Western Real Estate Business

AUG 2018

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

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M A R K E T H I G H L I G H T: L O S A N G E L E S 26 • August 2018 • Western Real Estate Business www.REBusinessOnline.com The Los Angeles County indus- trial market has a total of 992 million square feet, which is nearly 55 percent of the entire Metropolitan Los Angeles industrial market. The county's large and diversified economy is a signifi- cant contributor to expansion of the overall U.S. economy, including job and wage growth, as well as large- scale corporate investment. Major cor- porations continue to target the region due to its global strategic location and large, consumer-based population. This bodes well for continued indus- trial demand and keeps vacancy rates at lower levels than most other major national markets. Nationally, industrial fundamen- tals are now the strongest of all real estate asset classes. Consider that we just had our 32nd consecutive quarter of positive net absorption, the longest streak in 20 years. LA County vacancy remains the lowest in the nation, the result of a lack of developable land sites and persistent occupier demand stemming from cargo volumes at the nation's busiest port system. To that point, 2018 may top 2017 as the busi- est year on record for the ports of Los Angeles and Long Beach. With historically low vacancy rates in LA County and an inadequate sup- ply of functional product available in the infill markets, well-located, high- quality product will continue to attract a high level of demand and generate premium rental rates. Record-low vacancy rates and aggressive rent growth are projected to continue for the foreseeable future, and we expect vacancy rates to remain at record lows of less than 2 percent. Logistics and ecommerce tenants are especially active in the LA County industrial market. The average time on the market for available Class A and B warehouse space is between three and five months. Going forward, expect industrial demand to grow as 3PLs (third-party logistics) and online startups continue to search for space near population-dense areas of the market to "narrow the distance" to meet consumer expectations for same- day delivery. Construction starts are extremely limited due to available land con- straints. The region gained more than 1.9 million square feet in net occu- pancy this quarter – a result of strong demand and dwindling supply. That said, buildings under construction were down 60.3 percent from one year ago. This will likely slow future absorption gains in the coming quar- ters. The average asking rental rate of $0.79 per square foot was up 5.9 percent from one year ago, now at an all-time high. These factors will cause industrial rents to continue to climb as vacancy is incredibly tight, new con- struction is very limited and entitle- ment and development costs are both increasing. At a national level, we've seen un- precedented institutional allocations for industrial with limited core and value-add opportunities. Moreover, we are experiencing rising interna- tional inflows of capital into U.S. in- dustrial. This is especially true for top port markets like LA County, which is experiencing the perfect storm for investment sales – the highest pricing with cap rates below 4 percent. The development and redevelop- ment of urban areas is one of the big- gest trends on my radar right now. I have seen successful retail projects in urban markets like Santa Monica Place, Renaissance Marketplace and the Long Beach Exchange in the past few years. The biggest challenge de- velopers face is the lack of available in- fill land for retail development. There have been a few large, notable transactions that prove retail continues to be a viable investment for both private investors and large institutional groups. If a developer can successfully launch a ground-up or redevelopment project in a good location and captivate a local market, investors are generally willing to step up and continue to pay aggressive pricing. In addition to traditional retail developments, we're seeing successful mixed- use developments pairing with both residential and hospitality. Not only is this a popular trend overseas, but these same international developers are coming to California to build these types of projects. Oceanwide Plaza in Downtown Los Angeles is a great example. While retailers have been very aggressive in expanding into traditional retail developments, there has been an increasing pushback on larger retailers expanding into mixed-use developments. While developers may be looking to expand into mixed-use projects, they are still finding a challenge absorbing large spaces from retailers. What we are finding in these mixed-use projects are entertainment-oriented retailers, as there seems to be a challenge getting traditional retailers like gro- cery stores or larger soft good retailers in certain projects. This is often because the price the developer is asking is higher than these tenants can pay. Fortu- nately, forward-thinking developers are recognizing this and creating smaller anchor spaces and smaller average unit sizes to fit different retailers. This strat- egy can still drive the high rents necessary to validate the development. Developing these urban retail or retail-oriented mixed-use developments is challenging and extremely time consuming, but they can also be very reward- ing. We will continue to see changes in consumer spending that shape future developments and the long-term viability of retail real estate. These changes are exciting and will help cultivate a more creative spending environment with experiential ways to connect and spend money. DOWNTOWN LA'S OFFICE MARKET GETS NOTICED The downtown office migration trend continues in Los Angeles. Arup leased 66,000 square feet at the Wilshire Grand Center in a relocation and expansion of its regional office from Playa Vista, while Spotify will leave West Hollywood for 100,000 square feet in the Arts District. Both leases are indicative of a larger trend in which Westside tenants, faced with higher rents, are pursuing cost-effective options. Downtown's Class A asking rent averaged $3.73 per square foot in the second quarter, compared to $5.89 per square foot in Santa Monica and $5.27 in Playa Vista. As of the second quarter of this year, average asking rent across all prop- erty types reached new peaks. Class A rents exceeded its prior cyclical high by 9.7 percent, while Class B rent is 14.7 percent higher than its prior peak. West Hollywood led in absorption activity thanks to several move-ins from companies like Loyola Marymount University and Neilsen Financial, which absorbed 50,092 square feet and 34,689 square feet, respectively. De- spite higher costs, the Westside continues to remain a darling of the enter- tainment and tech worlds. Snapchat, Google and Amazon have all solidified their positions there, ensuring West LA will remain the star of the show for this real estate cycle. Traditional large occupiers continue to make moves Downtown. Transam- erica shed 140,000 square feet of space, while City National Bank settled into 120,000 square feet at 2Cal in Downtown with plans to eventually occupy 300,000 square feet. City National is now the first company with prominent building-top signage on two of Los Angeles' skyline-defining buildings, in- cluding City National 2CAL and City National Plaza. The overall feeling is that we are at a tipping point as rents continue to rise and building sales continue to set record highs. Tenants are struggling with the rates that landlords are projecting upon expiration of their current leases. Vacancies increased slightly in the second quarter as new construction de- liveries exceeded flat absorption gains. Looking ahead, the breadth of con- struction activity across LA will remain impressive, including new construc- tion and refurbishment of historic properties. Rockwood Capital broke ground on the 128,400-square-foot Water's Edge 3 in Playa Vista, expected to deliver in 2020, and Kilroy Realty began work on the 545,000-square-foot Academy on Vine in Hollywood. Warner Mu- sic Group, meanwhile, will fill the refurbished Ford Factory Building in the Arts District this fall. Transit-oriented development is also in demand, accelerating growth in Culver City and El Segundo. Construction is well underway on the $300 million Ivy Station development at the Culver City Station park-and-ride lot at Washington and National boulevards. The 160,000-square-foot (W)RAP- PER, now under construction, will be Los Angeles' first high-rise creative office building. The project sits adjacent to the Jefferson/La Cienega stop of the Expo Light Rail Line, making the tower site readily accessible by sur- face rail. Hackman Capital Partners is underway on Culver Steps, providing 40,000 square feet of curated retail, 75,000 square feet of creative office and a 35,000-square-foot public plaza. Situated in downtown Culver City, it's sandwiched between the Culver Hotel and the Culver Studios. — David Kluth, Executive Managing Director, NKF INDUSTRIAL DEMAND STAYS STRONG IN LA URBAN ENVIRONMENTS EMBRACE MIXED-USE, DEVELOPERS EMBRACE SMALLER RETAIL SPACES Bret Hardy Executive Managing Director, NKF El Warner Executive Vice President and National Director, Matthews Real Estate Investment Services

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