Pre-Effective Amendment to Registration Statement for Securities of a Real Estate Company — Form S-11
Filing Table of Contents
Document/Exhibit Description Pages Size
1: S-11/A Form S-11, Amendment No. 2 HTML 3.35M
2: EX-10.19 Material Contract 151 471K
3: EX-10.20 Material Contract 70 224K
4: EX-10.21 Material Contract 51 176K
5: EX-10.22 Material Contract 83 252K
6: EX-10.24 Material Contract 29 132K
7: EX-10.25 Material Contract 29 133K
8: EX-10.26 Material Contract 5 23K
9: EX-10.27 Material Contract 5 24K
10: EX-10.28 Material Contract 5 25K
11: EX-10.29 Material Contract 4 21K
12: EX-10.30 Material Contract 245 991K
13: EX-10.31 Material Contract 108 369K
14: EX-10.32 Material Contract 6 29K
15: EX-23.3 Consent of Experts or Counsel 1 10K
16: EX-23.4 Consent of Experts or Counsel 1 9K
17: EX-23.5 Consent of Experts or Counsel 1 9K
18: EX-99.3 Miscellaneous Exhibit 17 82K
19: EX-99.4 Miscellaneous Exhibit 187 895K
EX-99.3 — Miscellaneous Exhibit
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EXHIBIT 99.3
[RCG LOGO]
Los Angeles
Outlook
January 2003
By
Kenneth T. Rosen
Susan U. Persin
Kimberley J. Player
Rosen Consulting Group
1995 University Avenue
Suite 550
Berkeley, CA 94704
510 549-4510
(C) 2003 Rosen Consulting Group
TABLE OF CONTENTS
[Download Table]
Los Angeles Outlook Page
Summary 1
Economic Trends 3
Forecasted Economic Trends 6
Office Market Trends 6
Downtown Office Market Trends 7
Westside Office Market Trends 12
Tri-Cities Office Market Trends 13
Conclusions 14
(C) 2003 Rosen Consulting Group, LLC
Los Angeles Outlook
SUMMARY
Southern California, including the Los Angeles metropolitan area, is one of the
brightest spots in the national economy and office market, with good prospects
for long term economic and office market growth. Los Angeles is the center of
the Southern California region, which ranks among the top regions for growth in
the nation.
- From 1995 to 2002, Los Angeles added about 300,000 jobs, ranking
sixth in the nation for job growth. Orange County, Riverside, and
San Diego added an average of more than 260,000 jobs each during
this seven-year period, contributing to the vitality of the area.
- Growth is presently healthy in the Southern California metropolitan
areas. Riverside and San Diego were two of the top three fastest
growing U.S. metropolitan areas from November of 2001 to 2002. The
Los Angeles economy has shed some jobs from year-ago levels,
although nowhere near the level of the early 1990s. Recent softness
in Los Angeles is primarily evident in the manufacturing and
construction sectors, which generally does not affect office space
demand.
- From 1990 to 2002, Los Angeles ranked eighth in the nation in terms
of population growth. Additionally, RCG forecasts that the Los
Angeles population base will be the fastest growing in the nation
from 2002 to 2005. People will be attracted to Los Angeles by its
high quality of living with warm weather, a coastal setting,
entertainment and nightlife, high-caliber colleges and universities
and employment opportunities.
- Downtown Los Angeles is becoming more of a 24-hour city, which will
enhance long-term property values. A
NONAGRICULTURAL PAYROLL EMPLOYMENT (000)
[Download Table]
Jobs Added
1995 2002e 95-02e
------- ------- ------
1 Washington, DC 2,410.1 2,774.2 364.1
2 Dallas, TX 1,623.6 1,978.4 354.8
3 Houston, TX 1,787.1 2,115.9 328.8
4 New York, NY 3,842.3 4,167.2 324.9
5 Phoenix-Mesa, AZ 1,264.6 1,561.6 297.0
6 LOS ANGELES-LONG BEACH 3,762.2 4,057.7 295.5
7 RIVERSIDE-SAN BERNARDINO 792.6 1,069.7 277.1
8 Atlanta, GA 1,855.3 2,121.1 265.8
9 SAN DIEGO, CA 994.0 1,252.4 258.3
10 ORANGE COUNTY, CA 1,166.7 1,413.7 247.0
Source: Bureau of Labor Statistics
POPULATION GROWTH (000)
[Download Table]
People Added
--------------------
1990 2002e 2005f 90-02e 02-05f
------- ------- -------- ------- ------
LOS ANG-L. BCH 8,875.0 9,710.2 10,047.0 835.2 336.8
Phoenix-Mesa, AZ 2,245.8 3,459.1 3,741.1 1,213.3 281.9
Houston, TX 3,342.2 4,355.2 4,612.2 1,013.0 257.0
Dallas, TX 2,689.8 3,713.6 3,964.2 1,023.7 250.7
Atlanta, GA 2,977.7 4,326.2 4,576.1 1,348.5 249.9
RIVERS-SAN BERN 2,630.8 3,498.3 3,739.3 867.5 241.0
Las Vegas, NV 867.9 1,713.6 1,922.1 845.8 208.5
Chicago, IL 7,424.6 8,373.9 8,549.6 949.3 175.7
Orlando, FL 1,239.1 1,745.9 1,883.2 506.9 137.2
New York, NY 8,547.1 9,319.1 9,441.1 772.0 122.0
Minneap-St. Paul 2,548.2 3,037.4 3,158.4 489.2 121.0
ORANGE CO, CA 2,417.6 2,903.2 3,019.6 485.7 116.4
Fort Worth, TX 1,367.8 1,781.8 1,895.2 414.1 113.4
Fort Lauderdale 1,262.0 1,691.5 1,798.5 429.6 107.0
SAN DIEGO, CA 2,513.2 2,886.7 2,989.0 373.5 102.3
Sources: Bureau of the Census, RCG
LOS ANGELES POPULATION GROWTH
(IN THOUSANDS)
[BAR CHART]
(C) 2003 Rosen Consulting Group, LLC 1
myriad of developments, ranging from residential to entertainment,
cultural and educational facilities are generating excitement about
downtown. Downtown is one of few Los Angeles office submarkets
unaffected by oversupply conditions and, in addition, is one of the
only major U.S. office markets to post a vacancy rate below the
historic average. While rents have risen, they are low compared to
many major U.S. metropolitan areas and are well below the most
desirable suburban submarkets. Consequently, they have significant
upside potential. A significant amount of sales activity reflects
increased interest in downtown Los Angeles and is indicative of
investors' faith in the market.
- The Westside is one of the most attractive Los Angeles submarkets
from a long-term perspective. It has high barriers to entry and
limited room for new development. The area is close to executive
housing. The Westside is a popular location for the motion pictures
industry, professional services firms, and the local technology
industry. Rents have risen substantially in recent years, and while
this market has been affected by the dot.com fallout, market
fundamentals are strong, leading us to believe that future prospects
are good.
- The Tri-Cities of Glendale, Burbank and Pasadena offer a central
location and moderately-priced rents. The entertainment and
insurance industries form a significant part of the tenant base.
This region posted positive absorption during 2002 and should see
further improvement through 2005.
(C) 2003 Rosen Consulting Group, LLC 2
RCG believes that Los Angeles is an area with significant potential and, unlike
many other parts of the country, it is an area where office investment currently
makes sense.
ECONOMIC TRENDS
During the past decade, Southern California has experienced a shift from a
military and defense-dependent economy to one that is more private sector
service and technology-oriented. This transformation resulted in strong economic
growth through the late 1990s. The Los Angeles metropolitan area added nearly
300,000 jobs between 1995 and 2002, ranking sixth in the nation for job growth.
The rest of Southern California also outpaced the majority of the country with
Orange County, Riverside, and San Diego all added an average of more than
260,000 jobs each during this seven-year period.
Southern California's increasingly diverse economy was key in supporting
relatively healthy growth through the downturn in 2001 and 2002. In Los Angeles,
a comparatively low concentration of technology firms tempered the impact of the
stock market collapse and drop in business investment. Several other key factors
have also made Los Angeles particularly attractive to businesses.
- CALIFORNIA HOUSING: Home prices in Los Angeles are the lowest of any
part of coastal California. The median existing home price in Los
Angeles was $307,230 in November of 2002, according to the
California Association of Realtors. This level is about 19% below
the next lowest price of $378,040 in San Diego.
Because house prices are low compared to other parts of coastal
California, Los Angeles also ranks well in terms of housing
affordability. About 30% of local households are able to afford the
median priced home, compared to rates as low as 22% in the San
Francisco Bay Area.
- SKILLED WORKFORCE: The area has a large skilled workforce. Los
Angeles is home to a number of well-known universities, including
the University of California at Los Angeles (UCLA), University of
Southern California (USC), and Caltech.
COASTAL CALIFORNIA CITIES: HOME PRICE COMPARISON
[Download Table]
Median Home Price Affordability
Place Nov-02 Nov-02
----------------- -------------
LOS ANGELES $307,230 30%
San Diego $378,040 22%
Santa Barbara $382,260 20%
Ventura $387,350 32%
Orange County $434,110 25%
Monterey $456,060 19%
San Francisco Bay Area $515,460 22%
San Jose $535,000 28%
Sources: California Association of Realtors, RCG
LOS ANGELES NONAGRICULTURAL PAYROLL EMPLOYMENT (000)
[Enlarge/Download Table]
1998 1999 2000 2001 11/02 2002f 2003f 2004f 2005f
------- ------- ------- ------- ------- ------- ------- ------- -------
Total 3,968.4 4,046.2 4,095.1 4,063.8 4,060.5 4,057.7 4,090.1 4,155.1 4,240.7
% Change 1.8% 2.0% 1.2% -0.8% -0.4% -0.1% 0.8% 1.6% 2.1%
Construction 123.5 128.6 132.2 132.2 128.0 130.1 127.5 130.8 138.0
% Change 11.3% 4.1% 2.8% 0.0% -3.8% -1.6% -2.0% 2.6% 5.5%
Manufacturing 650.5 634.2 621.2 593.4 578.2 576.1 564.5 560.0 558.9
% Change -2.4% -2.5% -2.0% -4.5% -3.0% -2.9% -2.0% -0.8% -0.2%
Trade 875.3 898.4 908.4 899.9 902.1 899.9 908.0 922.6 940.1
% Change 1.2% 2.6% 1.1% -0.9% -0.5% 0.0% 0.9% 1.6% 1.9%
Services 1,303.7 1,335.9 1,364.7 1,350.0 1,357.3 1,358.1 1,389.8 1,430.2 1,477.3
% Change 2.5% 2.5% 2.2% -1.1% 0.4% 0.6% 2.3% 2.9% 3.3%
T.C.P.U. 228.8 239.4 247.9 246.5 246.2 248.0 247.7 249.5 252.7
% Change 4.9% 4.6% 3.6% -0.6% 0.1% 0.6% -0.1% 0.7% 1.3%
F.I.R.E. 231.2 230.9 231.2 233.6 235.5 235.0 236.9 240.5 245.6
% Change 3.8% -0.1% 0.1% 1.0% 0.5% 0.6% 0.8% 1.5% 2.1%
Government 550.7 574.7 585.3 604.0 609.1 606.4 611.4 617.5 623.9
% Change 2.7% 4.4% 1.8% 3.2% 0.9% 0.4% 0.8% 1.0% 1.0%
Sources: Department of Labor, RCG.
(C) 2003 Rosen Consulting Group, LLC 3
FEDERAL GRANTS FOR SCIENCE & ENGINEERING ($000)
Federal obligations for science and engineering to the top 100 universities
[Download Table]
2000
----
Total, top 100 institutions 16,048,114
Total 1st 10 institutions 4,233,385
1 Johns Hopkins University 933,245
2 University of Washington 444,625
3 U OF CA LOS ANGELES 398,565
4 Stanford University 377,918
5 U of Michigan 377,574
6 U of Pennsylvania 373,963
7 U OF CA SAN DIEGO 357,629
8 Harvard University 330,683
9 U. of Colorado 324,210
10 U. of CA San Francisco 314,973
Sources: National Science Foundation
UCLA ranked third in the nation during 2000 in federal grants received for
science and engineering, reflecting the significant amount of research
done locally.
During the twelve months ended November 2002, Los Angeles shed 15,000 jobs, for
a 0.4% decrease in employment, which is nowhere near the number lost in the
early 1990s. The weakest sectors are manufacturing and construction, which
generally do not affect office space demand to a large degree. RCG expects
year-end 2002 data to show only a 0.1% decrease in the total job base. Although
the pace of recovery will be slow, the outlook for Southern California and Los
Angeles is more positive than forecasts for the rest of the state and the
nation. Even with the expected hits from deficit-induced tax hikes and service
cuts, we project total employment will increase by close to 1.0% in 2003. Driven
by growth in the services sector and the industries highlighted below, Los
Angeles' diverse economy will rebound more quickly than most major metropolitan
areas. RCG forecasts the addition of 183,000 jobs between December of 2002 and
2005.
Motion Pictures Industry
The entertainment industry in Los Angeles is a $30 billion annual industry that
some estimate comprises 10% of the local economy. It is the most concentrated
part of the economy, and it has a multiplier effect on other employment sectors.
Los Angeles is the administrative center for the industry, controlling
financing, marketing and distribution.
ABSOLUTE JOB GROWTH
LOS ANGELES MSA
[BAR CHART]
Total production days increased by 1.7% during 2002, which is positive news for
the industry. By mid-2003, the film industry is expected to add back all of the
jobs lost in 2001 when two strikes were narrowly averted. Although concerns that
film production will move to lower cost locations persist, we expect Los Angeles
to retain the majority of the more highly-skilled, high-paying positions. Job
growth will be positive, albeit slower, as management and administration jobs
replace a number of production jobs. Even so, film industry expenditures of
upwards of $30 billion in Los Angeles will stay far above the nearest
competitors for producer dollars, including New York, British Columbia and
Toronto.
Despite slower production in Los Angeles, growth in the motion pictures industry
has been very strong in recent years and is relatively recession-proof.
Television and movies, whether rented or seen in theaters, are an inexpensive
source of entertainment. Part of the industry-wide growth is attributable to
increased movie-going domestically. Domestic box office production was expected
to hit a record $9.2 billion in 2002, up 6.4% from 2001. Much of this growth has
been fueled by an increase in international distribution, growth in cable and
satellite television, and video film sales. Hollywood's foreign entertainment
sales are the second largest export product from the United States, behind
commercial aircraft. Entertainment companies are a major contributor to demand
for office space in Los Angeles.
Technology and Venture Capital
Technology is important to the local economy and office market, but it is also
important to note that new economy companies make up a relatively small portion
of Los Angeles' services sector employment, behind such old economy industries
as engineering and management, motion pictures, and health services.
(C) 2003 Rosen Consulting Group, LLC 4
Los Angeles has a diverse array of technology companies that draw on the
remnants of the aerospace industry, a cluster of universities, and an
innovation-driven entertainment industry. These industries contributed to office
demand, especially in West Los Angeles, through much of 2001 and 2002. Although,
some high-profile dot-coms have failed, vacating large blocks of office space, a
significant portion of Los Angeles' technology base is related to advanced
communications in the aerospace and defense industry. This has buffered the area
somewhat from the recent volatility in the high-tech sector. At the same time,
the new homeland security budget has created additional funding opportunities
for security and defense-related technology firms. The outlook is also positive
for entertainment-related technology firms. The recent launch of the online
movie service Movielink highlights the potential for growth in the convergence
of technology and entertainment.
Venture capital has been the source of financing for many technology ventures.
The amount of venture capital invested in all of Southern California grew from
$1.7 billion in 1998 to $4.4 billion in 1999 and $6.9 billion in 2000. Venture
capital investment dropped significantly during 2001 as most venture capitalists
focused on protecting their existing investments and steering them to
profitability. However, because the Los Angeles region did not receive nearly as
much funding as other parts of the country, the pullback in funding that started
in the latter part of 2000 has had a limited effect on businesses in Southern
California.
As of third quarter 2002, national investment was at its lowest level in four
years, at $4.5 billion, a decrease of 85% from the $29 billion raised at the
peak in early 2000. In Los Angeles/Orange County, third quarter funding was also
down, to $270 million from $294 million in the second quarter, placing the
region seventh in the nation in terms of funding. In Los Angeles County itself,
15 companies received $121.4 million, down more than 30% from second quarter
financing totals. Software and biotech are the most popular investments,
however, it is Los Angeles' diverse range of technology firms, including defense
and entertainment-oriented companies, that are expected to attract future
venture capital dollars, leaving the region well-positioned for a high tech
recovery. Further evidence of Los Angeles' strength emerged in a 2002 report
from the California Technology, Trade and Commerce Agency, which ranks Los
Angeles County as number one in the state in terms of federal research and
development dollars, followed by San Diego, the Bay Area and Orange County.
Defense
The legacy of defense in the area has shaped Los Angeles into a center for
aircraft, ship, space and technology development and manufacturing. President
Bush's mandate to modernize the military, the war on terrorism, and possibility
of war against Iraq have spurred investment in security and defense
technologies, giving a boost to companies in this industry. We expect local
operations to be in line for a sizeable piece of the $7.4 billion allocated to
defense in the fiscal 2003 budget. Major southern California industry players,
including Northrop Grumman, Raytheon, TRW, Lockheed Martin, Honeywell and
Boeing, are becoming involved in projects such as the Space-Based Infrared
System Low, the Airborne Laser, and Active Electronically Scanned Array Radar
System. These contracts will not only support job growth at these local
aerospace companies, but will also provide subcontractors and suppliers with
additional defense dollars, many of which will require additional office and
flex space for expanded operations.
VENTURE CAPITAL INVESTMENT
LOS ANGELES/ORANGE COUNTY
[BAR CHART]
LOS ANGELES EMPLOYMENT GROWTH VS. U.S.
[LINE GRAPH]
(C) 2003 Rosen Consulting Group, LLC 5
FORECASTED ECONOMIC TRENDS
Los Angeles entered the current economic downturn more diversified and stronger
than it was when caught in the recession of the early 1990s. In addition, the
area never experienced the Internet bubble created in Northern California, and
as a result, it had less distance to fall. Job loss to date has been much less
severe than in the early 1990s and also less severe than recent losses
experienced in Northern California. RCG expects a return to positive growth in
2003 with employment growth accelerating in 2004 and 2005, averaging almost 2.0%
each year. This rate of expansion translates into the addition of 183,000 jobs
during the three-year period between 2002 and 2005. This economic growth rate is
slightly higher than our U.S. forecast during the same period.
OFFICE MARKET TRENDS
Los Angeles has the fifth largest office market in the country, behind New York,
Washington DC, Chicago and Dallas. Within the overall market, the CBD, the
Westside, and the Tri-Cities are areas that garner considerable attention. While
each of these submarkets has a large base of high-quality office space, they
attract different types of tenants and investors, making for very different
office market trends. After a relatively strong start to 2002, the CBD softened
late in the year, while the Westside, the submarket hit hardest by the
tech-wreck, has shown more positive recent growth. The Tri-Cities' performance
has also been mixed, with softer conditions in Burbank contrasting with the more
stable Pasadena and Glendale submarkets.
Unlike the leasing market, investment activity in Los Angeles has been very
strong, particularly in the CBD. In 2002, more than five million square feet of
space changed hands with transactions involving Library Tower, KPMG Tower, Ernst
& Young Plaza, BP Plaza, Figueroa Plaza and Union Bank Plaza. This sales trend
is expected to continue in 2003. Thomas Properties Group is leading an
investment group that expects to acquire the 2.7 million square-foot Arco Towers
for approximately $270 million by the end of January. Wells Fargo is also
expected to put the one million square-foot AON building up for sale in 2003.
The ongoing churn of office properties has not been confined to Los Angeles'
downtown. Investors have been buying up mid-sized office buildings in the
Westside, including the 110,000 square-foot 100 Corporate Pointe Tower in Culver
City and the 150,000 square-foot Teleflora Plaza in West Los Angeles.
This sales activity is evidence of investors' faith in the long-term health of
the Los Angeles office market. Despite the current slowdown, RCG believes
conditions will strengthen, with a turnaround expected in 2003. Downtown Los
Angeles, including the CBD, is being revitalized, gaining an important
residential base and becoming more of a 24-hour city, which will enhance
OFFICE MARKET TRENDS
LOS ANGELES DOWNTOWN/FINANCIAL DISTRICT
[BAR CHART]
OFFICE MARKET TRENDS
WEST LOS ANGELES
[BAR CHART]
OFFICE MARKET TRENDS
TRI-CITIES LOS ANGELES
[BAR CHART]
(C) 2003 Rosen Consulting Group, LLC 6
property values over the long term. The Westside and Tri-Cities are experiencing
short-term weakness resulting from sublease space and new construction, but
should recover during the next several years. The fundamentals of these areas,
especially their central locations, make them especially attractive from both a
supply and demand perspective during the medium to long term.
DOWNTOWN OFFICE MARKET TRENDS
Economic Revitalization
The concept of downtown revitalization is gaining momentum in Los Angeles, led
by the Los Angeles downtown Center Business Improvement District (BID). The
Downtown Center BID is cleaning streets, providing additional security and
trying to attract more businesses to the area. A number of developments are
helping to revitalize the economy, which will have a positive impact on the real
estate markets in downtown Los Angeles. Individually, none of these projects
would make the area extremely attractive, but together they create the sense of
downtown activity that is needed to revitalize the area.
RCG notes a number of characteristics that help establish or are essential to
the success of 24-hour cities:
- White collar residential base in or near downtown,
- Transportation links bringing people in from the suburbs,
- Entertainment options,
- Restaurant/shopping options,
- Visitors/Tourists/Hotels,
- Cultural and/or religious institutions,
- Educational institutions,
- Redevelopment of obsolete/vacant properties,
- Urban parks/waterfront, and
- Viable/vibrant private and public sector employment and office
market
White collar residential base in or near downtown
Increased residential development is driving increased interest in the downtown
Los Angeles area. The total number of residential units is expected to grow to
almost 18,400 by 2004, a 55% increase, according to the Los Angeles Downtown
Center BID. The success of current projects has generated increased interest
among other potential developers.
A recent wave of residential development is nearing critical mass and drawing
professionals to the area. The Central City Association's Adaptive Reuse
initiative has spawned a number of loft conversions including projects with
hundreds of for-sale or rental units. Between new residential construction and
Adaptive Reuse construction, nearly 1,400 units are being built with an
additional 2,000 units scheduled to come on line in 2003 and 2004. Some of the
larger projects include:
- Construction on the 297-unit Orsini Apartments will be complete in
late 2003. The developer, GH Palmer will also bring an additional
225 rental units and 10,000 square feet of commercial space to the
market when The Piero opens, also in 2004.
- The first phase of the 780,000 square-foot Santee Court mixed-use
project is under construction, with completion of the first 165
units expected in late 2003. The entire project will eventually
include 400 apartments, office, retail and a fitness club.
- Construction is underway on Aliso Village at Mission and First. The
project will include 400 apartments for low to moderate-income
residents and 93 single family detached homes. The units will be
ready for occupancy in early 2003.
- CIM Group is currently restoring and converting three historic Gas
Company buildings to 250 rental lofts and 22,500 square feet of
retail space in their Market at 9th and Flower project. A Ralphs
supermarket has also been secured for the site. Occupancy is
scheduled for early 2005. When complete, CIM Group's entire 7.2-acre
site will include 1,200 lofts and 127,000 square feet of retail
space.
- Capital Vision Equities is currently converting the former Pacific
Electric building into 314 lofts, which will be ready for occupancy
by 2005.
- Fifth Street Funding is converting the 195,000 square-foot Arcade
Building between Fifth and Sixth streets, Broadway and Spring, into
142 loft-style apartments. The project will open in late 2003.
- The Metropolitan will add 270 new loft units to the market in 2004.
- 153 units will come on line in the renovated Security Building by
2005.
- In the Fifth and Spring Street area, more than 330 loft-style
apartments are in the process of being converted, while in the 6th
and Main Street area, the conversion of another 400 loft-style units
is underway.
A number of other residential projects are in the planning phase. Examples
include 300 units at the Visconti, 264 units at the redeveloped Subway Terminal
buildings, 326 units at the Pegasus and up to 300 units at St. Vibiana's
Cathedral.
Transportation links bringing people in from the suburbs
Ease of access is important to the growth of downtown. Los Angeles has the worst
traffic delays in the country, placing a greater premium on accessibility and
greater focus on public transportation. Downtown Los Angeles is a hub of local
freeways, and can draw employees from throughout the Los Angeles basin. All
public transportation lines go downtown, includ-
(C) 2003 Rosen Consulting Group, LLC 7
TRAFFIC DELAYS- 2000
[Download Table]
Annual Delay
Per Peak Road
Total Annual Traveler
Delay (Hours) (Hours)
------------- -------
1 LOS ANGELES, CA 791,970 136
2 San Francisco-Oakland, CA 167,200 92
3 Washington, DC-MD-VA 123,190 84
4 Seattle-Everett, WA 67,550 82
5 Houston, TX 120,945 75
6 Dallas-Ft. Worth, TX 141,125 74
7 San Jose, CA 55,920 74
8 New York, NY-Northeastern, NJ 400,115 73
9 Atlanta, GA 97,245 70
10 Miami-Hialeah, FL 74,850 69
Source: Texas A & M University, 2002 Urban Mobility Study
ing Metrolink, Amtrak, and the new and expanding Metro subway system.
Transportation links will improve further as the Metro Gold Line is completed in
the third quarter of 2003 and usage increases to a projected 30,000 daily
riders. The Gold Line will link into the Red Line and will expand the Metro Rail
system from 59.4 miles to 73.1 miles. It will serve Los Angeles, Chinatown,
Lincoln Heights, Highland Park, South Pasadena and Pasadena.
The $2.4 billion, 20-mile Alameda Corridor rail line, which opened in April
2002, has increased the movement of goods between downtown's rail yards and the
Ports of Los Angeles and Long Beach. This expressway has increased business
interest in downtown space, particularly in industrial properties.
Visitors/Tourists/Hotels
Vibrant downtown areas draw visitors traveling for business purposes, as well as
tourists. Each year an estimated ten million visitors pass through downtown Los
Angeles, for business or pleasure. An important source of hotel and retail
business in the nearby Los Angeles Convention Center, which hosts an average of
300 trade shows and events each year. Additionally, the number of attractions
that will bring tourists and residents downtown is rapidly increasing.
Although not immune to the effects of the national downturn, Los Angeles
weathered the storm relatively well compared with most other major metropolitan
areas. Hotel occupancy rates averaged 65.3% during 2002, considerably higher
than the national rate of 59.2%. In a testimony to the strength of the Los
Angeles market, Hotels.com, the largest specialized provider of discount lodging
worldwide, reported in December 2002 that Los Angeles entered its Top 10
Destinations list for the first time.
Also in contrast to the majority of the country, Los Angeles has experienced an
ongoing, albeit smaller, stream of development dollars flow into hotel projects.
Hotel construction acts as a leading indicator for emerging markets and
represents lenders' faith in the strength of the downtown market. Currently,
downtown Los Angeles has about 5,700 hotel rooms. The largest hotels are the
1,354-room Westin Bonaventure Hotel and Suites and the 900-room Wilshire Grand
Hotel and Centre. Recent completions include:
- The 207-room Standard Hotel at Sixth and Flower streets in the
former Bank of California building.
- The remodeled Hilton Checkers, formerly the Wyndham Checkers Hotel.
As previously mentioned, a large hotel of up to 1,200 rooms is expected to
anchor the LA Live development near Staples Center. Approval of the Academy of
Television Arts & Science's lease proposal for the theater component of the
development should provide additional pressure on the city to allot
redevelopment funds to finance the hotel development. This is especially true in
light of allegations that the convention center has suffered from the lack of an
official convention hotel.
Entertainment Options
Development of stadiums, coliseums, and arenas in or near central business
districts allows for the use of vacant or underutilized land and reintroduces
people to downtown, creating night-time activity and encouraging economic
development. In downtown Los Angeles, the $250 million, 20,000-seat Staples
Center Arena opened in late 1999. The arena hosts more than 250 events each year
and is the home of the Los Angeles Kings, Los Angeles Lakers, the Clippers, and
the Avengers. This venue is a destination that brings thousands of people
downtown, promoting ancillary development.
The Anschutz Entertainment Group's proposal to build a $1 billion entertainment,
hotel and retail center on 43 acres across from Staples Center is contingent on
city funding. The "LA Live" project received a boost in December 2002 when the
Academy of Television Arts & Sciences approved a letter of intent for a 15-year
lease on a proposed 7,000-seat theater that would house the Emmy Awards. The
earliest completion date for the theater is 2006, and construction of the hotel
is a prerequisite for the Academy deal. Zoning has already been approved for
entertainment, restaurant, retail and parking space.
(C) 2003 Rosen Consulting Group, LLC 8
Restaurant/Shopping Options
People living, working and visiting downtown require restaurant and shopping
options. Parks also make a densely-developed area more livable.
The retail market in downtown Los Angeles is growing in anticipation of serving
a residential population that is expected to grow by 50% in the next two years.
- 7-Eleven will construct one or two 24-hour stores by early 2004 and
the company may open eight more downtown stores in the next five
years. The stores will provide a boost to the area's image as a
"24-hour city".
- As previously mentioned, Ralphs has been secured for CIM Group's The
Market at 9th and Flower project. The supermarket is slated to open
in late 2004.
In contrast to the lackluster holiday shopping season experienced by most
retailers in Los Angeles and throughout the United States, downtown Los Angeles
reported a strong turnout. The success of discount venues in the Fashion, Toy
and Jewelry districts was indicative of increased awareness of downtown
businesses and bodes well for increased tenant interest in locating near a
healthy commercial area.
Cultural and/or Religious Institutions
Theaters and museums are cultural institutions that draw people to an area.
Since the opening of Staples Center in 1999, approximately $1.43 billion has
been invested in downtown commercial, civic and cultural development.
One of the most high profile, recent additions to downtown Los Angeles is the
3,000-seat Our Lady of the Angels Cathedral, which was completed in the third
quarter of 2002. It is the home for the Roman Catholic Archdiocese of Los
Angeles and includes a 56,000 square-foot conference center and a 640-car
garage.
Great excitement has been generated by the $220 million, 2,268-seat, Frank
Gehry-designed Walt Disney Concert Hall that will anchor a downtown Los Angeles
cultural center. The facility will also include the 266-seat Cal Art Auditorium
and a 300-seat outdoor theater. It will open in October 2003 and will be the new
home of the Los Angeles Philharmonic Orchestra and the Los Angeles Opera.
A number of important museums are located in or near downtown. These facilities
attract visitors from throughout the metropolitan area and tourists and
contribute to the vitality of downtown. Several local facilities have expansion
and/or conversion plans.
- The LA County Natural History Museum is undergoing a $300 million
renovation. The redesign is part of a master plan for the Exposition
Park facility, projected for completion in 2003.
- Construction and renovations are underway for the $2.5 million
Chinese American Museum, which will be housed in one of the oldest
remaining buildings in the city's original Chinatown.
- Gilmore Associates is converting the former St. Vibiana's Cathedral
into a performing arts center for students at California State
University at Los Angeles. Upon completion in mid-2004, the center
will offer a 650-seat theater that will host music, drama and dance.
- Toyo Ito will design the $15 million renovation and 24,000
square-foot expansion of the Japanese American Cultural and
Community Center in Little Tokyo. The project is scheduled for
completion in 2005.
Educational Institutions
Schools and universities attract a vibrant young crowd and families to an area,
and Los Angeles is benefiting from development of educational institutions.
- The Southern California Institute of Architecture (Sci Arc)
completed a renovation that enclosed its main building in the fall
of 2001. Sci Arc serves about 400 students. The adjacent Freight
Yard site could potentially be developed as live-work loft housing
for students and the market. The school will serve as a catalyst to
the downtown artist district.
- The Alliance for a Better Community plans to turn the abandoned
Belmont Learning Complex at First and Beaudry into a charter school
for more than 4,800 students.
- The former LAUSD headquarters on Grand Avenue will become a
performing arts high school. The $72 million project is slated for
completion in 2005 and will house 2,200 downtown students.
- The LAUSD has plans to open a new high school, which would be one of
the largest in the area, at Third and Bixel Streets. The current
timeline calls for a 2006 completion date.
- The planned Downtown CityLife Charter School will expose 400
students in grades 6-12 to the arts, politics and history of Los
Angeles, in part through partnerships with other downtown cultural
and business entities.
- The new $24.3 million ScienCenter elementary school will house 850
students and will include a separate $28 million Center for Science
Learning. Completion is expected in late 2004.
(C) 2003 Rosen Consulting Group, LLC 9
Redevelopment of Obsolete/Vacant Properties
As part of revitalization, it is important to redevelop obsolete, underused, and
vacant properties. As previously mentioned, a number of these properties are
undergoing conversion to residential and/or hotel uses. Several other projects
are noteworthy.
- Los Angeles Center Studios opened at the site of the former Unocal
Corporation headquarters in 1999. The facility includes six sound
stages, dressing rooms, a commissary and a 550-seat theater intended
to serve film crews working downtown. A second phase, including a
550-seat theater, screening and meetings rooms, production office
space and parking is planned.
- The historic 150,000 square-foot Herald-Examiner building near
Staples Center downtown will be converted into creative office space
that could be available in late 2003.
Urban Parks/Waterfront
The Urban Land Institute touts urban waterfronts and big downtown parks as
opportunities for cities to create focal points, use an underutilized asset, and
enhance the quality of urban life. Recent development of large central-city
parks includes San Francisco's Yerba Buena Gardens and Atlanta's Centennial
Olympic Park, and an older example is New York City's Central Park.
A number of other cities have or are reclaiming their waterfronts by developing
parks, including, including New York City (Riverside Park South), Cleveland,
Memphis, Richmond (Canal Walk), San Antonio (River Walk), and Minneapolis.
Los Angeles is also recognizing the need to enhance quality of life in a
densely-developed area with parkland. In Los Angeles, decision has been made to
convert Taylor Yard on the Los Angeles River and the old "Cornfield" near
Chinatown into parks that will abut the river.
Public Sector Job Base
Downtown areas are traditionally hubs of public sector services, and Los Angeles
is no exception. Several high-profile public sector construction projects have
been announced that will further revitalize the downtown area.
- Renowned architect Thom Mayne is designing the new $171 million,
15-story, 700,000 square-foot Caltrans Regional Headquarters. The
project will house the state's and city's transportation departments
and will be open by 2005.
- A $414 million federal courthouse is planned for First and Broadway.
The project could begin construction in late 2003 if financing is
secured, with completion scheduled for 2008.
- The 400,000 square-foot Hall of Justice is undergoing a $144 million
renovation. The facility will likely reopen in 2005 and will house
county agencies, including the Sheriff's Department.
- The Los Angeles Unified School District moved into a newly-renovated
headquarters at 333 South Beaudry in 2002. The second and third
phases, which will relocate more LAUSD employees to the new space,
are slated for completion in 2003 and 2005, respectively.
Downtown Office Market Outlook/Private Sector Job Base
The health of the downtown office market is directly tied to the private sector
job base, because growth in downtown jobs translates to demand for office space.
Consistent with 2002's sight decline in employment, the Los Angeles
CBD/Financial District office market weakened during the second half of 2002.
Although the CBD has not been immune from the effects of uncertainty and cost
cutting, the area contains an important core of businesses that includes law
firms, commercial and investment banks and government agencies.
The CBD office market posted a 19.6% vacancy rate at year-end 2002. Although
this rate seems high relative to other major MSA's, Los Angeles' core market has
historically been characterized by high vacancies. The average vacancy rate for
the 1990s was in the 22% range, above the current rate. Still, the national
economic slowdown and corporate downsizing has resulted in softer conditions.
Although we believe the downtown market has a strong future, the market has been
negatively affected by the return of several large blocks of space to the
market. As in 2002, the majority of leasing activity in 2003 will be confined to
renewals and smaller, short-term deals. Expectations of further additions to the
CBD's supply of vacant space by Arthur Anderson and United California Bank will
hamper recovery through the first half of 2003. The prolonged economic downturn
causes us to move our prognosis for recovery to 2004.
Despite the increase in vacancy, average asking rents in the CBD not only held
firm, but increased slightly during 2002. Class A rents, which were $24.84 per
square foot at year-end 2001, registered $25.56 per square foot at year-end
2002. The increase in rents is a significant achievement at a time when asking
rents in many other parts of Los Angeles are softening. Even with increases in
recent years, downtown rents are well below those in the Westside and lower than
those in many other large U.S. office markets, which is another positive
indicator. Of the
(C) 2003 Rosen Consulting Group, LLC 10
20 largest U.S. office markets, rents in downtown Los Angeles at year-end 2002
were lower than 11 other markets. Substantial room to grow exists before rents
would be constrained by tenants relocating to less expensive areas.
It is important to note that a great disparity exists between high-quality
buildings in Bunker Hill and the rest of the Los Angeles CBD. Bunker Hill has
the lowest vacancy rate and highest rents in downtown market. Bunker Hill had an
8.0% vacancy rate at year-end 2002, far below the downtown average.
Although the volume of new lease transactions tapered off during the second half
of 2002, many tenants chose to take advantage of downtown's affordable rents by
either renewing existing leases or relocating for a better deal. Expansions,
although less common, also occurred. Law, accounting, and consulting firms have
generated the majority of demand, replacing oil and banking companies that
formerly anchored downtown projects. Major leases during 2002 include the
following:
- LAUSD (225,000 square-foot renewal at Wells Fargo South Tower)
- Quinn Emanuel Urquhart, Oliver & Hedges (expansion to 120,000 square
feet at 865 S. Figueroa Street)
- Thelen, Reid & Priest (56,000 square feet at BP Plaza)
- KPMG (50,000 square feet at 355 S. Grand Avenue)
- Parker Stanbury (40,000 square feet at Citibank Center)
- Nossaman, Guthner, Knox & Elliott (37,000 square feet at 445 S.
Figueroa Street)
- Perkins and Will (34,000 square feet at 617 West 7th Street)
- Veatch, Carlson, Grogan & Nelson (30,000 square feet at 700 S.
Flower Street)
- Marshall and Swift (22,000 square feet at 911 Wilshire Boulevard)
LARGEST U.S. OFFICE MARKETS: DOWNTOWN
RENT COMPARISON FOR 2002*
[Download Table]
Metropolitan Area Downtown Rent($/SF/Yr.)
----------------- -----------------------
Boston, MA $46.67
New York, NY $44.89
Washington, DC $40.27
Chicago, IL $36.34
San Francisco, CA $31.80
Sacramento, CA $30.88
Seattle, WA $30.22
Newark, NJ $28.48
Oakland, CA $28.44
Houston, TX $27.03
Philadelphia, PA-NJ $25.83
LOS ANGELES-LONG BEACH,CA $25.56
San Diego, CA $24.68
Atlanta, GA $22.27
Detroit, MI $22.13
* Represents Class A asking rents in most cases.
Sources: Selected Brokerage Companies, RCG.
Another stabilizing factor in the CBD office market has been the complete lack
of speculative new supply. Redevelopment is also taking some old, obsolete space
off the market for conversion to residences and hotels. Because central-city
development projects generally have a lead time of several years, no speculative
construction completions are anticipated through at least 2005. The reduction in
supply has helped to partially offset the recent decrease in demand.
The only new office construction added downtown in recent years was the 957,000
square-foot build-to-suit district headquarters for the Metropolitan Water
District at Union Station that included 527,000 square feet of office space.
However, the California Endowment made a recent decision to relocate to a new
128,000 square-foot downtown facility from Woodland
LOS ANGELES CBD OFFICE MARKET
[Enlarge/Download Table]
Units 1996 1997 1998 1999 2000 2001 2002 2003f 2004f 2005f
----- ---- ---- ---- ---- ---- ---- ---- ----- ----- -----
Inventory (SF 000) 28,877 28,877 28,877 28,877 28,877 28,877 28,877 28,877 28,877 28,877
Construction (SF 000) 0 0 0 0 0 0 0 0 0 0
Absorption (SF 000) -289 289 664 491 -578 1,155 -780 130 420 650
Occupied Stock (SF 000) 21,975 22,264 22,928 23,419 22,842 23,997 23,217 23,347 23,767 24,417
Vacancy Rate 23.9% 22.9% 20.6% 18.9% 20.9% 16.9% 19.6% 19.1% 17.7% 15.4%
Wtd. Avg. Rent ($ SF/Yr) $21.34 $21.60 $21.96 $23.04 $23.40 $24.84 $25.56 $25.61 $26.43 $27.62
Rent Growth -2.8% 1.2% 1.7% 4.9% 1.6% 6.2% 2.9% 0.2% 3.2% 4.5%
BUNKER HILL
VAC. RATE 13.1% 11.7% 11.2% 8.1% 7.9% 4.8% 8.0%
Sources: Cushman & Wakefield of California, RCG
(C) 2003 Rosen Consulting Group, LLC 11
Hills. The project will be the first privately funded office development in
downtown Los Angeles in several years. This move is being touted as a good sign
for the CBD office market and is indicative of continued tenant interest. The
planned office campus will break ground in late 2003 and will be occupied in
2006.
Our office model estimates demand for office space based on RCG's forecast of
job creation in employment sectors that occupy office space. RCG estimates the
creation of about 44,000 office jobs in Los Angeles from 2002 to 2005. A portion
of these jobs will be housed downtown causing positive absorption of office
space.
Forecasts for positive net absorption and a lack of new construction lead us to
believe that office market conditions in the CBD/Financial District submarket
will strengthen through our forecast time horizon of 2005. The overall downtown
vacancy rate will fall to the mid-15.0% range in 2005. The Bunker Hill vacancy
rate will fall to near 6.0%.
We forecast office rent growth in the CBD/Financial District using a
disequilibrium model. Rent changes are explained by the spread between the
prevailing vacancy rate and the natural vacancy rate, and overall price
inflation (CPI). The natural vacancy rate is defined as the level at which real
rent changes tend to inflect, becoming positive as vacancy rates fall and
negative as vacancy rates rise. The effect of the spread from the natural
vacancy rate is non-linear. Thus, exaggerated effects are produced as rents
either fall to low levels or spike to high levels.
Falling vacancy rates during the next three years will lead to accelerating rent
growth. The model forecasts slightly positive weighted average asking rent
growth in 2003, however, positive absorption and a lack of new supply will
result in a relatively quick turnaround. RCG forecasts rent growth of 3.2% in
2004, increasing to 4.5% in 2005. By 2005, average asking rents in the
CBD/Financial District should be in the mid-$27 per square foot range. Asking
rents at top tier buildings in Bunker Hill will be notably higher.
WESTSIDE OFFICE MARKET TRENDS
The Westside is a supply-constrained area, with high barriers to entry and
limited room for new development. It is a popular location for the motion
pictures industry, as well as professional services firms. It has also been the
focus of Los Angeles' technology industry. The area is close to the executive
housing and amenities in communities like Bel Air, Beverly Hills, Brentwood,
Westwood, Santa Monica and Malibu. As traffic worsens in the area, more
executives will want their offices near their Westside homes, generating demand
for Westside office space.
Although the Westside office market will take some time to recover from the
effects of the tech demise and an oversupply of new product, signs of healthy
activity were evident in second half of 2002. Increasingly aggressive asking
rents sparked a significant increase in occupied space during the third quarter.
While some of this gain was lost during the final three months of the year, we
believe that the influx of vacant space is leveling off and that the market has
bottomed out. The Westside recorded a 19.9% overall vacancy rate at year-end
2002 and a 15.5% direct vacancy rate. While the overall vacancy rate is among
the highest of the major Los Angeles submarkets, this very desirable area now
has an abundance of Class A space available at increasingly affordable lease
rates. For this reason, we expect the Westside to rebound relatively quickly
compared with other Los Angeles submarkets.
Average asking Class A rents grew at an average rate of 8.3% annually from 1994
through 2001, but then dropped 13.7% during 2002. While the decrease is
material, rents are still above the levels of the late 1990s and are the highest
in Los Angeles. It is important to note that, during the tech boom, Westside
rents spiked more dramatically than any other submarket, by 12.2% in 2000 alone.
As such, we view much of the 2002 decline as a correction in rents.
WESTSIDE LOS ANGELES OFFICE MARKET
[Enlarge/Download Table]
Units 1996 1997 1998 1999 2000 2001 2002 2003f 2004f 2005f
----- ---- ---- ---- ---- ---- ---- ---- ----- ----- -----
Inventory (SF 000) 36,520 36,520 36,520 36,654 37,956 38,540 39,315 40,090 40,440 40,690
Construction (SF 000) 0 0 0 134 1,302 584 775 775 350 250
Absorption (SF 000) 986 913 1,132 1,220 1,095 -2,350 -1,268 950 1,200 1,300
Occupied Stock (SF 000) 30,750 31,663 32,795 34,015 35,109 32,759 31,491 32,441 33,641 34,941
Vacancy Rate 15.8% 13.3% 10.2% 7.2% 7.5% 15.0% 19.9% 19.1% 16.8% 14.1%
Class A Rent ($ SF/Yr) $25.92 $29.28 $31.44 $32.40 $36.36 $39.48 $34.08 $34.22 $34.87 $36.54
Rent Growth 8.0% 13.0% 7.4% 3.1% 12.2% 8.6% -13.7% 0.4% 1.9% 4.8%
Sources: Cushman & Wakefield of California, RCG
(C) 2003 Rosen Consulting Group, LLC 12
As in the CBD market, uncertain economic conditions have slowed leasing
activity. However, aggressive marketing by landlords generated a number of
significant deals. Major recent transactions include the following:
- BAE Systems (150,000 square feet at 5140-50 Goldleaf Circle)
- O'Melveny & Myers (110,000 square feet at 1999 Avenue of the Stars)
- Sun America (66,000 square feet at 1999 Avenue of the Stars)
- Christensen Miller (60,000 square feet at 10270 Constellation
Avenue)
- DreamWorks Music (61,000 square feet at 331 N. Maple Drive)
- Mediacopy (52,000 square feet at 3535 Hayden Avenue)
- Bidz.com (50,000 square-foot sublease at 3562 Eastham Drive)
- US General Services Administration (20,000 square feet in the
Wilshire Bundy Building)
Although Westside land is costly and becoming scarce, the completion of several
new projects underway before the downturn has contributed to the rise in
vacancies. The largest project currently under construction is the 775,000
square-foot MGM Tower in Century City that is 70% pre-leased. We expect that
occupancy of this project will boost 2003 absorption figures.
The limited potential for future development on the Westside enhances the value
of existing properties. Investors showed a strong interest in midsize office
buildings, in particular, during the second half of 2002. Examples include the
sale of the 110,000 square-foot 100 Corporate Pointe tower in Culver City to
Charles Dunn Equities and Alliance Commercial Partners' purchase of the 150,000
square-foot Teleflora Plaza in West Los Angeles.
Demand for space on the Westside will strengthen in 2003, although it will be
2004 before absorption increases to levels near those of the late 1990s. With
demand outpacing deliveries during the next several years, the vacancy rate will
fall to 14.1% by 2005. In response, rents will increase, growing at 1.9% and
4.8% respectively, during 2004 and 2005. Over the long term, the Westside's
attractiveness and supply constraints make it a desirable location.
TRI-CITIES OFFICE MARKET TRENDS
The Tri-Cities submarket is centrally located within the Los Angeles
metropolitan area and includes the cities of Glendale, Burbank and Pasadena.
Rents in the Tri-Cities are lower than the nearby Westside, making the area
attractive to tenants. Traditional tenants in this area include insurance
companies and the entertainment industry.
During the first half of 2002, sublease space combined with new supply to
produce softening office market conditions in the Tri-Cities. However,
considerable improvement was evident during the last six months of the year,
with positive absorption translating into decreases in both the direct and
sublease vacancy rates. The overall vacancy rate registered 18.6% while the
direct vacancy rate ended the year 2002 at 12.4%. Rent growth in the Tri-Cities
averaged 4.4% during 2002, bringing average Class A asking rents to about $28.68
per square foot.
Of the three Tri-Cities markets, Burbank posted the highest vacancies, due in
part to a substantial amount of new supply that came on line during 2002. At
year-end 2002 the Burbank Media Center and the Burbank Media District posted two
of the highest vacancy rates in Los Angeles, at 19.1% and 37.9%, respectively.
During the first half of the year, Burbank was negatively affected by ongoing
consolidation in the entertainment industry, however, this sector has shown more
recent signs of strength.
TRI-CITIES LOS ANGELES OFFICE MARKET (GLENDALE, BURBANK AND PASADENA)
[Enlarge/Download Table]
Units 1998 1999 2000 2001 2002 2003f 2004f 2005f
----- ---- ---- ---- ---- ---- ----- ----- -----
Inventory (SF 000) 18,575 19,089 19,346 19,772 20,424 20,479 20,729 20,729
Construction (SF 000) 378 514 257 426 652 55 250 0
Absorption (SF 000) 1,010 390 -767 91 175 390 450
Occupied Stock (SF 000) 15,901 16,910 17,301 16,533 16,625 16,800 17,190 17,640
Vacancy Rate 14.4% 11.4% 10.6% 16.4% 18.6% 18.0% 17.1% 14.9%
Class A Rent ($ SF/Yr) $27.48 $28.80 $26.04 $27.48 $28.68 $28.82 $29.28 $30.16
Rent Growth 4.8% -9.6% 5.5% 4.4% 0.5% 1.6% 3.0%
Sources: Cushman & Wakefield of California, RCG
(C) 2003 Rosen Consulting Group, LLC 13
Several deals including Technicolor's expansion, Insomniac Games' lease, and
Black Entertainment Television's sale of its western headquarters building
helped boost activity levels in the second half of the year. Following the
completion of Burbank Media Center, Building 2 and Media Studios North, Phase
IV, construction activity in Burbank will come to a halt, allowing the market to
absorb the excess of available space.
Although Glendale's base of financial companies has downsized somewhat, a lack
of new construction has kept overall office market conditions relatively stable.
The direct vacancy rate in Glendale fell to the single-digit range, at 9.9%, in
December. Even with sublease space factored in, the overall vacancy rate has
decreased significantly, to 14.9%.
Pasadena's office market has also been steady, the result of limited new supply.
Pasadena and East Pasadena posted vacancies of 15.7% and 17.7%, respectively in
2002. Construction is underway on the 270,000 square-foot Western Asset Plaza
and on the 52,000 square feet of office space in the Pasadena Collection
mixed-use development. Rather than add to the vacant space in this market, these
developments have attracted healthy tenant interest and are expected to
contribute to increased net absorption in 2003.
Average Class A asking rents in Glendale and Pasadena ranged between $27 and $28
per square foot at year-end 2002. Burbank registered a much wider range of lease
rates, from a high of $33 per square foot in the Media District, to a low of
near $25 per square foot in the North Hollywood area.
Recovery in the Tri-Cities office market is already underway. Competitively
priced space and a central location will ensure improvement through the forecast
horizon. Rent growth will be flat in 2003 as demand fuels absorption, but will
increase to 3.0% by 2005. By this time, RCG anticipates that the vacancy rate
will fall below 15%.
CONCLUSIONS
RCG believes that downtown Los Angeles is one of the nation's healthiest office
markets and one with significant potential for future growth. A
slower-than-expected recovery can be attributed not to local market conditions,
but to the effects of the national downturn. Los Angeles has weathered this
downturn better than most major office markets. Looking forward, we believe that
Los Angeles will see a return to positive job growth beginning in 2003,
generating additional demand for office space.
The Los Angeles CBD office market will strengthen, as the downtown's residential
and cultural evolution draws rising interest. The Westside's rebound will
reflect its continued appeal as a desirable location, with a limited amount of
space for new development. The Tri-Cities, too, will capitalize on its appeal to
entertainment and financial services tenants, among others, with a good supply
of well-located, reasonably-priced space.
Los Angeles is an area with significant potential. Unlike many other parts of
the country, we believe that Los Angeles is an area of the country where office
investment currently makes sense.
(C) 2003 Rosen Consulting Group, LLC 14
This report was prepared with data from both public and private sources,
including our own estimates and proprietary models. We believe the data to be
reliable, and make no representation as to either its completeness or accuracy.
The opinions herein reflect our opinions as of the date of this report and are
subject to change without notice. This report is not intended to solicit the
sale or purchase of any property, mortgage, or security. RCG and its officers
and employees may perform or seek to perform services relating to the sale or
purchase of properties in the markets covered in this report. RCG and its
officers and employees may advise or seek to advise firms trading property in
the markets covered in this report.
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