Savills Studley Report Los Angeles office sector Q1 2015

Savills Studley Research Los Angeles

SUMMARYMarket Highlights

CLASS A AVAILABILITY RATE FALLS

The overall availability rate was essentially unchanged in the first quarter, averaging 18.0%, but the rate fell from 19.5% to 19.2% in Class A properties. The Westside registered sharp quarter-on-quarter declines in Class A rates in Hollywood (down by 1.9 pp to 12.1%) and Fox Hills/Marina (down by 1.6 pp to 19.9%).

STRONG LEASING ACTIVITY

Tenants have leased approximately 10.1 msf over the last six months – the strongest

two-quarter total in several years. Steady demand among entertainment, media and tech firms has been supplemented by increased activity in the legal and education sectors.

RENTS CONTINUE GROWTH

Overall asking rents continue to trend upwards, rising by 1.7% quarter-on-quarter from $30.50 to $31.02. Class A asking rents rose from $31.64 to $32.12, increasing by 1.5%.

“Newly constructed and renovated creative office spaces have enjoyed strong demand from both tenants and investors. Developers are scrambling to find buildings that are suitable conversion candidates.”

Mike Catalano,Executive Vice President

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Savills Studley Report | Los Angeles

Active Start to 2015Availability rates in the Los Angeles office market have been falling at a slower pace in the last three quarters. The overall rate was essentially unchanged in the first quarter, averaging 18.0%, but the rate fell from 19.5% to 19.2% in Class A properties. Nevertheless, the 10.1 msf leased in the last two quarters represents the strongest two-quarter total in several years. Although entertainment, media and tech firms have accounted for many of the relocations and expansions, market activity has also been boosted by increased demand from law firms, educational institutions and a few financial services companies.

While very few law firms are increasing the size of their lease commitments, they have recently become more active. The last few months have brought a flurry of law firm deals in Century City, including those finalized by Irell & Manella (125,250 sf at 1800 Avenue of the Stars); Milbank, Tweed, Hadley & McCloy (56,527 sf at 2029 Century Park East); and Polsinelli Shugart (56,514 sf at 2049 Century Park East). Additionally, Singer, Wolf, Goldman & Holtz; Covington & Burling; and Hecker Law Group have signed mid-sized leases in Century City.

Entertainment and Marketing Firms Lead LeasingMedia and entertainment companies still account for many top deals and a number of this quarter’s leases were renewals. In Burbank, Nickelodeon signed a new lease and renewed another at 203 W. Olive Avenue (113,760 sf) and 3000 W. Alameda Avenue (108,410 sf), respectively. At nearby 2900 W. Alameda Avenue, CBS Interactive and the Writers Guild leased a combined total of 66,378 sf. Cast & Crew Entertainment renewed a 70,230-sf lease at 2300 W. Empire Avenue and CBS Radio took 63,954 sf at 5670 Wilshire Boulevard in the Miracle Mile. Not all of the deals signed are indications of growth in the entertainment sector. As DreamWorks Animation SKG continues to cope with repercussions from sharp $263.2-million losses during the fourth quarter of 2014, the film maker sold its 497,403-sf headquarters to SunTrust Bank for $185 million and then leased it back through 2035. The new owner quickly put the property back on the market. The fully leased campus is expected to attract strong interest from institutional investors.

As the broader U.S. economy gains traction, consumers are spending more on durable goods such as electronics and mobile phones, as well as automobiles and

Source: Bureau of Labor Statistics

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

-9.0%

-7.0%

-5.0%

-3.0%

-1.0%

1.0%

3.0%

5.0%

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

$32.12$30.74

$26.89$24.34

$0

$5

$10

$15

$20

$25

$30

$35

$40

2015 1Q 2014 1Q 2013 1Q 2012 1Q 2011 1Q2010 1Q

($/sf) Rental Rate Trends

Class A Class B & C

Asking Rent Trends

19.2%20.9%

14.7%17.6%

0%

5%

10%

15%

20%

25%

2015 1Q 2014 1Q 2013 1Q 2012 1Q 2011 1Q2010 1Q

(%) Availability Rate Trends

Class A Class B & C

Availability Rate Trends

savills-studley.com/research 03

Q1 2015

Tenant Sq Feet Address Market AreaDreamworks Animation* 497,403 1000 Flower St GlendaleBeachbody Holdings 132,920 3301 Exposition Blvd Santa MonicaCity of Los Angeles 125,591 350 S Grand Ave Downtown LAIrell & Manella LLP 125,250 1800 Ave of the Stars Century CitySouthern California Edison 125,000 2 Innovation Way San Gabriel ValleyNickelodeon 113,760 203 W Olive Ave BurbankNickelodeon 108,410 3000 Alameda Ave BurbankEurofins Scientific 100,000 931 Corporate Center San Gabriel ValleyUSC School of Social Work 80,047 1149 S Hill St Downtown LACast & Crew Entertainment 70,230 2300 W Empire Ave BurbankSum of Top 10 Leases 1,478,611 Sum of 1st Quarter Leasing Activity 5.8 MSF

household appliances. In turn, advertising and marketing companies are seeing some increased demand for their services. Omnicom leased 60,000 sf at 12777 W. Jefferson Boulevard. Ignited Minds signed a 52,282-sf lease in the South Bay. Finally, in Santa Monica, Beachbody Holdings renewed 132,920 sf at 3301 Exposition Boulevard.

Rents Push Higher, Particularly in West Los AngelesRegional asking rents continued to trend upward, rising by 1.7% quarter-on-quarter from $30.50 to $31.02. Class A asking rents rose from $31.64 to $32.12, increasing by 1.5%. The West Los Angeles submarket continues to outpace the others in Los Angeles County. Class A asking rents in West Los Angeles have spiked by 10.3% year-on-year to $47.11. In contrast, rents in submarkets outside West Los Angeles, such as the San Fernando Valley and Downtown, have registered much more modest growth. As pricing in Santa Monica and surrounding areas increases, creative-sector tenants requiring bigger blocks of space continue to migrate to Playa Vista and El Segundo. Yahoo will move to Playa Vista, taking 400 jobs to a 131,592-sf building at the Collective at Playa Vista. The company will keep its space in Burbank. Harmony Inc., the parent company for eHarmony, signed a 10-year, 50,568-sf lease for the top four floors at 10900 Wilshire Boulevard in Westwood, where it received building signage. The dating site will relocate its office space from 64,000 sf at Colorado Center.

Scramble to Build Creative Space Newly constructed and renovated creative spaces have enjoyed success. Bixby recently signed Sanrio, creator of the popular Hello Kitty character, to a 28,584-sf lease at 2101 El Segundo Boulevard. Bixby has pushed occupancy at the property to nearly 80% just a year after it completed renovations. El Segundo has emerged in the last two years as an attractive alternative for creative-sector companies priced out of Santa Monica or Playa Vista. The market has a growing number of creative-sector office options and tenants and an expanding labor pool near South Bay Beach communities.Several developers in Downtown Los Angeles are hoping to emulate Bixby’s recent success. Realty Partners acquired Figueroa Courtyard, a five-building, 270,169-sf park near the Bunker Hill Financial District. The buyer expects to reconfigure the park,

where the buildings are currently 72% leased, as creative office space.

Investors Paying Top Dollar for Select PropertiesThe gross value of office property sales in Los Angeles dropped slightly in 2014, falling from $9.7 billion to $7.9 billion. Cap rates fell from an average of 6.5% to 6.0%. Premium properties, superior locations and steady cash flow are commanding even lower cap rates. The Reserve in Marina Del Rey, for example, sold for $316 million ($791.24/sf) with a reported cap rate of 4.3%. Newport Beach's Invesco Real Estate bought the fully leased 399,373-sf building from Shorenstein Properties and Worthe Real Estate Group.

Fully leased creative office space properties with elevated occupancy are selling at prices that are more than double the market average. Los Angeles-based IDS Real Estate Group paid $108 million ($847.71/sf) for the Beats by Dre complex in Culver City. Beats

by Dre leases two of the three buildings in the complex, and digital marketing company Steelhouse leases a smaller 17,600-sf property. Prior to renovation costs, the seller, Hackman Capital Partners, paid $25.3 million for the Beats by Dre buildings in 2007 and $2.3 million for the Steelhouse property in 2012.

Rents have recovered in Santa Monica and surrounding areas, but remain well below pre-recession peaks in most other areas including Tri-Cities and Downtown. Value-add investors, in turn, see a strong upside in assets that have below-market rents and imminent lease rollovers. Properties that were acquired in the last market peak (2006 to 2008) are still selling at a discount to pre-recession pricing. In late 2014, for example, 505 N. Brand Boulevard sold for $83 million ($200/sf). The seller, LaSalle, divested the property at a 20% discount from the $109 million it paid in 2005.

Availability Rate Comparison Overall Rental Rate Comparison

Major Transactions

$52.02$50.78

$48.73$47.20

$42.88$42.10

$36.82$35.29$35.25$34.78

$33.15$31.02

$30.04$29.80$29.45$28.99

$27.07$25.72$25.71$25.66$25.40$25.30$24.89$24.67$24.50$24.47

$22.44$20.52

$41.37$30.96

$27.85$0 $10 $20 $30 $40 $50 $60

Century CityBeverly Hills/W.Hollywood

Santa MonicaWestside

Westwood/West LAHollywood

Miracle MileFox Hills/Marina

BurbankDowntown LA

US IndexLos Angeles Region

Tri-CitiesPasadenaGlendale

N.Hwd/St.City/Univ. CitySouth Bay

South Bay AreaSan Fernando Valley

Santa Clarita ValleyWest San Fernando Valley

Central San Fernando ValleyLong Beach

AirportSan Gabriel Valley

Wilshire DistrictPark Mile

Mid-Wilshire

NewExisting Direct

Sublet

($/sf)

Type

8.8%12.7%12.8%12.9%13.4%13.6%14.3%15.0%15.2%15.5%15.5%15.6%16.3%16.6%16.9%17.0%17.1%17.5%18.0%18.0%

19.2%20.9%21.2%

22.7%22.8%

23.7%24.2%

28.0%

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

HollywoodWestwood/West LA

Beverly Hills/W.HollywoodSan Gabriel Valley

N.Hwd/St.City/Univ. CitySanta Clarita Valley

Central San Fernando ValleyLong Beach

WestsideMiracle Mile

Santa MonicaCentury City

San Fernando ValleyBurbank

PasadenaUS IndexTri-Cities

West San Fernando ValleyLos Angeles Region

GlendaleFox Hills/MarinaWilshire District

Downtown LAPark Mile

South Bay AreaMid-Wilshire

South BayAirport

(%)

*Sale-leaseback

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 34,399 2,788 7,282 6.0% 7,003 21.2% 1.2% 20.4% $34.78 3.4% $30.98Downtown LA - Class A 22,830 2,113 5,500 1.7% 5,423 24.1% 0.4% 23.8% $35.32 3.4% $31.67Wilshire District 16,133 1,044 3,379 -2.5% 3,472 20.9% -0.5% 21.5% $24.47 0.1% $23.70Wilshire District - Class A 13,183 925 2,955 -3.0% 3,006 22.4% -0.7% 22.8% $25.16 0.2% $24.43Hollywood 4,433 456 388 -7.9% 411 8.8% -0.8% 9.3% $42.10 1.6% $38.95Hollywood - Class A 2,249 393 272 -13.4% 313 12.1% -1.9% 13.9% $44.50 2.2% $40.72Westside 51,292 6,080 7,805 -3.9% 8,436 15.2% -0.6% 16.4% $47.20 2.3% $42.67Westside - Class A 46,364 5,316 7,356 -4.8% 7,853 15.9% -0.8% 16.9% $47.11 2.2% $42.70South Bay Area 34,938 1,883 7,962 1.7% 8,081 22.8% 0.4% 23.1% $25.72 1.0% $25.16South Bay Area - Class A 24,053 1,418 5,532 0.7% 5,558 23.0% 0.2% 23.1% $25.32 0.9% $24.66

San Fernando Valley 32,480 2,196 5,286 -0.8% 5,346 16.3% -0.1% 16.5% $25.71 0.0% $25.26San Fernando Valley - Class A 21,970 1,613 4,042 1.6% 3,835 18.4% 0.3% 17.5% $26.53 -0.1% $26.55Tri-Cities 25,187 2,203 4,307 -3.6% 5,007 17.1% -0.6% 19.9% $30.04 0.0% $30.19Tri-Cities - Class A 18,605 1,739 3,344 -5.2% 4,044 18.0% -1.0% 21.7% $32.47 1.7% $31.98

Santa Clarita Valley 2,760 115 376 5.2% 395 13.6% 0.7% 14.3% $25.66 -2.0% $26.92Santa Clarita Valley - Class A 2,081 95 320 4.6% 355 15.4% 0.7% 17.1% $26.62 -1.8% $27.61

San Gabriel Valley 11,402 659 1,475 9.4% 1,540 12.9% 1.1% 13.5% $24.50 0.6% $24.03San Gabriel Valley - Class A 3,910 296 435 -6.1% 658 11.1% -0.7% 16.8% $25.37 1.1% $25.04Greater Los Angeles Total 213,024 16,968 38,260 0.1% 39,691 18.0% 0.0% 18.6% $31.02 1.7% $29.29Greater Los Angeles Total - Class A 155,245 13,516 29,755 -1.7% 31,046 19.2% -0.3% 20.0% $32.12 1.5% $30.48

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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.

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 © 2015 Savills Studley

Savills StudleyDowntown Los Angeles777 S. Figueroa Street30th FloorLos Angeles, CA 90017(213) 553-3800

Director & Regional ManagerMark T. Sullivan - EVP,msullivan@savills-studley.comLicense 00975518

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Savills StudleyWest Los Angeles10960 Wilshire BoulevardSuite 1700Los Angeles, CA 90024(310) 444-1000

Executive Branch ManagerMike Catalano - EVP,mcatalano@savills-studley.comLicense 01759030