LOS ANGELES INDUSTRIAL MARKET

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1 RESEARCH 3Q 2018 LOS ANGELES INDUSTRIAL MARKET VACANCY HOVERS NEAR 1.0%, TENANTS HAVE FEW OPTIONS Vacancy is the tightest in the country, lease rates climbed to a new high and developers are scouring the market for buildable sites. Approximately 1.7 million of net absorption this quarter came from occupancies of facilities built in 2010 or later. South Bay had this quarter s three biggest move-ins: Nordstrom (512,490 square feet), Puma (206,055 square feet) and Flexport (136,685 square feet). All were in Class A facilities. Industrial land prices in Los Angeles infill markets now average $59/SF, up 103% from five years ago. Higher replacement costs will lead to additional rent growth, if current fundamentals persist. Property owners want long-term leases, and many are closely evaluating the creditworthiness of prospective tenants. Port container volume reached 8.1 million loaded TEUs in the first eight months of 2018, up 3.3% from the same period in This year s volume may top 2017 as the busiest year on record. More cargo in the basin favors industrial occupancies. Most of today s trade tariffs are focused on commodities and intermediate goods, which hurts manufacturers. Logistics users, which distribute finished products to consumers, will be less impacted. Logistics users are driving occupier demand in today s market. One thing is certain with a trade war: Consumer prices on some items will increase. This will hurt the profits of many American retailers if tariffs further escalate. RISING TRANSPORT COSTS The trucking industry faces serious capacity constraints amid record-high freight volumes and a driver shortage. According to an August 2018 Wall Street Journal article, third-party hauling rates are at record levels, up 26.0% from the prior year. This is causing many companies, such as Kraft Heinz Co. and Coca-Cola, to raise prices to offset higher freight costs. Reducing transport costs and expediting shipping times are foundational priorities for all industrial distributors, meaning Los Angeles home to the nation s busiest port system, a consumer population of 10.1 million, freight rail connectivity to the rest of the country and a tight vacancy rate is in a strong position. New construction is in high demand, with buildings constructed from 2010 onward listing for an average of seven months before they are leased. New construction leasing is driving aggressive rent growth, with warehouse/distribution asking rents across all building classes up 46.7% from five years ago. MARKET ANALYSIS and Vacancy $0.80 $0.73 $0.66 $0.59 $0.52 $ % 3Q08 3Q09 3Q10 3Q11 3Q12 3Q13 3Q14 3Q15 3Q16 3Q17 3Q Average Vacancy (%) Net (SF, Millions) -4 3Q08 3Q09 3Q10 3Q11 3Q12 3Q13 3Q14 3Q15 3Q16 3Q17 3Q18 Construction and Deliveries (SF, Millions) Q13 3Q14 3Q15 3Q16 3Q17 3Q18 Under Construction MARKET SUMMARY Current Quarter Prior Quarter Deliveries Year Ago Period 12 Month Forecast Inventory 993 MSF 992 MSF 984 MSF é Vacancy Rate 1.2% 1.3% 1.1% é ê Quarterly Net 1.9 MSF 656, ,983 é ê Average $0.79 $0.78 $0.75 é Under Construction 4.1 MSF 2.2 MSF 5.9 MSF é ê 4.0% 3.2% 2.4% 1.6% 0.8% Deliveries 815, MSF 2.3 MSF é ê NEWMARK KNIGHT FRANK 2018 RESEARCH 1

2 WHAT CAN EXISTING TENANTS DO? Most opt for renewal, while a tenant in search of expansion or consolidation can either pay premium rents for new construction (often after bidding wars), move to the Inland Empire or target facilities where move-outs will occur. The last approach is blurring the lines between the infill markets of South Bay, Central and Mid-Cities. Since infill land is costly, development activity in Los Angeles North is on the rise. It is also pushing farther north to Kern County, which passed an economic incentive program called Advance Kern in late 2017 to attract major companies and stimulate job and economic growth. This quarter, L'Oréal USA leased 240,000 square feet at Tejon Ranch Commerce Center in what will be a relocation move from YTD IMPORT AND EXPORT VOLUME Loaded Inbound and Outbound Cargo (TEUs, Thousands) Valencia. The company received $2.3 million in tax incentives, has land for future expansion next to its new building and is within a two-hour drive of the ports. OUTLOOK Vacancy will remain near 1.0% this year, as rents, particularly in the warehouse/distribution segment of the market, scale new heights. Key drivers benefiting occupier demand include Los Angeles consumer base, a healthy though very competitive labor market, growing retail sales, e-tailer efforts to achieve next-day (and same-day) delivery and rising drayage costs. The leasing and subsequent occupancy of new construction will account for the bulk of absorption gains in the coming quarters. PAYROLL EMPLOYMENT Nonfarm Unemployment Rate, Not Seasonally Adjusted 6,200 5,800 5,400 5,000 4,600 4,200 Aug-11 Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 Aug-18 Ports of Los Angeles and Long Beach Source: Port of Los Angeles, Port of Long Beach 15% 12% 9% 6% 3% 0% Aug-11 Aug-12 Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 Aug-18 Los Angeles-Long Beach-Glendale Source: U.S. Bureau of Labor Statistics LEASE TRANSACTIONS Tenant Building City Type Square Feet Coca-Cola Bottling Norwalk Blvd Santa Fe Springs New Lease 355,590 IDI Logistics Industry Cir La Mirada New Lease 203,850 Flexport 1420 McKinley Ave Compton New Lease 136,685 Midas Express Los Nietos Rd Santa Fe Springs New Lease 121,000 US Pride Furniture Salt Lake Ave City of Industry New Lease 115,000 SALE TRANSACTIONS Building(s) City Sale Price Price/SF Square Feet 14-Property Portfolio Burbank $84,500,000 $ , E Imperial Ave El Segundo $49,787,000 $531 93, Corinth Ave Los Angeles $29,188,949 $ , Lurline Ave Chatsworth $28,564,545 $ , Alcoa Ave Los Angeles $24,515,000 $ ,450 NEWMARK KNIGHT FRANK 2018 RESEARCH 2

3 SUBMARKET STATISTICS Inventory Under Construction Vacancy Rate Qtr YTD Wh/Dist General Ind Central 295,226, , % 287, ,018 $0.72 $0.84 $0.74 Bell 3,755, % 0 21,515 $ $0.72 Bell Gardens 2,339, % 0 67,978 $0.65 $0.77 $0.67 Commerce 52,559, % 75,323 21,834 $0.55 $0.70 $0.56 Cudahy 828, % Downtown Los Angeles 129,482, , % -2,947 36,399 $0.96 $0.92 $0.95 Huntington Park 4,871, % 0 13,390 $0.70 $0.61 $0.67 Lynwood 3,815, % Maywood 764, % Montebello 13,445, % 18, ,625 $0.76 $0.59 $0.75 Pico Rivera 10,712, % 0-160,053 $ $0.71 South Gate 11,356, % Vernon 61,294,834 30, % 196, ,330 $0.63 $0.70 $0.64 Mid-Cities 113,918,524 70, % 278,501 1,545,487 $0.78 $0.76 $0.77 Artesia 308, % Buena Park 14,477, % -102, ,457 $0.86 $0.82 $0.86 Cerritos 14,952,135 70, % ,640 $0.73 $0.74 $0.71 Downey 4,294, % 0 0 $0.58 $0.72 $0.66 La Mirada 14,269, % 72, ,257 $0.67 $0.63 $0.65 La Palma 2,083, % Norwalk 3,577, % $1.10 $1.05 Santa Fe Springs 55,721, % 308,082 1,277,327 $0.85 $0.80 $0.83 Whittier 4,232, % 0 0 $ $0.67 NEWMARK KNIGHT FRANK 2018 RESEARCH 3

4 SUBMARKET STATISTICS Inventory Under Construction Vacancy Rate Qtr YTD Wh/Dist General Ind LA North 184,719, , % 380, ,438 $0.78 $0.90 $0.87 Central Valley 31,816, % -11,238-47,515 $1.06 $1.04 $1.01 Conejo Valley 14,792, % 149, ,798 - $0.93 $0.99 East Valley 56,531, % 13,357 75,146 $0.91 $1.10 $1.02 Santa Clarita 25,013, , % 202, ,490 $ $0.71 Simi/Moorpark 13,854, % -10, ,774 - $0.82 $0.86 West Valley 42,711, % 37, ,275 $0.76 $1.01 $0.91 LA East (San Gabriel) 179,547,175 2,251, % 495, ,374 $0.76 $0.81 $0.77 Central SGV 26,397, % 188, ,521 $0.75 $0.80 $0.77 Eastern SGV 33,156, , % 16,451-25,398 $ $0.68 El Monte Area 18,379,443 1,302, % 10,670 43, Industry Area 89,660, , % 263,241-66,466 $ $0.79 Western SGV 11,953, % 16,841 29,381 - $1.85 $1.85 South Bay 219,626,526 1,125, % 431, ,066 $0.85 $0.82 $0.85 Carson 40,620, % -83,106 72,349 $0.82 $0.69 $0.78 Compton/Rancho Dominguez 40,933,963 94, % ,750 $0.81 $0.76 $0.80 El Segundo 9,985, % 0-228,933 - $1.29 $1.33 Gardena/110 Corridor 34,150, , % -105,558-83,712 $0.69 $0.74 $0.73 Hawthorne 10,149, % 0-2,000 $0.68 $0.97 $0.94 LAX/Inglewood 11,397, % 7,866-20,127 $1.26 $1.37 $1.30 Long Beach/Signal Hill 18,213, , % 27,613-2,912 $0.90 $1.03 $0.98 Paramount 9,410, % 0-54,760 $0.79 $0.71 $0.72 Port District 6,541, % 33,010-18,610 - $0.88 $0.93 NEWMARK KNIGHT FRANK 2018 RESEARCH 4

5 SUBMARKET STATISTICS Inventory Under Construction Vacancy Rate Qtr YTD Wh/Dist General Ind Redondo Beach 3,577, % Torrance Area 34,645, % 551, ,021 $0.87 $0.85 $0.89 Los Angeles 993,038,851 4,125, % 1,873,558 3,713,383 $0.76 $0.83 $0.79 NEWMARK KNIGHT FRANK 2018 RESEARCH 5

6 DAIN FEDORA Director of Research NORMA LLAMAS Senior Database Coordinator Newmark Knight Frank has implemented a proprietary database and our tracking methodology has been revised. With this expansion and refinement in our data, there may be adjustments in historical statistics including availability, asking rents, absorption and effective rents. Newmark Knight Frank Research Reports are available at All information contained in this publication is derived from sources that are deemed to be reliable. However, Newmark Knight Frank (NKF) has not verified any such information, and the same constitutes the statements and representations only of the source thereof, and not of NKF. Any recipient of this publication should independently verify such information and all other information that may be material to any decision that recipient may make in response to this publication, and should consult with professionals of the recipient s choice with regard to all aspects of that decision, including its legal, financial, and tax aspects and implications. Any recipient of this publication may not, without the prior written approval of NGKF, distribute, disseminate, publish, transmit, copy, broadcast, upload, download, or in any other way reproduce this publication or any of the information it contains. NEWMARK KNIGHT FRANK 2018 RESEARCH 6