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NAI CAPITAL Market Report | Year-End 2011


1

Economic Trends Economically speaking, 2011 was an interesting year for California. Gross Domestic Product (GDP), the most comprehensive economic variable, increased each quarter. In fact, the State’s GDP increased each of the past nine quarters. However, GDP growth was not robust. It failed to exceed 2 percent during the first three quarters. 2011 was much different than 2010 when GDP growth was 2 percent or higher during three of four quarters. The slow growth gave the impression that California was not really improving. Unemployment, although falling, is still high. The same goes for foreclosures. Wage and salary growth has been minimal and the housing market is still a mess. In general, it was difficult to believe that California had turned the corner. As 2012 begins optimism is beginning to spread. Our 2011 Q4 forecast for GDP growth is 2.3 percent. If we are correct this will represent the highest growth rate since Q2 2010. Our forecast for the first half of 2012 is not as robust but it is better than our previous forecast. As we update our forecast every quarter the data support a higher GDP growth rate. This is what we mean by optimism. New economic data continue to reinforce the idea that California’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 put the shortfall at $9 billion. This is smaller than previous years but it is still a shortfall. Thus, once again we can expect more cuts to education and perhaps even new or higher taxes and fees. Regardless of how the shortfall is remedied, the annual budget shortfall continues to wreak havoc on certain sectors of California’s economy. From a business perspective California remains a risky state. Businesses want stability not an annual budget deficit. Businesses, rightly so, are concerned about higher business taxes. California is already a business unfriendly state. If business taxes increase more companies will decide to leave the State. From a jobs perspective the annual budget shortfall is a disaster. State and local government jobs are disappearing. This is particularly true in the education sector. Class sizes are increasing, teachers are frustrated, tuition is increasing and students are suffering. California needs to stabilize its budget before this trend can be reversed. Sadly, it does not appear that policy makers are ready to do this. We expect more partisan politics that will exacerbate the problem. We fully expect this to happen again next year. Hopefully, the shortfall will be smaller. Our second concern has to do with oil prices. Iran continues to defy the rest of the world as it threatens to close the Strait of

3.50

California GDP Seasonally Adjusted Annual Growth Rate

3.00 2.50

Percentage

NAI Capital is pleased to provide the following economic outlook to our clients. We understand the importance of timely, accurate data when making significant financial decisions. As such, we have taken every measure to verify the accuracy of the data contained in this report. We hope that this information is helpful to you

2.00 1.50 1.00 0.50 0.00

Q1

Q2

Q3

2010

Q4

Q1

Q2

Q3

2011

Q4

Q1

Q2

2012

Source: CERF (dark blue indicates forecasted numbers)

Hormuz. According to the Energy Information Administration of the Department of Energy, approximately 17 million barrels of oil pass through the Strait of Hormuz daily! Any disruption of this magnitude will negatively impact oil prices. Will Iran follow through on its threat? That is a difficult question to answer. As economic forecasters we tend to shy away from political games. Nonetheless, the answer to that question may be mute. If the world believes the threat is credible oil prices will increase. In fact, this has already happened. Oil prices rose immediately after the December 27th announcement by Iran. Prices have retreated some but are still above the December 27th price. Our last concern is sovereign debt issues in Europe. The European Union has yet to find a solution to this problem. Until it does economic uncertainty will rise. Political and economic pundits fear that the Eurozone may fall apart. Although U.S. banks are not terribly exposed to European debt problems the impact on world financial markets will be severe if one or more of these countries defaults on its debt or if the single currency Eurozone disintegrates. The data on wage and salary growth was mixed during 2011. The good news is that wage and salary income grew during the first three quarters of 2011. The bad news is core inflation, the inflation rate minus volatile food and energy prices, grew faster than wages in Q2 and Q3. As a result, real income fell in each of these quarters. Over the next three quarters we forecast the opposite will occur. Wage and salary income will grow faster than inflation. This will bode well for the consumer. After accounting for higher prices consumers will have more money in their pockets to spend. Despite the growth in real wages we are concerned that wages are not growing fast enough. The forecast calls for moderate increases in wages and salary not robust increases. We expect wages and salary to grow between 2 and 3 percent on a seasonally adjusted annual rate.The good news is inflation will be less than 2 percent over the next three quarters.


2 California’s official unemployment rate remains high. At the end of Q3 2011 12 percent of Californians were unemployed. Going forward we expect the unemployment rate will fall significantly in Q4 2011 due to a robust holiday season. Starting in Q1 2012 we anticipate the unemployment rate will fall but the declines will be much smaller. At the end of Q2 2012 we anticipate the unemployment rate will be 11.4 percent. This is still high but it is moving in the right direction. The slow decline in unemployment is due to our concerns regarding the public sector and the construction sector. As mentioned above, California’s $9 billion budget shortfall will not bode well for public sector employment. In regards to construction, an oversupply of both residential and commercial properties will limit the need for new construction. We anticipate that only the multifamily market will experience significant construction in 2012.

The change in number of unemployed persons in the Basin is accelerating. From November 2010 to November 2011 the number of unemployed persons in the Basin declined 133,000. This is nearly three times the amount we reported in May 2011. Furthermore, this represents a significant improvement over last year in which the number of unemployed persons increased 63,900.

California Unemployment Rate Seasonally Adjusted Rate 12.6% 12.4% 12.2% 12.0% 11.8% 11.6%

After rising during the summer months employment rates throughout the Basin are declining. Thanks to this decline unemployment rates in the Los Angeles Basin are better than the State with one exception. The Inland Empire continues to experience a higher unemployment rate relative to California. Unemployment rates in Los Angeles, Orange and Ventura County are below the State unemployment rate. More importantly, unemployment rates in Orange and Ventura County are below 10 percent.

California Wage and Salary Income Seasonally Adjusted Annual Growth Rate 9%

11.4% 11.2% 11.0% 10.8%

Q1

Q2 Q3 2010

Q4

Q1

Q2 Q3 2011

Q4

Q1 Q2 2012

Source: CERF

Unemployment Rate by County 16% 15%

8%

14%

7%

13%

6%

12%

5%

11%

4%

10%

3%

9%

2%

No v10 De c10 Ja n10 Fe b10 M ar10 Ap r-1 0 M ay -1 0 Ju n10 Ju l-1 1 Au g11 Se p11 Oc t-1 1 No v11

8%

1% 0%

Q1

Q2 Q3 2010

Q4

Q1

Q2 Q3 2011

Q4

Los Angeles

Q1 Q2 2012

Source: CERF

Orange

Inland Empire

Ventura

Source: California Employment Development Department

Change in Unemployed Persons

California Core Inflation Rate Year-on-Year Percentage Change 1.80

Nov 2010 - Nov 2011

Nov 2009 - Nov 2010

1.60

Percentage

1.40

Number

% Change

Number

% Change

1.20

Los Angeles

(71,000)

-11.2%

57,100

9.9%

1.00

Orange

(21,000)

-14.1%

300

0.2%

Inland Empire

(34,900)

-13.6%

5,100

2.0%

(6,100)

-13.0%

1,400

3.1%

(133,000)

-13.0%

63,900

3.8%

0.80 0.60

Ventura

0.40 0.20

Total/Average

0.00 Q1

Source: CERF

Q2 Q3 2010

Q4

Q1

Q2 Q3 2011

Q4

Q1 Q2 2012

Source: California Employment Development Department


3 California Median Home Price Year-to-Year Percent Change

Los Angeles Basin Job Growth November 2010 to November 2011 25% Government Other Services

20%

Leisure & Hospitality Educational & Health Services

15%

Professional & Business Services Financial Activities

10%

Information Transportation, Warehousing & Utilities

5%

Retail Trade

0%

Wholesale Trade Manufacturing

-5%

Construction -2

0

2

4

-10% Q1

Q2 Q3 2010

Q4

Q1

Q2 Q3 2011

Q4

Q1 Q2 2012

Source: California Employment Development Department

Source: CERF

This is a positive sign that the labor market is improving. The increasing pace at which unemployed persons is falling bodes well for the local labor market. More importantly, this is all private sector hiring. As we discuss below, the public sector continues to lose jobs.

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.

In terms of industries, job losses have not been spread evenly. Budget problems at the state, county and city level have taken a toll on government employment. Given the budget problems faced by governments throughout the Basin and the State, we expect more public jobs to vanish in 2012. The already-decimated Construction industry continues to lose jobs. The over-supply in the residential and commercial real estate markets does not bode well for this sector. We expect construction to remain weak throughout the foreseeable future. The gains in Education & Health Services are solely due to Health Services. Jobs in the Education Sector are declining. Furthermore, budget cuts to the State’s K-12 and University systems are likely to lead to more education sector job losses. Retail sales, a primary source of revenue for governments, have grown seven consecutive quarters. The increases in the last six

After growing for most of 2010, California median home prices fell from Q4 2010 to Q3 2011. While the declines are not what they were in 2008 and 2009, they are troubling. This is evidence that the housing market still has some hurdles to overcome. Credit markets remain frozen to many buyers. Consumers remain burdened with high loan-to-value ratios. In many cases the loanto-value ratios exceeds 100 percent. Persistent high unemployment, weak labor market conditions and declining real wages are not conducive to home buying. We believe that California’s economy is too weak to sustain a robust recovery in the housing market at this time. Going forward we expect home prices to essentially remain flat. What little growth we forecast is below 5 percent. Conditions for a robust housing recovery are not present at this time. Given the problems mentioned above we expect conditions in the housing market to remain as they are. We expect very little growth and a lot of frustrated home owners and buyers.

Median Home Price Year-on-Year % Change

California Retail Sales Year-on-Year Percent Change

4%

7%

2%

6%

0%

5%

-2%

4%

-4%

3%

-6%

2%

-8%

1% Q1

Q2 Q3 2010

Q4

Q1

Q2 Q3 2011

Q4

Q1 Q2 2012

No v10 De c10 Ja n11 Fe b11 M ar11 Ap r-1 1 M ay -1 1 Ju n11 Ju l-1 1 Au g11 Se p11 Oc t-1 1 No v11

-10%

0%

Los Angeles

Source: CERF

Orange

Riverside

Source: California Association of Realtors

San Bernardino

Ventura


4 Foreclosures

California Foreclosure Rate

9,000

5.50

8,000 7,000

5.00

Percentage

6,000

4.50

5,000 4,000

4.00

3,000 2,000

3.50 1,000

3.00

0

Q1

Q2

Q3

Q4

Q1

2010

Q2

Q3

Q4

2011

Q1

Q3 Q4 2009

Q2

Q1

Q2 Q3 2010

Q4

Q1

Q2 2011

Q3

2012 Los Angeles

Orange

Riverside

San Bernardino

Ventura

Source: CERF

Source: DataQuick

As we move from California to the Basin the picture does not improve. The median price for all homes in the Basin decreased during 2011. As with the State, the declines were not as steep as they were in 2008 and 2009. Nonetheless, the declines point to a weak housing market.

home prices. As long as foreclosures remain high home prices will suffer.

At the risk of sound redundant, the issues that plague the California market also plague the local markets. We do not anticipate a quick recovery in the local housing market. At best we anticipate prices to modestly increase in 2012. Foreclosures continue to plague the California residential market. Although the foreclosure rate has fallen it remains well above its historical average. Unfortunately, we do not expect the rate to fall to its historical average in the near future. We expect the foreclosure rate to fall modestly from Q4 2011 to Q2 2012. High unemployment combined with too many upside-down mortgages suggests that foreclosures are not going away any time soon. The persistently high foreclosure rate will continue to plague California’s residential real estate markets. Our expectation regarding foreclosures plays a key role in our forecast of median

After peaking in the first quarter of 2009, Notices of Default (NODs) began declining in the Los Angeles Basin. Unfortunately, the rate of decline has slowed in recent quarters. In fact, the number of NODs increased throughout the Basin in Q3 2011. This is another sign of a weak housing market. Sadly, the local housing market is likely to drag along at its current level. All the data point to another poor year in the residential market. A slightly different pattern emerges for foreclosures. Los Angeles, Riverside and San Bernardino County’s all experienced a decline in foreclosures from Q3 2009 to Q3 2011 while Orange and Ventura County’s remained flat over the same time period. The decline in the three markets is certainly good news. However, the persistent rate in Orange and Ventura County’s is troubling. Going forward we expect foreclosures to rise in the Basin. This is due to the increase in NODs mentioned above. We do not expect

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

Notices of Default 25,000 20% 15%

20,000

10%

15,000

5% 0%

10,000

-5% -10%

5,000

-15% -20%

0 Q3 Q4 2009 Los Angeles

Source: DataQuick

Q1 Orange

Q2 Q3 2010 Riverside

Q4

Q1

Q2 2011

San Bernardino

Q3

-25% Ventura

Q1

Q2 Q3 2009

Q4

Q1

Source: Pacific Maritime Association

Q2 Q3 2010

Q4

Q1

Q2 2011

Q3


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

Port Hueneme Year-to-Year Percent Change 60% 50%

The entertainment industry slowed during 2011. Box Office Mojo reports that gross receipts for 2011 declined 3.8 percent compared to 2010. The decline was solely due to a decline in tickets sold. For the year ticket sales declined 4.7 percent. The decline in ticket sales relative to gross receipts is due to an increase in average ticket prices. Ticket prices increased $0.07 from 2010 to 2011.

40% 30% 20% 10% 0% -10% -20% -30% -40%

Q1

Q2 Q3 2009

Q4

Q1

Q2 Q3 2010

Q4

Q1

Q2 Q3 2011

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

Source: Pacific Maritime Association

the increase to be significant. However, the last thing any of these housing markets need is an increase in foreclosures. Total inbound and outbound traffic at Los Angeles and Long Beach ports increased from Q1 2010 to Q2 2011 then declined in Q3 2011. On the surface this decline seems like bad news. We have a different take. We believe the decline simply reflects the fact that Q3 2010 was so good. We cannot expect 20 percent increases every quarter.

The Retail Market Thanks in large part to improving retail sales the retail market is showing signs of improvement. Compared to Q4 2010 vacancy rates are essentially unchanged. For the Basin as a whole vacancy rates increased from 7.1 to 7.2 percent. Relative to the size of

Q4 2011 Orange County Retail Vacancy Rates 9%

8.3%

8.4%

8%

This is important because we do not believe that activity at the ports is declining. This is simply a comparison issue and is not linked to a structural decline in activity. There may be a few more quarters of small decreases as we compare to Q4 2010 and Q1 2011, as both of these quarters experienced growth of 10 percent or higher.

6.9%

7%

6.8%

6.5%

6% 5%

4.7%

4% 3%

Overall, we expect activity at the ports to remain robust. However, there is one caveat. As mentioned above, the potential disruption of oil from the Strait of Hormuz may negatively impact world trade. The news is not quite as good for the Port of Hueneme. Total inbound and outbound traffic increased every quarter of 2010 but

2% 1% 0% OC Airport

9%

8.4%

8%

4%

Orange County

11.2%

10%

7%

9.1% 5.8%

6% 5%

OC West

10.5% 7.7%

7%

OC South

Q4 2011 Inland Empire Retail Vacancy Rates 12%

8.9%

OC North

Source: Costar

Q4 2011 Los Angeles County Retail Vacancy Rates 10%

OC Central

5.8% 5.7%

5.6%

4.9%

8%

4.4% 3.9% 3.4%

6%

3% 2%

4%

1%

2%

An te lop e

Va Do lley w nt ow n M id -C itie M s id W ils hir Sa e Sa nt a n Cl Fe ar rn ita an do Sa n Va G l ley ab rie lV all ey So ut h So B ut ay he as tL .A . Tr i-C itie s W es tL .A L. . A. Co un ty

0%

0%

Source: Costar

Source: Costar

IE East

IE West

Inland Empire


6 the market this small change is insignificant. Unfortunately lease rates continue to decline. However, the rate of decline has slowed and 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 slightly improve. As mentioned above we expect retail sales to grow but at lower rates. Although improving, unemployment remains problematic in the Basin. On a positive note, real incomes are expected to increase.

Q4 2011 Ventura County Retail Vacancy Rates

Q4 2011 Inland Empire Retail Net Absoption

6.6%

200,000

6.5%

6.5%

6.5%

150,000

6.4%

100,000

6.4%

156,091

50,000

6.3%

6.3%

0

6.3%

(50,000)

6.2%

6.2%

6.2%

(100,000)

6.1%

(150,000)

6.1%

(200,000)

(166,970)

IE East

6.0% Ventura North

Ventura South

Source: Costar

Source: Costar

Q4 2011 Los Angeles County Retail Net Absorption 350,000

Q4 2011 Ventura County Retail Net Absorption 50,000

304,753

300,000

IE West

Ventura County

43,927

45,000

250,000

40,000

200,000

184,276

35,000

150,000

30,000

100,000 86,131

88,200 59,287

25,000

53,508

50,000

20,000

10,279 0 (6,068)

(6,026)

(50,000)

(37,555)

15,000 10,000

(100,000)

7,060

5,000

(150,000)

0

(149,080)

Ventura North

Ventura South

An te lop e

Va lle y Do w nt ow n M id -C itie M s id W ils hir Sa e nt Sa a n Cl Fe a rit rn a an do Sa Va n G lle ab y rie lV all ey So ut h So Ba ut y he as tL .A . Tr i-C itie s W es tL .A .

(200,000)

Source: Costar

Source: Costar

Q4 2011 Orange County Retail Net Absorption

Q4 2011 Los Angeles County Retail Rental Rates $3.50

200,000 168,036

161,761

150,000

$3.00

100,000

$2.50

50,000

$2.00

$3.23 $2.99

$2.06

$1.94

$1.92

0

$1.50 $1.40

(79,916)

$0.50

(150,000) (153,391)

(200,000) OC Airport

Source: Costar

OC Central

OC North

OC South

OC West

$0.00 Va Do lley w nt ow n M id -C i t ies M id W ils hir Sa e Sa nt a n Cl Fe a rn rit an a do Sa n Va G lle ab y rie lV all e So y ut h So Ba ut y he as tL .A . Tr i-C itie s W es tL .A L. A. . Co un ty

(100,000)

$1.53

$1.52

$1.00

(37,638)

An te lop e

(50,000)

$1.95

$1.74

$1.69 $1.52

Source: Costar


7 Q4 2011 Orange County Retail Rental Rates

Q4 2011 Ventura County Retail Rental Rates $1.90

$2.50 $2.11

$1.85

$2.04

$2.00

$1.86 $1.56

$1.85

$1.83

$1.80

$1.59

$1.76

$1.75

$1.50

$1.70 $1.00

$1.65 $1.62

$1.60

$0.50

$1.55 $0.00 OC Airport

OC Central

OC North

OC South

OC West

Orange County

$1.50 Ventura North

Ventura South

Ventura County

Source: Costar

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 percentage points. Essentially, vacancy rates are constant relative to last year.

Here we mention a few of the larger transactions.

At 10.5 percent the Inland Empire has the highest vacancy rate while 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. In a 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 exception of the Inland Empire. Thankfully, the 10,000 square feet returned to the market in the Inland Empire was insignificant. At 588,000 square feet, Los Angeles County had the highest net absorption. Lease rates continue to decline. The average lease rate for retail space declined $.06 per square foot from a year ago. At $1.40 per square foot per month the Inland Empire has the lowest lease rates in the Basin. Los Angeles County experienced the largest decline as lease rates fell from $2.07 to $1.95.

Q4 2011 Inland Empire Retail Rental Rates $1.47

$1.46

$1.42 $1.40

$1.40 $1.37

$1.36 $1.34 $1.32 IE East

Source: Costar

3) The Empire Academy of Makeup leased 12,118 square feet in the 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’ Westlake Market Plaza. The estimated lease rate is $30.00 per square foot per year NNN. Sales Transactions 1) The Monterey Marketplace in Rancho Mirage was sold on 12/5/2011. The sales price was $11,000,000 or $82.84 per square foot. 2) The 218,530 square foot Culver Center was sold on 11/16/2011. The sales price was $115,000,000 or $526.24 per square foot.

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

$1.44

$1.38

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

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

$1.50 $1.48

Leasing Transactions 1) 24 Hour Fitness leased 17,065 square feet in the Palmdale Town Square. The estimated lease rate was $6.60 per square per year NNN. NAI Capital represented both the leasing company and the tenant.

IE West

Inland Empire


8

Los Angeles Basin Retail Market n Fourth Quarter 2011 Average Asking Rental Rate1

Vacancy Rate 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)

Source: CoStar 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.


9 The Office Market As we reported several months ago, California is losing businesses to other states. Unfortunately, the trend continues today. California has become a business unfriendly state. Other states are taking advantage of this and actively recruiting California businesses to relocate. One of the unfortunate outcomes of California’s budget crisis is that tax incentives for new businesses have all but disappeared. Historically, programs such as these have been effective in encouraging startup companies. Small companies are the backbone of the American economy. They supply the bulk of jobs in this country. Sadly, California is doing very little for them during a time when they are desperately needed.

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

Q4 2011 Orange County Office Vacancy Rates 25% 19.8%

20% 17.6%

16.1%

15.4%

16.9% 15.3%

15%

10%

5%

The lack of incentives was particularly hard on California and the Basin. California has been a hot-bed of startups. The Silicon Valley is a prime example. The state has a phenomenal venture capital system that provides the necessary capital for new companies. Human capital produced at the University of California has provided the employees for startups. California’s ability to encourage new businesses is fading. Potential new environmental regulation will not help. High business taxes and over regulation are encouraging companies to leave the state not stay. The bottom line is that all of these issues are negatively impacting the office market. Vacancy rates for office space in the Los Angeles Basin average 16.1 percent. Ventura County’s 19.9 percent vacancy rate is slightly above the Inland Empire’s 19 percent rate. Los Angeles County has the lowest vacancy rate, 15.2 percent.

0% OC Airport

OC Central

OC North

OC South

OC West

Orange County

Source: Costar

Q4 2011 Inland Empire Office Vacancy Rates 21.0% 20.5%

20.5% 20.0% 19.5%

19%

19.0% 18.5%

18.4%

18.0% 17.5%

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

Q4 2011 Los Angeles County Office Vacancy Rates 25%

17.0% IE East

IE West

Inland Empire

Source: Costar

Q4 2011 Ventura County Office Vacancy Rates 25%

21.1%

20.7%

19.5%

20%

20% 16.3%

15.5%

15%

10.6%

10%

15.2% 15.4% 15.2%

14.8%

13.2%

19.9%

16.2% 15%

11.5% 9%

10% 5% 5%

An te lop e

Va Do lley w nt ow n M id -C itie M s id W ils hir Sa e Sa nt a n Cl Fe a rn rit an a do Sa n V all G ey ab rie lV all ey So ut h So Ba ut y he as tL .A . Tr i-C itie s W es tL . L. A. A. Co un ty

0%

Source: Costar

0% Ventura North

Source: Costar

Ventura South

Ventura County


10 Net absorption was a positive 846,046 million square feet during the fourth quarter. The positive net absorption helped reduce vacancy rates from 16.6 to 16.1 percent. Every county with the exception of Ventura experienced positive net absorption during the quarter. Although small, the positive impact of net absorption should not be overlooked. Before vacancy rates can fall and lease rates rise excess inventory must be absorbed. The office market has a ways 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 for the entire Basin are holding steady. Lease rates in Los Angeles County actually increased relative to last year. The increase is not significant but at least they are increasing. Furthermore, lease rates 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 lease rates. 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

Q4 2011 Los Angeles County Office Net Absorption 250,000

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

Q4 2011 Inland Empire Office Net Absoption 35,000 29,594

30,000 25,000 20,000 15,000 10,000 5,000

3,253

0 IE East

IE West

Source: Costar

Q4 2011 Ventura County Office Net Absorption 40,000

200,000

183,652

150,000

10,000 55,574

50,000 29,100

0

34,942 1,384

0

27,109

20,000

100,244 110,283

100,000

30,000

(10,000) (20,000)

(25,509)

(50,000)

(44,348)

(30,000)

(70,681)

(100,000)

(40,000)

(150,000) (50,000) (178,010)

An te lop e

Va lle y Do w nt ow n M id -C itie M s id W ils hir Sa e nt Sa a n C Fe l a rit rn a an do Sa Va n G lle ab y rie lV all ey So ut h So Ba ut y he as tL .A . Tr i-C itie s W es tL .A .

(200,000)

(60,000)

(59,285)

(70,000)

Ventura North

Ventura South

Source: Costar

Source: Costar

Q4 2011 Orange County Office Net Absorption 500,000

Q4 2011 Los Angeles County Office Rental Rates $3.50

452,058

$3.18

$3.00

400,000

$2.50

300,000 $2.00 $1.87

200,000

$2.50

$2.55

$2.43 $1.93

$2.08

$2.03 $1.86

$2.42

$1.99 $1.75

$1.50 123,986

123,719

$1.00

100,000 32,270

$0.50

0

An te lop e

(83,289)

Va Do lley w nt ow n M id -C itie M s id W ils hir Sa e Sa nt a n Cl Fe ar rn ita an do Sa n Va G lle ab y rie lV all ey So ut h So Ba ut y he as tL .A . Tr i-C itie s W es tL .A L. . A. Co un ty

$0.00

(100,000) (200,000) OC Airport

Source: Costar

OC Central

OC North

OC South

OC West

Source: Costar


11 Q4 2011 Orange County Office Rental Rates $1.95

Q4 2011 Ventura County Office Rental Rates $1.98

$1.94 $1.92

$1.96

$1.96

$1.91

$1.90

$1.88

$1.94

$1.94

$1.92 $1.85

$1.90 $1.81

$1.88

$1.80

$1.86 $1.84

$1.75

$1.75

$1.84

$1.82 $1.80

$1.70

$1.78 $1.65

OC Airport

OC Central

OC North

OC South

OC West

Orange County

Source: Costar

Ventura North

Ventura South

Ventura County

Source: Costar

Q4 2011 Inland Empire Office Rental Rates $1.68

$1.67

$1.66 $1.64 $1.62

$1.61

$1.60 $1.58

$1.76

Leasing Transactions 1) Southern California Schools Risk Management, JPA leased 9,785 square feet of space at the Hospitality Executive Center in San Bernardino. The lease rate is estimated to be $18.60 per square foot per year. 2) International Rectifier Corporation renewed a lease for 128,532 square feet in El Segundo. The estimated lease rate is $28.20 per square foot per year.

$1.58

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

$1.56 $1.54 $1.52 IE East

IE West

Inland Empire

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

Source: Costar

Sales Transactions 1) 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 Camino Drive 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 Main Street 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 1174 Amazon Way in Simi Valley was sold on 10/12/2011. The price was $795,000 or $285.05 per square foot.


12

Los Angeles Basin Officel Market n Fourth Quarter 2011 Average Asking Rental Rate1

Vacancy Rate 2011

2010

Difference

Net Absorption (SF)

2011

2010

Difference

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 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.


13 The Industrial Market Net absorption exceeded 2 million in the Inland Empire. For the Basin as a whole net absorption was a positive 3.3 million square feet. Vacancy rates for the entire basin declined 0.9 percent points from a year ago. More importantly, lease rates increased $.01 per square foot compared to last year.

Q4 2011 Inland Empire Industrial Vacancy Rates 10.0% 9.8%

9.8% 9.6% 9.4%

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

9.2%

9.2% 9.0% 8.8%

8.7%

8.6%

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

Q4 2011 Los Angeles County Industrial Vacancy Rates 9% 6.4%

7%

6.8%

8.2% 8.0% IE East

IE West

Inland Empire

Source: Costar

Q4 2011 Ventura County Industrial Vacancy Rates 12%

8.3%

8%

8.4%

7.1%

7.6%

7.5%

10.5% 6.8%

10%

5.7% 5.6%

6%

8.5%

5%

8%

4.9%

4.8%

4%

7.4%

6%

3% 1.9%

2%

4%

1% 2%

An te lop e

Va Do lley w nt ow n M id -C itie M s id W ils hir Sa e Sa nt a n Cl Fe a rn rit an a do Sa n V all G ey ab rie lV all ey So ut h So Ba ut y he as tL .A . Tr i-C itie s W es tL .A L. . A. Co un ty

0%

Ventura North

Ventura South

Ventura County

Source: Costar

Source: Costar

Q4 2011 Orange County Industrial Vacancy Rates 9% 8%

0%

Q4 2011 Los Angeles County Industrial Net Absorption 600,000

8.2% 7.7%

7%

7%

466,549

500,000

7.5%

400,000 300,000

6.2%

200,000

6% 5.2%

100,000

5%

105,021 107,150 37,043

23,587

59,772

23,061

0 (8,481)

4%

-100,000

3%

-200,000 -300,000

2%

-400,000

1% OC Airport

Source: Costar

OC Central

OC North

OC South

OC West

Orange County

(417,498)

Va lle y Do w nt ow n M id -C itie M s id W ils hir Sa e nt Sa a n Cl Fe a rit rn a an do Sa Va n G l l ey ab rie lV all ey So ut h So Ba ut y he as tL .A . Tr i-C itie s W es tL .A .

-500,000

An te lop e

0%

(46,724) (147,036)

Source: Costar


14 vacancy rates in Ventura County rose 0.8 percentage points from last year. For the Basin as a whole, net absorption in the second quarter was a positive 3.3 million square feet. Most of this was due to the

Q4 2011 Orange County Industrial Net Absorption 300,000

Inland Empire. Los Angeles, Orange and Ventura Counties all had positive net absorption for the quarter as well but the amounts were much less than the Inland Empire. Lease rates for the Basin increased slightly in the fourth quarter as

Q4 2011 Los Angeles County Industrial Rental Rates $1.80

$1.70

262,774

$1.57

$1.60 192,598

200,000

$1.40

158,874

$1.20 100,000

$1.00 $0.78

$0.80 0

$0.60 $0.40

(100,000) (130,084)

$0.48

$0.58

$0.54 $0.45

$0.38

$0.64 $0.55 $0.41

$0.46

$0.20

OC Airport

OC Central

OC North

OC South

OC West

Source: Costar

Source: Costar

Q4 2011 Inland Empire Industrial Net Absoption 3,500,000 3,000,000

An te lop e

(235,148)

(300,000)

Va Do lley w nt ow n M id -C i t ies M id W ils hir Sa e Sa nt a n Cl Fe ar rn ita an do Sa n Va G lle ab y rie lV all ey So ut h So B ut ay he as tL .A . Tr i-C itie s W es tL .A L. . A. Co un ty

$0.00

(200,000)

Q4 2011 Orange County Industrial Rental Rates $0.90

3,109,596

$0.78

$0.80

2,500,000

$0.70

2,000,000

$0.60

1,500,000

$0.61

$0.61 $0.52

$0.50

$0.50

1,000,000

$0.40

500,000

$0.30

0 (500,000)

(334,022)

$0.20 $0.10

(1,000,000)

IE East

IE West

$0.00 OC Airport

Source: Costar

OC Central

OC North

OC South

OC West

Orange County

Source: Costar

Q4 2011 Ventura County Industrial Net Absorption

Q4 2011 Inland Empire Industrial Rental Rates $0.35

400,000

$0.35 307,730

300,000

$0.35

200,000

$0.34

100,000

$0.34

0

$0.33

(100,000) (200,000)

$0.59

$0.34

$0.33

$0.33 (192,612)

$0.32

(300,000) Ventura North

Source: Costar

Ventura South

$0.32 IE East

Source: Costar

IE West

Inland Empire


15 Q4 2011 Ventura County Industrial Rental Rates $0.68 $0.67

$0.66 $0.64

$0.63

$0.62 $0.60 $0.58 $0.56

$0.56

$0.54 $0.52 $0.50 Ventura North

Ventura South

Ventura County

Source: Costar

compared to last year. The average lease rate for industrial space is now $.49 per square foot, a meager $0.01 increase from Q4 2010. Orange County was the only region to experience a further decline in lease rates. Thankfully, the decline was very small as lease rates fell from $0.60 to $0.59. Leasing Transactions 1) 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 space in the Los Angeles Food Center. The lease rate is $9.96 per square foot per year. 3) Berry Plastics Corporation leased 117,857 square feet in the Fullerton 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 1756 Eastman Avenue in Ventura. The lease rate is $9.60 per square foot per year. Sales Transactions 1) 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 on 10/28/2011. The sales price was $9,950,000 or $123.01 per square foot. 4) An 85,430 square foot self storage building in Moorpark sold on 10/27/2011. The sales price was $10,500,000 or $122.91 per square foot.


16

Los Angeles Basin Industrial Market n Fourth Quarter 2011 Average Asking Rental Rate1

Vacancy Rate 2011

2010

Difference

Net Absorption (SF)

2011

2010

Difference

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

Source: CoStar 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.


17 Multifamily Market Welcome to our new multifamily section. The data for this segment is limited. However, due to the growing importance of multifamily properties we felt that adding this section was in our clients’ best interest. We hope you find this information timely and useful. Of all the markets we track, the multifamily market is performing the best. Problems in the housing segment are creating opportunities in the multifamily market. Vacancy rates throughout the Basin are extremely low and we expect them to remain low for the foreseeable future. As we noted above, foreclosures and notices of default remain high. As a result, consumers are losing their homes in record numbers and shifting to the multifamily market. The lack of credit is also creating more demand for multifamily housing as potential home buyers are not able to secure financing. Since we expect these conditions to remain in effect for the foreseeable future we anticipate that the demand for multifamily housing will remain high. Increased demand is creating a boom in new construction. Quite frankly, the multifamily market is the only segment in which construction is occurring. We expect construction to continue as long as demand remains. Despite all the new construction, prices for multifamily buildings are increasing. Below we list some of the major sales transactions that took place in Q4 2011. Sales Transactions 1) 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 on 10/19/2011. The sales price was $32,200,000 or $245,802 per unit. 4) The 30 unit Mountain Shadow Apartments in Newbury Park sold on 12/1/2011. The sales price was $5,105,000 or $170,167 per unit.


Regional Offices

COMMERCE (866) 739-9314

PALM DESERT (760) 346-1566

SIMI VALLEY (805) 522-7132

WEST LOS ANGELES (310) 440-8500

ENCINO-Corporate Office (800) 468-2618

PASADENA (866) 716-5209

SOUTH BAY (866) 716-5208

WESTLAKE VILLAGE (805) 446-2400

ORANGE COUNTY (866) 739-9315

RIVERSIDE (866) 906-9979

TEMECULA VALLEY (951) 491-7590

ONTARIO (909) 945-2339

SANTA CLARITA (661) 705-3550

VENTURA COUNTY (805) 278-1400

CAL LUTHERAN UNIVERSITY Kirk M. Lesh, Senior Economist Center of Economic Research and Forecasting n 805 493 3788 www.clucerf.org

www.naicapital.com Committed to Southern California. Connected to the World. Find us online:


NAI Capital 2011 Southern California Year-End Market Report