to a 15.2% rate in the Westside.

Tenants seeking less than 20,000 sf have ample options to consider, particularly in Downtown. Firms can select from 10.4 msf of available space Downtown, 25.4% of the region's 40.9 msf of availability within the next 12 months. Rent in most buildings is generally more than 20% below comparable Westside properties. Rent growth has been very limited in the older and traditional office towers, and typically hovers in the mid-$40/sf raange. The newest building in Downtown, the Wilshire Grand tower, tops out at $52 psf.

Arts District Shows Strength

The strongest demand Downtown continues to be in its rapidly expanding creative office space sector. In 2018, Honey Science Corporation and Spotify made major moves into the Arts District. Arizona State University's leasing of the former Herald Examiner building was also a big step forward. Rents in creative buildings in the Arts District are pushing north of $60/sf, this still about 10% below rent for creative office buildings on the Westside. Two additional buildings 700 South Flower (The Bloc) and 145 South Spring (the former LA Times Building) have had success targeting creative office space users. Rent in these buildings remain on the lower end of the spectrum, ranging from $40 to $45 psf.

Parking rates are an added cost that can be a serious differentiator between buildings. Companies that can find space on outside lots still capture a cost savings by being Downtown, those having to park in structures have to factor in this extra fee. Downtown high-rise garages can charge from $250-$500 per stall per month compared to the Arts District which ranges from $150-$200 per stall per month.

Investors Shift Focus

Investment activity in Los Angeles has been quite strong in the last two years. Investors remain attracted to Los Angeles. Rising interest rates continue to put pressure on the cost of debt. Many of the top creative loft/office buildings in the Westside and Arts District changed hands in 2016 and 2017. In turn, investors have turned their attention to campus-style office properties. The best-in-class complexes command higher pricing than many traditional office buildings. Most recently, Hackman Capital finalized the purchase of CBS’ Television City campus for $750 million. The 25-acre campus consists of roughly 1.0 msf of office and studio space. Hackman Capital has yet to release its plans for the property, but CBS will continue to produce content on the grounds. In early November, Heitman paid $320 million ($940/sf) for the 340,000 sf Campus at Playa Vista project. Built in 2009, the four- building campus which is connected by

9,000-sf private landscaped terraces is located in the heart of Silicon’s Beach tech hub. Redwood Partners, based out of Orange County, purchased The Hub for $60.5 million (287.51/sf). The 210,000-sf creative office campus located in Long Beach, was 88% leased at the time of sale.

Looking Forward

Area logistics/distribution markets have been another bright spot for the region. Lingering trade challenges with China could potentially spell trouble for this sector. Los Angeles, like other markets, with a strong import/export market continues to keep a nervous watch on the tariff talk from Washington, DC.

Availability Rate Comparison Rental Rate Comparison ($/sf)

Major Transactions

$63.18$59.89

$56.12$56.07

$54.75$52.78

$50.33$49.93

$47.67$39.73$39.68$39.01$38.25

$36.28$35.39$34.74$34.69$34.43$33.44$33.20$32.55$31.74$30.86

$29.77$29.76$29.58

$28.48$28.43

$26.77

$0 $15 $30 $45 $60 $75

Santa MonicaBeverly Hills/West Hollywood

HollywoodWestside

Westwood/West LAFox Hills/Marina

Culver CityCentury CityMiracle Mile

Downtown LAPark Mile

Los Angeles RegionBurbank

AirportWilshire District

Tri-CitiesUS Index

N. Hwd/St. City/Univ CityPasadenaGlendale

South Bay AreaCentral San Fernando Valley

South BaySan Fernando Valley

Santa Clarita ValleyLong Beach

West San Fernando ValleySan Gabriel Valley

Mid-Wilshire

9.7%12.3%12.8%

15.2%15.4%

16.4%17.2%17.2%17.2%17.3%17.4%17.90%

17.9%18.0%18.1%18.4%

19.7%20.2%20.2%20.8%21.1%21.3%

22.5%23.0%

24.7%24.8%24.9%25.1%25.6%

0% 5% 10% 15% 20% 25% 30%

Century CityCentral San Fernando Valley

HollywoodWestside

Westwood/West LABeverly Hills/West Hollywood

Santa MonicaLong Beach

Santa Clarita ValleySan Gabriel Valley

San Fernando ValleyU.S. Index

Fox Hills/MarinaPasadena

BurbankWest San Fernando Valley

Los Angeles RegionMid-Wilshire

Tri-CitiesWilshire District

GlendaleMiracle Mile

South Bay AreaCulver City

Park MileSouth Bay

N. Hwd/St. City/Univ CityAirport

Downtown LA

Savills Studley Report | Los Angeles

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Map Submarket Total

SF(1000's)

Last12 Months

ThisQuarter

%Change

fromLast Qtr.

YearAgo

ThisQuarter

ppChange

fromLast Qtr. (1)

YearAgo

ThisQuarter

%Change

fromLast Qtr.

YearAgo

Downtown LA 40,663 2,043 10,421 -1.7% 9,303 25.6% -0.5% 23.2% $39.73 -8.3% $39.84Downtown LA - Class A 23,678 1,008 5,254 -2.5% 5,215 22.2% -0.6% 22.6% $43.37 -3.3% $41.39Wilshire District 15,160 548 3,146 2.3% 2,655 20.8% 0.3% 17.7% $35.39 1.8% $33.81Wilshire District - Class A 11,675 440 2,572 5.1% 2,163 22.0% 1.1% 18.5% $35.65 1.7% $34.78Hollywood 5,579 1,126 692 -10.3% 659 12.4% -2.8% 12.9% $56.12 0.0% $55.48Hollywood - Class A 4,078 1,074 348 -24.7% 527 8.5% -5.0% 15.4% $61.99 1.9% $57.93Westside 54,097 5,381 8,239 -0.5% 8,995 15.2% -0.2% 16.8% $56.07 -0.8% $55.48Westside - Class A 45,770 4,794 6,804 -3.2% 7,936 14.9% -0.7% 17.5% $57.29 -0.2% $55.84South Bay Area 33,068 2,020 7,425 4.3% 6,295 22.5% 0.9% 19.2% $32.55 4.2% $28.91South Bay Area - Class A 21,107 1,525 4,561 10.7% 4,086 21.6% 2.1% 19.6% $35.24 6.2% $30.39San Fernando Valley 30,149 2,591 5,257 7.2% 5,764 17.4% 1.3% 19.1% $44.26 10.5% $40.79San Fernando Valley - Class A 18,778 1,802 2,999 -6.6% 3,505 16.0% -0.9% 18.7% $45.75 12.3% $41.46Tri-Cities 21,747 996 4,384 8.4% 4,289 20.2% 2.8% 18.5% $34.74 1.1% $33.55Tri-Cities - Class A 16,453 722 3,346 -0.2% 3,589 20.3% 0.3% 21.5% $36.80 2.8% $34.83Santa Clarita Valley 2,642 135 446 18.8% 374 16.9% 2.4% 14.4% $29.76 -1.5% $29.30Santa Clarita Valley - Class A 1,900 114 350 18.0% 311 18.4% 2.8% 16.4% $30.95 -2.2% $30.58San Gabriel Valley 10,743 549 1,607 -4.5% 1,339 15.0% -3.1% 14.4% $28.43 3.3% $26.68San Gabriel Valley - Class A 3,155 117 324 -9.5% 220 10.3% -2.1% 7.6% $30.37 2.1% $30.51Greater Los Angeles Total 208,269 14,263 40,925 2.1% 39,014 19.7% 0.4% 18.9% $39.01 -2.3% $38.34Greater Los Angeles Total - Class A 142,516 10,522 26,210 0.0% 27,026 18.4% 0.0% 19.1% $42.35 0.0% $41.09

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LeasingActivity

AvailableSF

AvailabilityRate

Asking RentsPer SF

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(1) Percentage point change for availability rates. Unless otherwise noted, all rents quoted throughout this report are average asking gross (full service) rents psf. Statistics are calculated using both direct and sublease information. Short-term sublet spaces (terms under two years) were excluded. ^Unless otherwise noted, source for data is Savills Studley.The information in this report is obtained from sources deemed reliable, but no representation is made as to the accuracy thereof. Statistics compiled with the support of The CoStar Group. Copyright © 2019 Savills Studley

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