Western Real Estate Business

OCT 2016

Western Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Western United States.

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44 • October 2016 • Western Real Estate Business www.REBusinessOnline.com Westchester, as well as tech meccas Santa Monica and Venice. While start-ups and other tech com- panies may want to set up shop in these creative clusters, actually find- ing the space to do so is another issue entirely. Leasing activity for creative office space skyrocketed 91 percent in 2015, with asking rents increasing 33 percent since the second quarter of 2013, CBRE reports. If You Build It All this demand has motivated developers to add about 2.3 mil- lion square feet of new creative of- fice space to the Los Angeles area. This includes projects like Wilshire Curson, a $170 million creative of- fice project that is being developed by JH Snyder Company in the city's Miracle Mile neighborhood. The new 250,000-square-foot development will feature a two-story lobby that opens onto a public garden. Wilshire Curson will act as a bookend for its Museum Row neighbors, including the LaBrea Tar Pits, the George C. Page Museum and Los Angeles County Museum of Art (LACMA), once it's complete in late 2017. "Miracle Mile is soon to be the most desirable location in LA," says Jerry Snyder, founder and senior partner at JH Snyder. "Its cultural cachet is be- ing burnished with the addition of the Academy's Motion Picture Museum, an exciting new plan for LACMA and the re-opening of the revitalized Petersen Automotive Museum. Fur- ther, it's an easy walk to the Grove and Farmers Market, our most iconic gathering places, and initial work is underway on the Purple Line subway that will run along Wilshire. It's going to be a new era for the Miracle Mile." Though Wilshire Curson was origi- nally slated to be occupied by a sole tenant, the project is now moving for- ward on a spec basis. A 12-story spec office building may sound terrifying to some, but if CBRE's numbers are to be believed, the pent-up demand is ready and waiting for a project like this. Making History Creative office construction in LA is set to reach its highest level in this cur- rent cycle, but about half that space is already pre-leased, CBRE reports. This has led developers to convert an array of traditional offices, industrial spaces and even historical structures into creative office product. The study cites at least 27 existing buildings that have undergone this conversion, in- cluding the Masonic Temple in Glen- dale and the Ford Motor Factory and Broadway Trade Center in Downtown Los Angeles. John Zanetos, CBRE's senior vice president, says this type of repur- posing makes perfect sense in a city known for its art, history, talent and hordes of people who want to be in the thick of it. "Los Angeles has a unique combi- nation of historic office buildings and industrial product," he says. "These are one-of-a-kind buildings with ex- posed brick and wood-beamed ceil- ings left over from a once-robust man- ufacturing economy that are no longer useful in the way they were originally intended. These revamps make them relevant again and offer tenants a unique branding opportunity and ex- citing space to work out of." Preserving LA's rich media his- tory was most certainly on the minds of Kilroy Realty when it developed Columbia Square on the former lot for CBS's radio and television opera- tions. CBS broadcasted from the facil- ity, situated on Hollywood's famous Sunset Boulevard, from 1938 to 2007. The new 4.7-acre Columbia Square is a mixed-use campus that has attracted the likes of Viacom (MTV and Com- CREATIVE OUTPUT Regions like Oakland and Orange County are bolstering the West's office market, though there are nationwide challenges ahead. The office sector has been among the slowest sectors to recover now that we're several years removed from the bottoming out of commercial real estate asset classes across the board. Ten-X Re- search indicated that, while the market has shown steady signs of incremental growth, its recovery has lagged well behind more vital sectors, including industrial and multifamily. That deliberate pace has been evident through the first half of this year, as Ten-X's latest report reveals the office vacancy rate remained flat in the second quarter, holding at 16 percent. While this figure marks a low for the current cycle, it represents just a 50 basis point improvement from a year ago and is a decline of only 160 basis points from its cyclical peak. Despite the lackluster improve- ment in vacancies as of late, effective rents have continued to grow. They have risen 0.6 percent in the second quarter and 3.1 percent from a year ago, bringing effective rents to an all-time high of $25.37 per square foot, according to Reis. The continued strength in the labor market, particularly in office-using sectors, portends for solid office absorption ahead. However, stark regional differences are being masked by this rosy national picture, as only select metros are seeing robust employment growth. Fortunately, most Western markets — particularly gateway cities and those with strong tech industries — are on the right side of this divide, with metro areas like Orange County and Oakland lead- ing the way. Oakland is benefitting from a multitude of factors, including growth in its education and healthcare sectors, as well as spillover growth from the booming Bay Area at large. The city's affordability is driving population growth, and with a relatively low outlook for incoming office supply, Oakland is positioned well for growth in fundamentals in the near future. Orange County is also experiencing solid gains, as a strong local economy continues to drive improvement in office fundamentals. Vacancies currently measure near 16 percent, a new low for the cycle, driving strong rent growth of just less than 5 percent in the past year. Orange County will see some office completions in the coming years, but the growth generated by the local economy should be sufficient to absorb the new space. Portland and Phoenix are also seeing improvements in their office markets due to robust local economic growth. In fact, our research depicts a Western region that is performing well on the whole, as it boasts stronger demograph- ic trends than the Midwest and Northeast, and has avoided the oil slowdown that has adversely impacted Texas. It is important to note, however, that the Bay Area and Seattle are tied closely to the volatile tech sector, which can change those markets' demand profiles rapidly. While the West has been one of the select regional 'winners,' the overall future outlook for the national office market also remains positive. Ten-X Research projects U.S. office absorption to measure just less than 47 million square feet this year, a slight decline from last year's cyclical high of more than 50 million square feet. However, we expect 5 mil- lion square feet less of supply additions this year, which will lead to a 30 basis point improvement in vacancies. But as we cautioned earlier, the outlook varies by metro. The office sector does face secular headwinds inhibiting stronger gains in fundamentals. Cloud servers, shared floor plans and telecommuting are among the multitude of variables that have led companies to use less and less space per employee each year, resulting in office absorption weaker than the job growth would dictate. This trend looks to remain in place for some time, and will continue to inhibit office absorption and NOI growth around the country. — Peter Muoio, Executive Vice President and Chief Economist, Ten-X DESPITE MIXED NATIONAL RESULTS, WESTERN CITIES KEEP U.S. OFFICE MARKET TRENDING UP CREATIVE from page 1 Muoio CREATIVE OFFICE CONTEXT ASKING RENT INCREASED 33% SINCE Q2 2013 IN RESPONSE TO THE DEMAND FOR CREATIVE SPACE 0.0% 4.0% 8.0% 12.0% 16.0% 20.0% $0.00 $1.00 $2.00 $3.00 $4.00 2006 Q2 2006 Q4 2007 Q2 2007 Q4 2008 Q2 2008 Q4 2009 Q2 2009 Q4 2010 Q2 2010 Q4 2011 Q2 2011 Q4 2012 Q2 2012 Q4 2013 Q2 2013 Q4 2014 Q2 2014 Q4 2015 Q2 2015 Q4 2016 Q2 Vacancy PSF/MO Direct Rent (FSG) Direct Vacant Source: CBRE Research

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