Lee Central Coast Market Report Q1 2017

The Lee Central Coast Brief

Q1 2017

1 LEE OVERVIEW 2 NATIONAL OVERVIEW 3 KEY MARKET SNAPSHOTS 4 SIGNIFICANT TRANSACTIONS 5 NATIONWIDE LEE OFFICES

62%

increase

in transaction volume over 5 years

Lee & Associates Overview

$11.6 billion

890

2016

and growing nationwide

transaction volume

Ranked 2nd

June 2016, Commercial Property Executive (2016 Top Brokerage Firms) LOCAL EXPERTISE. NATIONAL REACH. WORLD CLASS. At Lee & Associates® our reach is national but our expertise is local market implementation. This translates into seamless, consistent execution and value driven market-to-market services. Our agents understand real estate and accountability. They provide an integrated approach to leasing, operational efficiencies, capital markets, property management, valuation, disposition, development, research and consulting.

CANADA

agents

OFFICE INDUSTRIAL RETAIL INVESTMENT APPRAISAL MULTI-FAMILY LAND PROPERTY MANAGEMENT VALUATION & CONSULTING

EAST MIDWEST

WEST

SOUTH

SOUTHWEST

We are creative strategists who provide value and custom solutions, enabling our clients to make NATIONWIDE LOCATIONS profitable decisions.

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1 Regional Overview

LEE & ASSOCIATES CENTRAL COAST

3 offices

within the tri-counties

11 agents

and growing

Ranked #1

Lee-Associates Central Coast ranks #1 in the Region Pacific Business Times ~ 9/2016

CALIFORNIA

Central Coast

SANTA BARBARA SANTA MARIA LOMPOC SAN LUIS OBISPO PASO ROBLES

Market Snapshots

GLOBAL ECONOM 2

National Economic Overview

GLOBAL ECONOMY

In the past two quarters we have been describing the global eco do, but we can point to at least some improvement around the w short-lived. It didn’t take long for world markets to absorb the new fromeconomic the EU is drawing much attention now.to The In the past two quarters we have been describing exit the global outlook as troublesome. Weless still do, but we can point at leastBritish once the actual process ramps up tothis spring. some improvement around the world. The panic be over short-lived, the Brexit vote was short-lived. It didn’t take long for world markets absorb the news. There’s a long way to go, but the UK’s exit from the EU is drawing much less attention now. The British Pound took a beating, but that may also be short-lived, once the actual process ramps up this spring.

EURO AREA REAL GDP2

When the UK made its surprise decision to leave the EU, the long term survival of the union was called into serious question. However, while Europe’s political union is still in doubt, GDP growth across the pond has picked up. EU GDP growth for 2016 bounced back up to 1.8%, 20 basis points higher than the US growth rate. Yet the aggressive monetary policy of the European Central Bank continues and calls for fiscal austerity fall on deaf ears. That, and the ongoing nationalist fervor whipped up by a huge influx of refugees from the Middle East, leaves a lot of unanswered questions on the continent.

(QUARTER-ON-QUARTER PERCENTAGE CHANGES)

Wh to l the How still has bou high agg Cen aus ong a h Eas on t

The recent OPEC agreement to cap production helped to stabilize the price of a barrel of oil above $50 in Q1 of 2017. Even non-OPEC players like Russia and Venezuela cut The production to help bring reduce supply. But, US producers have increased output to fill a perceived gap, and the active rig count continued to rise through the first three months ofproduction the year. Supplyhelped is still running ahead of demand and without more robust economic to stabilize the price of a barrel of oil above $50 growth around the world, oil prices are not likely to rise much beyond current levels.

like Russia and Venezuela cut production to help bring reduce su output ll a perceived gap, andtothe active rig shortfalls. count continued Oil-rich Middle-Eastern countries, including Saudi Arabia, to are ﬁ still burning through cash reserves cover oil revenue Even Supply is still ahead of demand without m China is issuing government debt to help it copethe withyear. its ongoing transition from running an export based economy to one moreand reliant on domestic consumption. But, a recent spike in import/export activity in theare Asia not Pacific regionto is cause cautious optimismcurrent that worldlevels. world, oil prices likely rise for much beyond

GDP GROWTH

Oil-rich Middle-Eastern countries, including Saudi Arabia, are still oil revenue shortfalls. Even China is issuing government debt to from an export based economy to one more reliant on domes import/export activity in the Asia Paciﬁc region is cause for cautio a sustainable upswing, which would give world GDP growth som

The US economy is, by far, the largest on the planet and we also consume more foreign goods and services than any other nation. Whatever happens here at home, is felt and observed the world over. So, US GDP, the primary metric for tracking the total output of goods and services, is closely watched around the globe. Annualized US GDP growth in Q4 of last year topped 2.1% on the third and final revision. However, total growth for all of 2016 was just 1.6%, well short of the 2.4% growth rate recorded in 2015. Unfortunately, the US economy is off to another slow start in 2017, with the preliminary estimates of annualized GDP growth coming in under 1%. The question that still remains is whether or not US companies and consumers will accept a slower growth model as the “new normal” and press forward in a way that promotes further growth.

2 National Economic Overview

GDP GROWTH GDP GROWTH 2

National Economic Overview

Until 2016, the US looked relatively good compared to Europe, as growth across the pond had been flat at despite drastic monetary and fiscal measures to keep the European Union member countries from sliding into recession. The European Central Bank is even experimenting with Negative Interest Rate Policy (NIRP) and it continues with a massive bond-buying program to keep the cost of capital near historic The USlows. economy is, European by far, Union the largest on besting the planet and wetime also consume and In 2016, the grew at 1.8%, the US for the first in recent memory,more but thatforeign fact leavesgoods a lot of experts erviceswondering than any nation. Whatever happens here at is felt and observed the world over. So, whatother the result would have been without all the meddling by home, central bankers.

US GDP, the primary metric for tracking the total output of goods and services, is closely watched around Political turmoil, civil unrest and economic challenges around the world still weigh heavy on the minds of central bankers, and the US Fed is he globe. among those keeping a close eye on global goings-on. Changes here at home are also on the radar of those who follow GDP closely. The Trump Bump after the election surprised the world and equities markets have soared on the expectation of lower corporate and personal

Annualized US growthregulations in Q4 ofandlast year topped 2.1% onprogram. the third ﬁnal revision. total income tax GDP rates, reduced a huge infrastructure spending But, and GDP growth received no However, boost at all from the enthusiasm that followed the November election. Turning campaign promises into real changes in the law is no small feat, as evidenced rowth for all of 2016 was just 1.6%, well short of the 2.4% growth rate recorded in 2015. Unfortunately, the by the recent of the legislation repeal replace the the Affordable Care Act. estimates Our political system is designed toGDP have big change US economy is offfailure to another slow to start in and 2017, with preliminary of annualized growth occur over time, and checks and balances built into the US Constitution protect the party in the minority. Tax reform is next on the legislative oming priority in under 1%. The question that still remains is whether or not US companies and consumers list, and it stands to face significant opposition from Democrats and some Republicans in both houses of Congress. So, GDP growth will accept a slower growth model theforeseeable “new normal” and press forward in a way that promotes further will remain dependent on current lawsas for the future. Though, the psychology of decision making appears to be more positive, rowth. as the prospects of a more business-friendly economic environment are still on the rise. QUARTER-TO-QUARTER GROWTH IN REAL GDP

Corporate earnings anally bounced back in Q4 and kept momentum in the 1st Quarter of 2017. For much of 2015 and 2016, companies were resorting to cost-cutting and stock buyback programs to increase profits. In Q4 of 2016, that seemed to turn around and more the companies reported relatively revenue increases, would ordinarily contributeas to growth GDP growth. However, means Until 2016, US looked goodwhich compared to Europe, across theongoing pond cost hadcutting been ﬂat more job cuts and lower consumer spending, which accounts for roughly 70% of GDP . If earnings growth continues, we should see espite drastic monetary and ﬁscal measures to keep the European Union member countries from slidinga positive impact on GDP growth later in the year.

nto recession. The European Central Bank is even experimenting with Negative Interest Rate Policy Perhaps the biggest concern relative to GDP growth is the performance of thethe automotive which significantly NIRP) and it continues with a massive bond-buying program to keep cost ofsector, capital near historicimpacts lows. manufacturing output, job growth and consumer spending. In the final quarter of 2016, incentive-driven car sales accounted for a n 2016, the European Union grew at 1.8%, besting the US for the ﬁrst time in recent memory, but that disproportionate share of GDP growth. That did little for bottom line profits in the sector, but did give GDP a badly needed shot in the arm. act leaves a lot of experts wondering what the result would have been without all the meddling by central Slow sales of non-SUV vehicles are likely to weigh heavy on automobile manufacturers in Q1 and, most likely, throughout 2017, which ankers.will negatively impact GDP growth.

2 National Economic Overview

EMPLOYMENT

Job growth statistics are a moving target because of the rather odd way they are compiled. The U3 unemployment rate, the most widely quoted in the media, includes those who are employed and those of the unemployed who have actively sought employment in the most recent five weeks. We are still not sure who came up with U3, but we wish they hadn’t because it quite often produces counter-intuitive results. When job creation is good, those who have not been looking for work, re-engage in their search and are added to the total of those who are actively looking, increasing the number of unemployed workers and thereby raising the unemployment rate. March 2017 numbers make a good example. A dismal 98,000 jobs were 2 created in March (well below the number needed to keep up with new entrants to the workforce) yet the unemployment rate Economic went down 20 basis points. Conversely, 235,000 jobs were created in National Overview February of 2017 and the U3 20% 64.0% unemployment moved just 10 points bases lower. These anomalies happen with some 16% frequency and have caused many to discount the validity of 14% 63.0% the Bureau of Labor Statistics’ 12% U3 metric that removes from the calculation those workers who have not been actively seeking employment in the most recent five week period.

EMPLOYMENT

The U6 unemployment rates counts those working part time in their field of choice, who would prefer to be working full time, as unemployed. Many believe U6 offers a more accurate employment picture. It does make clearer the frustration of many in the middle class who stillgrowth feel like the recession never ended. They are technically but don’t the impact of higher income.The The U3 U6 Job statistics are a moving target because employed, of the rather oddfeel way they are compiled. unemployment rate is still double that of U3, at 8.9%. unemployment rate, the most widely quoted in the media, includes those who are employed and those of

the unemployed who have actively sought employment in the most recent ﬁve weeks. We are still not sure

Job creation slowed in 2016, but did get off to a good start in Q1 of 2017. The 12 month rolling average of new positions had fallen who came up with U3, but we wish they hadn’t because it quite often produces counter-intuitive results. by over 50,000 in the past year, but the pace picked up again in the first two months of the year. Then came March when an unexpectWhen job creation is good, those who have not been looking for work, re-engage in their search and are edly low 98,000 new jobs were created. Some say February stole from March due to a higher level of construction jobs coming early added to the total of those who are actively looking, increasing the number of unemployed workers and due to warmer weather. Wild swings in job growth impact consumer spending and business expansion. Companies large and small thereby raising the unemployment rate. March 2017 numbers make a good example. A dismal 98,000 jobs tend to more cautious in making long term decisions that have a big impact on hiring.

Unemployment & U6 Unemployment

Labor Force Participation

were created in March (well below the number needed to keep up with new entrants to the workforce) yet the unemployment went The Labor Participation rate Rate, thedown NATIONAL UNEMPLOYMENT 20 basis points. Conversely, metric that measures the percentage jobs were created in UNEMPLOYMENT UNEMPLOYMENT U6 LABOR FORCE PARTICIPATION of those235,000 eligible for employment be20% 64.0% February 2017 andare the U3 tween the ages of 16ofand 64 who moved currentlyunemployment working, also remains near a just 18% 10 basis points lower. four-decades low. A loss of job growthThese 63.5% anomalies with some 16% momentum and the happen early retirement andcombined have caused of Baby frequency Boomers, have to 14% 63.0% to potential discountworkers the validity of keep justmany 63% of in the Bureau of Labor Statistics’ 12% active production. U3 metric that removes from 62.5% 10% Laggingthe wage growth remains a calculation those workers problemwho that have has kept a lid actively on not been 8% 62.0% US economic Full-time, seeking growth. employment in the 6% high-paying jobs are available, but most recent 5 week period.

too few applicants are qualified. 61.5% 4% 2012 2013 2014 2015 2016 2017 Lower-skilled workers are relegated rates The U6 unemployment to jobs counts that makethose it difficult to get part working ahead. time Wage in growth has seen some their ﬁeld of choice, improvement having tracked at an working full time, as unemployed. Many believe U6 offers a more accurate who would prefer to be annualized a rate of just underIt3% employment picture. does make clearer the frustration of many in the middle class who still feel like the for the past several months.2.9%. But, for workers earning aemployed, middle income 3%the increase mayofnot change spending habits recession never ended. They are technically butwage, don’t afeel impact higher income. The U6 enough unemployment to move the needle on economic growth. Roughly two-thirds of that increase goes to cover current inflation, leaving little rate is still double that of U3, at 8.9%. for new purchases that would boost GDP. As a direct result, many middle class workers feel like they have been left on the economic sidelines. Job creation slowed in 2016, but did get off to a good start in Q1 of 2017. The 12 month rolling average

of new positions had fallen by over 50,000 in the past year, but the pace picked up again in the ﬁrst two months of the year. Then came March when an unexpectedly low 98,000 new jobs were created. Some say February stole from March due to a higher level of construction jobs coming early due to warmer weather. Wild swings in job growth impact consumer spending and business expansion. Companies large

2 National Economic Overview

MONETARY POLICY

After years of sending cryptic mixed signals, the Fed finally stepped up in December of 2016 and again in March of 2017 by sending its benchmark Fed Funds rate by a combined 50 basis points to 1%. By historical standards, that is still low, and it will take a sustained series of quarter-point increases to fully neutralize the activist posture of our central bank. Since the financial crisis that began at the tail end of 2007, the Fed has been aggressively manipulating the cost and flow of capital to the point that it has drawn heavy criticism for taking a more active role than it should have. Some believe our central bankers are largely responsible for what could be a bubble in the equities National Economic Overview and commercial property markets, as both have seen disproportionate gains throughout the economic recovery.

MONETARY POLICY

Fed rate hikes generally strengthens the US dollar making exports more expensive and effectively raises the debt service on dollar-denominated loans for borrowers around the world. However, the spike in the dollar has quieted some in recent months and its impact on the rest of the world found on the front page less often. What may become big news soon is the potential impact of reducing the Fed’s balance sheet, which swelled to over $4.5 trillion after several years of bond-buying known as quantitative easing (QE). That money, created in a computer on an as-needed basis, has to go back into the computer to be removed from circulation. Speculation from some Fed officials indicates that the balance sheet problem will be addressed sooner than later. To date, the Fed has been reinvesting proceeds from maAfter years of sending mixed signals, ﬁnallydoesn’t stepped up in D turing T-bills by buying more T-bills. When that changes, bondholders will cryptic be watching carefully just in the caseFed the market take the in March of 2017 by sending its benchmark Fed Funds rate by a combined adjustment in stride. For many who fear the inflationary impact of the dilution of the US dollar associated with QE, the Fed’s decision to historical standards, that is still low, and it will take a sustained series of qu clean up its balance sheet will be welcome news.

neutralize the activist posture of our central bank. Since the ﬁnancial crisis t

Despite the Fed’s more robust monetary stance, central the world are still at full throttle in termsthe of monetary stimulus. 2007, thebanks Fedaround has been aggressively manipulating cost and ﬂow ofThe capital European Central Bank and the Bank of Japan are still toying with negative rates, which certainly doesn’t telegraph a bullish outlook for beli heavy criticism for taking a more active role than it should have. Some economic growth. Both banks continue to buy corporate bonds in addition to their own sovereign debt. The Bank of Japan is running largely responsible for what could be a bubble in the equities and commercia out of government debt to buy back and have resorted to buying individual stocks, which is against the law here in the US. Critics are not have seen disproportionate gains throughout the economic recovery. p p g bashful in criticizing these drastic measures, which are largely untested and could have US TREASURY RATES consequences down the line. Concerns of a near term recession here in the US have subsided, at least for now. The surprise election of Donald Trump as President sent markets on a tear and drowned out the voices of the economic naysayers who predicted a bursting of a stock bubble and the beginnings of an economic correction. If such a thing did occur, at least the Fed has extricated itself from the corner it painted itself into by keeping rates at the zero bound for so long. With Q1 GDP growth so weak, having some room to maneuver is probably not a bad thing. It only takes two consecutive quarters to be in recession, and first quarter growth under 1% lends little comfort.

Trump’s promise of a big infrastructure investment hasbalance buoyed hopes that the Fed will get a littletohelp from$4.5 Congress and the White House. years Fed’s sheet, which swelled over trillion after several But, the deficit hawks on the political right are loathe to let deficits move higher on their watch. If the recent failure to repeal and replace quantitative easing (QE). That money, created in a computer on an as-nee the Affordable Care Act is any indication, it could be a long year for Mr. Trump, Speaker Ryan and Majority Leader McConnell. At the end into the computer to be removed from circulation. Speculation from some of the day, the Fed may not get the assist and will opt to keep its foot on the economic gas pedal. the balance sheet problem will be addressed sooner than later. To date, th If that turns out to be the case, borrowers will continue to enjoy low interest rates. Mortgage rates have begun to move up, but remain maturing Whenrates, thatand changes, b near historic lows Most commercial propertyproceeds lenders use from a spread over theT-bills yield onby thebuying 10 Year more T-bill toT-bills. set mortgage that just inrates case market take themoment, adjustment stride. For ma yield is currently stabilized in the 2.4% range,carefully which mortgage willthe remain slightlydoesn’t under 5%. For the it’s stillin a good time impact of the dilution of the US dollar associated with QE, the Fed’s decision t to borrow money.

will be welcome news.

US INDUSTRIAL MARKET

NET ABSORPTION COOLS - RENTS K 2

National Economic Overview

US INDUSTRIAL MARKET

After putting in another strong performance to ﬁnish the year, the industrial ma a breather in Q1, but kept moving in the same direction. Supplies of quality spa across the country and rents keep moving higher. Construction activity is robust, in a handful of major distribution hubs. Supply in more mature markets is industrial land is being repurposed to higher uses despite dangerously low vac After putting in another strong performance to finish the year, the industrial market took a bit of a breather in Q1, but kept demand from expanding businesses. The post-election surge of optimism conti moving in the same direction. Supplies of quality space are declining across the country and rents keep moving higher. noticeably afterbut the failed inattempt repeal and replace themature controversial Afforda Construction activity is robust, concentrated a handful ofto major distribution hubs. Supply in more markets is running thin as industrial land is being repurposed to higher uses despite dangerously low vacancy and strong demand from expanding things considered, the industrial market kept its momentum and should continue businesses. The post-election surge of optimism continues, but cooled noticeably after the failed attempt to repeal and replace lines for the rest of 2017. The Fed made another move on interest rates during adjustm VACANCY RATES BY BUILDING TYPE 2001 - 2016 months Total Market T F Flex Fl Warehouse W h closer targets employ took th the g hiccup hike c Decem This ti Fed’s 16% 14%

Vacancy Rate

12%

10%

8% 6% 4% 2%

2002 Q4

2003 Q4

2004 Q4

2005 Q4

2006 Q4

2007 Q4

2008 Q4

2009 Q4

2010 Q4

2011 Q4

2012 Q4

2013 Q4

2014 Q4

2015 Q4

have come as welcome news, as industrial business owners and commercial real estate investors see the tightening of monetary policy as a sign of a strengthening economy.

2016 Q4

FUTURE DE

the controversial Affordable Care Act. All things considered, the industrial market kept its momentum and should continue on current trend lines for the rest of 2017. The Fed made another move on interest rates during Q1, the second adjustment inPRELEASED just three & UN-L months, after inching closer to hitting its targets for inflation and employment. Markets took the move without the global economic hiccup its initial rate hike caused back in December of 2015. 160 140estate This time around, the Fed’s moves seem to have come as welcome news, as industrial business owners and commercial real investors see the tightening of monetary policy as a sign of a strengthening economy. The recent rate hikes did push mortgage rates 120 higher, but not by enough of a margin to dampen the enthusiasm for acquiring industrial properties. Demand from owner/users and third-party investors has pushed prices to record levels, and supply continues to run at a fraction of current demand. Lenders are 100 underwriting deals with closer scrutiny, but there are enough highly qualified buyers out willing to be under the microscope.

M illio ns SF

The recent rate hikes did push mortgage rates higher, but not by enough of a margin to dampen the enthusiasm for acquiring industrial properties. Demand from owner/users and third-party 80 investors has pushed prices to record levels, and supply Caution has its place, especially so many years into the market up cycle. At this point, no one knows how much further rates will 60 needcontinues to rise to initiate the rate decompression so many have been talking about. For the time being, owner/user buyers, tocaprun at a fraction ofexperts current demand. Lenders are are still lining up to pay record prices, but even though owners can reap windfall profits by selling, the tax consequences of cashing underwriting dealsis seen with closer scrutiny, but 40 out are significant and exchanging by many as just kicking the tax can downthere the road.are enough highly qualiﬁed buyers out willing to be under the microscope. 20

RECENT DELIVERIES

LEASED & UN-LEASED SF IN DELIVERIES LAST 5 YEARS 300

Un-Leased

Leased

2017 Q2

Caution has its place, especia

Vacancy

6% 4%

National Economic

2% 0%

2002 Q4

2003 Q4

2004 Q4

2005 Q4

2006 Q4

2007 Q4

2008 Q4

2009 Q4

2010 Q4

2011 Q4

2012 Q4

2013 Q4

2014 Q4

the global economic hiccup its initial rate hike caused back in of 2015. OverviewDecember This time around, the Fed’s moves seem to 2015 Q4

omic Overview have come as welcome news, as industrial business owners

SOUTH SOUTHWEST

A LOOK AHEAD

2016 Q4

KETNET ABSORPTION COOLS - RENTS KEEP MOVING HIGHER and commercial real estate investors see the tightening of monetary policy as a sign of a strengthening economy.

- RENTS KEEP MOVING HIGHER

FUTURE DELIVERIES

PRELEASED & UN-LEASED SF IN PROPERTIES SCHEDULED TO DELIVER 160

Un-leased U l d

Preleased P l d

140

The recent rate hikes did push mortgage rates higher, but not 120 by enough of a margin to dampen the enthusiasm for Still, acquiring buyers remain aggressive, especially user buyers who can 100 ar, the industrial market took a bit of industrial properties. Demand from owner/users and third-party take advantage of SBA financing at 90% of a property’s value. ECONOMIC pplies of quality space are declining 80 investors has pushed prices to record levels, and supply They like the idea of keeping occupancy costs at for up to 25 n activity is robust, but concentrated DRIVERS 60 continues to run at a fraction of current demand. Lenders are fixed rate years with mortgages that are still in low 5% range mature markets is running thin as despite the recent40increase. underwriting deals with closer scrutiny, but there are enough angerously low vacancy and strong highly qualiﬁedbut buyers out willing toGDP beGROWTH under the microscope. 20 e of optimism continues, cooled M illio ns SF

In Q1, net absorption was positive, but tepid compared to the 0 last several quarters. Rent was strong 2017 and vacancy 2018 2017 growth 2017 Q1 Q2 Q3 Q4 held steady as new deliveries stayed in relative balance with leasing action. GDP growth for 2016 came in at a disappointing Caution has its place, especially so many years into the market up 1.6%, and the preliminary estimate for Q1 growth is under 1%, cycle.which At this point, no one knows how much further rates will need doesn’t seem to sync up with current market sentiment to rise to initiate the cap rate decompression so many experts and metrics. Fourth quarter earnings season brought generally havegood beennews talking fromabout. corporate America. Profits were up and so were revenues, which indicates that there is still room for industrial For the time being, buyers, areperiods, still lining upofto pay sector growth. In owner/user the past several reporting much record though caused ownersmore canby reap windfallthan proﬁts by theprices, growth but was even in profitability cost-cutting top the line tax revenue gains. So, the of increase in top revenue selling, consequences cashing outline are signiﬁwas cant and welcomeisnews. exchanging seen by many as just kicking the tax can down the

ontroversial Affordable Care Act. All RECENT DELIVERIES LEASED & UN-LEASED SF IN DELIVERIES and should continue on current trendLAST 5 YEARS EMPLOYMENT nterest rates during Q1, the second Leased Un-Leased 300 MONETARY POLICY adjustment in just three 275 months, after inching 250 arket GLOBAL ECONOMY closer to hitting its 225 targets for inﬂation and 200 employment. Markets took the move without 175 the global economic 150 hiccup its initial rate 125 hike caused back in 100 A LOOK AHEAD December of 2015. 0 2013 2012 2014 2015 2016 This time around, the Fed’s moves seem to M illio n SF

BC CANADA

ners g of

not ring arty pply are ugh pe.

MIDWEST

EAST

SOUTH

SOUTHWEST

road. Still, buyers remain aggressive, especially user buyers who

2016 Q4

lee-associates.com FUTURE DELIVERIES

1 LEE OVERVIEW

PRELEASED & UN-LEASED SF IN PROPERTIES SCHEDULED TO DELIVER

Un-leased U l d

160

Preleased P l d

140 120 100 80 60 40

M illio ns SF

2015 Q4

WEST

2017 Q2

2017 Q3

2017 Q4

2018 Q1

as its place, especially so many years into the market up is point, no one knows how much further rates will need initiate the cap rate decompression so many experts talking about.

me being, owner/user buyers, are still lining up to pay es, but even though owners can reap windfall proﬁts by e tax consequences of cashing out are signiﬁcant and g is seen by many as just kicking the tax can down the buyers remain aggressive, especially user buyers who

Vacancy was unchanged in Q1, but has been in steady decline in almost every primary and secondary market for the past few 4 SIGNIFICANT TRANSACTIONS 5 LEE NETWORK NATIONAL OVERVIEW 3 KEY MARKET SNAPSHOTS years. The shortage of quality space offered for lease has forced tenants to renew in place, relocate to inefficient space or pay the premium for first generation space. Rent growth is being driven by the increased efficiency offered in new projects where the latest in materials handling technology can help tenants think more three dimensionally. Owners of new space are demanding longer terms and stronger credit on top of higher rents. Developers in low-vacancy markets are unable to find land suitable for ground-up development, and repurposing properties to multifamily and mixed-use retail/office projects is often the only way to make projects pencil out. Land is getting more expensive to acquire, projects are taking longer to get entitled and buildings are getting more expensive to construct, which is keeping significant amounts of spec building concentrated in major land-rich markets like Dallas/Fort Worth, Atlanta, Phoenix, Philadelphia, Chicago and Southern California’s Inland Empire.

sector growth. In the past several reporting periods, much of the growth was in proﬁtability ca cost-cutting than top line revenue gains. So, 2 the increase in top line revenue was welcome news

National Economic Vacancy was unchanged in Q1, but has been in Overview steady decline in almost every primary and sec for the past few years. The shortage of quality space offered for lease has forced tenants to r relocate to inefficient space or pay the premium for first generation space. Rent growth is being increased efficiency offered in new projects where the latest in materials handling technology ca think more three dimensionally. Owners of new space are demanding longer terms and stronger higher rents.

US INDUSTRIAL MARKET

Net absorption cooled off in Q1 but remained

NET ABSORPTION 100

* For Top 42 Markets 92,096,783

90 80 70 Millions SF

63,471,880

53,532,096

50 41,200,230

40 30 20

2016 Q2

2016 Q3

2016 Q4

2017 Q1

Developers in territory low-vacancy markets firmly in positive with a total gain in are land suitable an occupied spaceforofground-up 57.8 million development, square feet after posting total gain of 80 square retai properties toamultifamily andmillion mixed-use feet in the final period of 2016. The e-commerce is sector, often big theshippers only way to make projects pen and 3PL operators are still getting more expensive to acquire, projects a the market makers, taking down space in enorUntiland recently, is was just are the major to mous get chunks. entitled buildings getting m distribution hubs getting most of the action, but to construct, which is keeping signiﬁcant am the push for “Last Mile” locations to speed up building concentrated in major land-rich shipping time has given secondary and tertiary Dallas/Fort Atlanta, Phoenix, markets a bigWorth, boost. Amazon.com continues itsPhilade massive expansion by leasing multiple fulfillment and Southern California’s Inland Empire.

centers each quarter, some over 1 million square feet. Walmart is expanding in a similar fashion as Net partabsorption of its long termcooled strategy tooff takein the Q1 battlebut to rem Amazon.territory E-commerce is here to staygain the need positive with a total in for occupied state-of-the-art distribution space will be ongoing million square feet after posting a total gai for years to come.

square feet in the ﬁnal period of 2016. Th sector, big shippers and 3PL operators are still the market makers, taking down space in enormou Newrecently, deliveries for build-to-suit projects hubs for Q1 getting reached 63.3 million square feet in 517 nearly is both wasspeculative just theand major distribution most of the action, but buildings, the push for “Last equaling Q4’s totals. That brought total US industrial property inventory past the 22 billion-square-foot mark. As the quarter ended, to speed up shipping time has given secondary and tertiary markets a big boost. Amazon.com another 268 million square feet was still in the construction pipeline. Development activity is focused primarily in distribution hubs expansion by and leasing llment centers quarter, over 1 million like massive Dallas, Chicago, Philadelphia Atlantamultiple where landfulﬁ is still available at priceseach that allow projectssome to pencil at today’s rents. squar Thatisis expanding not the case in in mature markets like Los Angeles where what little land remains is too expensive for conventional industrial a similar fashion as part of its long term strategy to take the battle to Amazon. E development. Infill markets like LA are losing industrial inventory to repurposing to other product types that make more economic here to stay the need for state-of-the-art distribution space will be ongoing for years to come. sense.

New deliveries for both speculative andand build-to-suit projects for reached 63.3metrics million square feet in As we reported last quarter, the balance between spec build-to-suit construction has Q1 helped keep market in balance. Newnearly deliveriesequaling continue to Q4’s run comfortably net absorption, which maintained market equilibrium even in past marketsthe with22 billi totals. short Thatof brought total UShasindustrial property inventory substantial construction. Speculative buildings are leasing quickly to fast growing tenants who like not having to wait for build-to-suit space. mark. As the quarter ended, another 268 million square feet was still in the construction pipeline The national vacancy rate for warehouse and flex space was unchanged in Q1 at 5.3%. In the past four quarters, the vacancy rate has activity is points, focused primarily in distribution hubs like Dallas, Philadelphia and Atlanta wh fallen by 40 basis and several major market areas still have vacancy rates in the 2%Chicago, range, including Central Los Angeles, Long Island, New York and California’s Orange County. available at prices that allow projects to pencil at today’s rents. That is not the case in mature m

Angeles where what little land remains is too expensive for conventional industrial developmen econ

Average asking lease rates across the country moved higher again in Q1, ending the period up $.10 to $6.14. Markets with the likelevels LAofare losing are industrial to repurposing product types that make more highest construction still seeing inventory the most rent growth, as tenants will to payother a premium for efficient, first generation space with higher clearance and more sophisticated fire suppression systems. However, rising development costs are driving up the rents required to make projects pencil, and that has developers and their lenders wondering whether the current pace of rent growth will cover those additional costs by the time projects are built.

lee-associates.com

1 LEE OVERVIEW

2 NATIONAL OVERVIEW

3 KEY MARKET SNAPSHOTS

4 SIGNIFICANT TRANSACTIO

The global economic growth picture still isn’t good, but it has improved substantially. GDP growth in the European Union trumped the US for the first time, but the European central bank is still printing money to buy sovereign and corporate bonds and continues to experiment with negative interest rates to stimulate further economic growth. The Asia Pacific region is picking up the pace, as well. Port activity was way up in the first quarter, in part driven by higher commodity and oil prices. In all, we started 2017 on a much more positive note than we did in 2016, when the world economy got spooked by the Fed’s first rate hike in December of 2015.

2 National Economic Overview

US INDUSTRIAL MARKET LOOKING AHEAD High demand, low supply, rising prices and declining vacancy will continue to drive market dynamics. However, economic growth is still stubbornly sluggish and there is a fair amount of uncertainty from a macroeconomic perspective. Monthly swings in job and wage growth are sending a mixed message about the rest of the year, yet our central bankers are optimistic enough to raise interest rates twice in three months and send a strong signal of further near term hikes. The yield on 10-Year Treasuries, the benchmark for setting commercial mortgage rates, spiked to over 2.6% during Q1, but has settled in the 2.3% range of late, which means the markets have already factored in the Fed rate hikes. The global economy looks to improve further going forward. The Brexit scare was short-lived, and the markets have gotten used to the idea of an EU without the United Kingdom. China and other emerging economies are still facing big challenges, but talk of global recession has subsided in the wake of improved economic indicators around the world. US economic growth is perhaps more of a mystery. With GDP getting such a slow start in 2017, itâ&#x20AC;&#x2122;s hard to say where the year will end up. However, the industrial market is largely driven by rapid growth in e-commerce and third-party logistics operators. So, current activity levels are maintainable in the near term. Barring a significant economic event, the industrial property market should continue to expand at the current pace. Vacancy will keep moving lower in small increments, as the bulk of new construction is concentrated in distribution hub markets with strong, ongoing positive net absorption. Net absorption should remain positive and healthy in 2017, but may moderate in markets that have very low vacancy. Landlords will keep pushing for longer terms and stronger credit, while tenants will look for shorter terms that provide strategic flexibility and the chance for lower rental rates when the market finally corrects. Construction will remain at current levels in areas with ample supplies of land, but will decline further in markets like Los Angeles where land is either unavailable or too expensive for industrial development. Lenders still have money to loan, but will continue to tighten up on underwriting to mitigate potential downstream risk.

2 National Economic Overview

US RETAIL MARKET

National Economic Overview

RETAIL SECTOR HOLDS THE L US RETAIL MARKET The US retail property market kept pace in Q4. Vacancy and construction activity were

P GD

The US retail property market kept pace in Q4. Vacancy and construction activity were relatively unchanged, rents rose modestly and relatively unchanged, rentsterritory. rose Even modestly and netpoint absorption remained solidly incontinues positive net absorption remained solidly in positive though the numbers to market consistency, the retail industry to experience significant change as the traditional department stores to consistency, adjust to the massive presented by growth in territory. Even though numbers point tostruggle market thechallenge retail industry continues online and the demographic shift from baby boomers to millennials.department Sporting goods operators Chalet and Authority tosales experience significant change as traditional storesSport struggle to Sport’s adjust to the shuttered all their stores in 2016, as did women’s apparel giant The Limited, which will remain in business as an online-only retailer. massive challenge presented by growth in online sales and the demographic shift from But there was more bad news for national chains in the first quarter, as another 11 name brands filed for bankruptcy protection, includbaby boomers to millennials. ing Eastern Outfitters, Wet Seal, Gander Mountain, HHGregg, General Wireless Operations (Radio Shack) and Payless Shoe Source. While reorganization efforts are ongoing, some retailers may end up in liquidation if their reorganization plans come up short.

Sporting goods operators Sport Chalet and Sport’s Authority shuttered all their stores in 2016, as did women’s apparel giant The Limited, which will remain in business as an VACANCY RATES BY BUILDING TYPE 2007-2017 11% 10% 9% 8% 7% 6% 5% 4% 3% 2% 2007 Q3

2008 Q1

2008 Q2

2009 Q1

2009 Q2

2010 Q1

2010 Q3

2011 Q1

2011 Q3

2012 Q1

2012 Q3

2013 Q1

2013 Q3

2014 Q1

2014 Q3

2015 Q1

2015 Q3

2016 Q1

2016 Q3

2017 Q1

Millions SF

Store closings have also become a much larger problem tore closings have also become a much larger problem for mall owners. retailer. But(138 there ABSORPTION MajorNET department stores announcing big store closure plans this year include (160online-only Sears & Kmart stores), JC Penny stores)was and more national inAmerican the first quarter, Macy’s (68 stores). Mall-based chains are also closing stores, including Abercrombie & Fitchchains (60 stores), Apparel (110 as an * For Top 42 Markets stores), Wet40Seal (171 stores), Crocs (160 stores) and Guess (60 stores). Most ofbrands the struggling point mainly to protection, increased filedretailers for bankruptcy in 36. 6.4 4 More bad news is expected, as experts keep adding other big name retailers to the list of those online competition for their woes. Outfitters, Wet Seal, Gander Mountain, HH 35 33. 3.6 6 who may not make it through the year. The 33 vacancy rate was unchanged in Q1 at 4.8%, but it has fallen 20 basis points in the past Wireless Operations (Radio Shack) and four quarters. But, reported vacancy in secondary submarkets ranges much higher. General retail (freestanding, general purpose 30 Source. reorganization efforts are properties) maintains the lowest vacancy of all retail property types, followed closely by mallsWhile and power centers. 25

retailers may end up in liquidation if their

2.8 8 Shopping center (neighborhood, community and strip22. centers combined) rates are still highest, supply in this category plans comebut upexcess short. 20 remains concentrated in unanchored centers in traditional suburban submarkets that generally have a higher concentration of local tenants on their 15. 5.6 6rent rolls. Urban areas continue to account for a greater share of net absorption as retailers continue to shift Store closings have also become a much 15 0 15.0 15 their marketing focus onto millennial consumers. This group prefers multifamily housing near public transportation, trendy for mall Major stor restaurants and cool bars over the suburbs they grew up in. They are more inclined to rent owners. than own their homes,department prefer public 0 store closure thisnear year include transportation over2016 car ownership and like being close enough to work and amenitiesbig to walk. As a result, mixedplans use projects public 20 201 2016 01 16 201 2 01 17 201 20 01 16 201 20 201 16 201 20 01 16 transportation tend Q1 to have the Q2 lowest retailQ3 vacancy. Q4 (160 Sears & Kmart stores), JC Penny (1 Q1

Macy’s (68 stores). Mall-based chains a stores, including Abercrombie & Fitch (60 stores), American Apparel (110 stores), Wet Seal (17 (160 stores) and Guess (60 stores). Most of the struggling retailers point mainly to increased onli for their woes. More bad news is expected, as experts keep adding other big name retailers to who may not make it through the year.

RETAIL SECTOR HOLDS THE LINE IN Q1 2 ECONOMIC DRIVERS

The US retail property market kept pace in Q4. Vacancy and construction activity were National Overview relatively unchanged, rents rose modestly and Economic net absorption remained solidly in positive territory. Even though the numbers point to market consistency, the retail industry continues to experience significant change as traditional department stores struggle to adjust to the massive challenge presented by growth in online sales and the demographic shift from baby boomers to millennials.

RETAIL SECTOR HOLDS THE LINE IN Q1 P

GROWTH EMPLOYMENT

Sporting goods operators Sport Chalet and Sport’s Authority shuttered all their stores MONETARY POLICY in 2016, as did women’s apparel giant The Limited, which will remain in business as an Q1 net absorption topped 13.6 million square feet in the fi rst quarter, bringing the net gain in occupied space in the last four GLOBAL ECONOMY periods up to just over 134 million square feet. The general retail category accounted for the biggest slice of that gain, followed VACANCY RATES BY BUILDING TYPE 2007-2017

by the shopping center category and then malls. Power center absorption has been light in the past year, which is indicative of 2 11% several 300 current trends in retailing: department stores closing, big-box retailers reducing 250 store size and count and the shift National Economic Overview 10% to urbanized areas with the most millennial population growth. BC CANADA

EAST

WEST

MIDWEST

SOUTH

Shopping center (neighborhood, community and strip centers combined SOUTHWEST

supply this category remains concentrated in unanchored centers in tra The overall average asking rate still managed another increase in Q1, up inanother $.29 to $16 per square foot. Over the past 7% generally have a higher concentration of local tenants on their rent rolls. four quarters, retail rents across all product types and locations moved up by just over 3.3%, but rent gains are generally steeper A LOOK AHEAD 6% in urban locales. Suburban retail centers, especially those that are not grocery-anchored, toa see weaker higher as retail Urban areas continue tocontinue account for greater sharegrowth, of net absorption 5% vacancy and the need for landlord concessions to secure new leases. The rate of rent growth suffers as distance from urbanized focus onto millennial consumers. This group prefers multifamily housing 4% restaurants andfor cool over the suburbs they grew up in. They are mo cores increase, which reflects the ongoing shift in lifestyle priorities. New deliveries thebars quarter topped 18 million square feet, homes, prefer public transportation over car ownership and like 3% down from 24 million square feet in the previous period. In the past four quarters, 85 million square feet of new space has beenbeing clos walk. As a result, mixed use projects near public transportation tend to hav added to2%the base inventory, which now stands at 13.15 billion square feet. Another 86.7 million square feet currently under 2008 2010 2011 2011 2013 2014 2015 2015 2016 2017 2007 2008 2009 2009 2010 2012 2012 2013 2014 2016 construction, over Q1Q4 of Q1 Q1 Q3 Q3 net Q3 Q1 topped Q3 Q1 Q1 square feet in the first quarter, bring Q3 upQ19% Q2 Q2 2016. Q3 Q1 Q3 Q1 Q1 absorption Q3 Q1 13.6 million

NET ABSORPTION 40

Millions SF

* For Top 42 Markets

36. 6.4 4 33. 33 3.6 6

30 25

22. 2.8 8

Millions SF

in the last four periods up to just over 134 million square feet. The genera bigges HISTORICAL DELIVERIES 1994 - 2016 was more bad news for shoppi online-only retailer. But there national chains in the first quarter, as another 11 name Power Average Delivered SF pas Deliveries brands filed for bankruptcy protection, including Eastern the 300 curren Outfitters, Wet Seal, Gander Mountain, HHGregg, General stores 250 Wireless Operations (Radio Shack) and Payless Shoe store s Source. While reorganization efforts are ongoing, some urbani 200 retailers may end up in liquidation if their reorganization popula 150 plans come up short.

The o manag 15. 5.6 6 Store closings have also become a much larger problem anothe 15 0 15.0 15 50 for mall owners. Major department stores announcing the pa pro 0 big store closure plans this year include Sears Holdings all 0 up by 20 201 2016 01 16 201 2 01 17 201 20 2016 01 16 201 20 201 16 201 20 01 16 1996 1998 & 2000 2002 stores), 2004 2006JC2008 2010 (138 2012 2014 2016 and (160 Sears Kmart Penny stores) Q3 Q1 Q1 Q4 Q2 are ge Macy’s (68 stores). Mall-based chains are also closing Suburb that are not grocery-anchored, continue see stores), weaker growth, stores, including Abercrombie & Fitch (60 stores), American Apparel (110 stores), Wet Seal to (171 Crocs higher v concessions to secure newto leases. The rateonline of rentcompetition growth suffers as distan (160 stores) and Guess (60 stores). Most of the struggling retailers point mainly increased LOOKING AHEAD bad news is expected, as experts keep which reflects the ongoing shift in lifestyle priorities. adding otherdensely big name retailers to the list of those Thefor UStheir retail woes. market More will keep growing, but that growth will remain concentrated in more populated areas that have been or are who may make itprocess. through theand year. New deliveries themay quarter 18 million square feet, But, down from 24 undergoing the not gentrification GDP wage growth picked up late last year andfor that give topped retail sales a welcome boost. period.rate In the pastcreation four quarters, 85 million square feet of new consumer spending and retail sales growth have been uneven and the monthly of job has slowed from 229,000 a year ago,space has now stands 13.15 billion square feet. Another 86.7 million to just post-election optimism becomes in the form ofwhich stronger job growth, retail sales could gain momentum. Amazon The180,000. vacancyIf rate was unchanged in Q1 reality at 4.8%, but it has fallen 20 basisatpoints in the past four quarters. But, square up 9% over Q4 of 2016. recently announced that it in would be addingsubmarkets another 100,000 full time employees to its ranks byretail 2018.(freestanding, Other large US corporations have also reported vacancy secondary ranges much higher. General general purpose announced new investment in plant equipment that will moreproperty jobs. properties) maintains the and lowest vacancy of create all retail types, followed closely by malls and power A LOOK AHEAD centers. Imported goods will remain cheap due to the strength of the US dollar, and that will keep the discounters busy expanding their footprints. The to USreduce retail market growing,cycle, but that will remain Central banks around the world have resorted to negative interest rate policies the riskwill of akeep deflationary but growth Europe and Asia concen areas that haveSNAPSHOTS been or are the gentrifi5 cation process. GDP an 1 LEE OVERVIEW 2 4 undergoing KEY MARKET SIGNIFICANT TRANSACTIONS LEE NETWORK lee-associates.com are showing signs of increasing stability. The US central bankNATIONAL made aOVERVIEW moveyear to 3raise rates In December, but the cost of capital is still relatively and that may give retail sales a welcome boost. But, consumer spen low. Further rate hikes are likely and they may impact business expansion been later inuneven 2017 and andinto the 2018. monthly rate of job creation has slowed from 229 post-election optimism becomes reality in the form of stronger job growth, recently announced that itfor, would be prices addingrebounded another 100,000 fu Low oil prices, with us for more than two years now, did not produce the Amazon boost in retail sales that was hoped and oil 2018. Other large Job US corporations havetoalso new to investment somewhat in the last half of the year, which may help energy market economies in 2017. growth will need pickannounced back up again create more jobs. rates trends are unlikely to change significantly. expect further increases in retail sales. For the time being, vacancy, net absorption and rental Demand for retail investment properties continues to run well ahead of demand. Cap rates are compressed to record lows, but there is a lot more talk about an investment market that is getting long in the tooth. Through the first nine months of 2016, cap rates for retail investment properties fell another 11 basis points to 7.06%. However, well-located, prime retail properties are trading at cap rates under 5%. Foreign investors will keep giving demand a boost, as they continue to move capital to US markets for safety. 1 LEE OVERVIEW 2 NATIONAL OVERVIEW 3 KEY MARKET SNAPSHO lee-associates.com 20

100

2 2 National Economic Overview

US OFFICE MARKET Office Market Taps th National Economic Overview

US OFFICE MARKET

The US office market showed signs of fatigue in the first quarter of 2017. Vacancy was unchan The US officerent marketgrowth showed signs of fatiguedeliveries in the first quarter of 2017. Vacancy was absorption, unchanged, rent growth slowed, were flat and net whileslowed, still deliveries positive, dec were fl at andsubstantially. net absorption, while still positive, declined substantially. Sublease inventory also moved higher. Altogether, it has experts Sublease inventory also moved higher. Altogether, it has experts wondering wh wondering whether the long steady recovery in the office sector is showing signs of fatigue. Major markets including New York City, the long steady recovery in the office sector is showing signs of fatigue. Major markets inclu Los Angeles and even tech-darling San Francisco posted significant negative net absorption as did Atlanta, Houston and Hartford. New York City, Los Angeles and even tech-darling San Francisco posted significant negativ absorption in Q VACANCY RATES BY CLASS 2002-2016 did Atlanta, Hou C sA Clas Cl Total Market C sB Clas C sC Clas and Hartford. 17%

16% 15% 14% 13% 12% 11% 10% 9% 8% 7% 2002 Q4

2003 Q4

2004 Q4

2005 Q4

2006 Q4

2007 Q4

2008 Q4

2009 Q4

2010 Q4

2011 Q4

2012 Q4

2013 Q4

2014 Q4

2015 Q4

2016 Q4

Taking a closer at net absorp which is the indicator of m expansion, the quarter tota 10.8 million sq feet was a bit

surprise. In Q4, over 23 million square feet of net gain was recorded, after gains of 37 millio

Taking a closer look at net absorption, which is the key indicator of market expansion, the first quarter total of 10.8 million square feet in theInprevious quarters. more than 40 markets tracked by36 CoStar feet was a bit of a surprise. Q4, over 23two million square feetIn of fact, net gain was recorded, after gains of 37 million and million poste square feet in the previous In fact, than 40 markets tracked by CoStar posted net lossescance in occupied for space fortwo thequarters. quarter. It more is too early to say what long term signifi poorspace absorption the quarter. It is too early to say what long term significance poor absorption for the quarter has, but multiple quarters of declinmultiple quarters of declining market growth is worth noting. Downsizing caused by chan ing market growth is worth noting. Downsizing caused by changes in workplace design may be partly to blame for the reduction may partly to blame reduction in net absorption. No sector immune in net absorption. Nobe sector is immune from thefor trendthe in open space design precipitated by demographic shifts inisthe workforce from t design precipitated demographic shifts posted in thenetworkforce and the leveraging of advances in mobileby technology. Only four markets absorption in excess of 1 million square feet. Leading the way was Washington, DC at 2.75 million square feet, followed by Chicago at 2.5 million squareDELIVERIES feet, Dallas/ FUTURE and the leveraging of advances in mobile technology. PRE-LEASED & UN-LEASED SF IN PROPERTIES SCH Ft. Worth at 1.5 million square feet and Boston at 1.1 million square feet. Major market posting disappointing Q1 results included New York City at negative 1.6 million square feet, Los Angeles at negative 1.3 million square feet and Hartford at negative Only markets net absorption in excess of 1 million 803,000 square feet.four By building class,posted net absorption remains relatively well-balanced, as Class A, B55product reported gains of 5.9 million square and 5 million square feet respectively. In terms Suburban versus Central (CBD) performance, feet. Leading the way wasofWashington, DC atBusiness 2.75 District 45 the difference million is stark. Absorption 1.25 million squareby feetChicago to the negative in million CBD markets and 12 million square feet to the square feet, followed at 2.5 square positive for Suburban markets. It’s the suburban submarkets featuring urbanized hubs that appeal to employers most, as they 35 feet, Worth 1.5 million feetinand Boston at 1.1 choose locations thatDallas/Ft. will attract and retainatworkers who aresquare increasingly to the live, work and play lifestyle. Millennials are 25 redefining the workforce by way of their strong lifestyle preferences, and landlords who don’t or can’t respond accordingly are RECENT DELIVERIES being caught out.LEASED & UN-LEASED SF DELIVERIES LAST 5 YEARS 15

Millions SF

The vacancy rate, which stood at 9.7% as Q1 ended, was unchanged for theLeased second consecutive period, but it is down 20 basis L U L Un-Leased d 100 quarters. By building class, it is a story of opposites. Vacancy for Class A is up 20 basis points in the last four points over the past 5 four quarters, while90Class B vacancy has declined in each of the last four periods to end Q1 at 9.7%. Suburban and CBD vacancy 0 is just 10 basis points apart at 9.7% and 9.8%, respectively. 80

2017 201 017

Q Q2 Average asking lease rates for the US moved up again in Q1, adding another $.13 to $24.44 per square foot. That is a 70 .5% increase for the period. Asking rents keep moving up in most office markets around the country, but there are significant 60 differences in the trajectory of rent growth within local markets as tenants move between building classes and submarkets to realize operational efficiencies. 50

20 20 201 01 17 Q Q3

million square feet. Major marke Q1 results included New York Cit

National Economic Overview

million and 5 million square feet respectively. In terms of Suburban versus Central Business District (CBD) performance, the difference is stark. Absorption 1.25 million square feet to the negative in CBD markets and 12 million square feet to the positive for Suburban markets. It’s the suburban submarkets featuring urbanized hubs that appeal to employers most, as they choose locations that will attract and retain workers who are increasingly in to the live, work and play lifestyle. Millennials are redefining the workforce by way of their ABSORPTION & DELIVERIES PAST 7 QUARTERS strong lifestyle preferences, and landlords who don’t or can’t respond accordingly are being caught out.

National Economic Overview

OFFICE MARKET TAPS THE BRAKES IN Q1 29. 29 2 29.5 9 9. 9.5 5

26 26. 64 The vacancy at 9.7% advances as 26.4 Office occupiers across all sectors are finding rate, new which ways stood to leverage in communication 23223. and computing technologies in 3.5 5 23. 3.4 4 Q1 ended, was unchanged for the second order to use less space. Markets with more active tech and healthcare sectors tend to see bigger rent gains, but energy markets 21 2 21. 1. 17 consecutive period, but it is down 20 basis 18. 8.8 8 are still seeing rent declines and bigger to large blocks of long term sublease space that166.compete with 8 pointsconcessions, in the last fourmainly quarters.toBydue building 16.4 1 5 16 16. 15. 5.6 6 16. 6.0 class, it is a story of opposites. Vacancy for direct space offerings. 13. 1 13 3 3.1 Class A is up 20 basis points over the past 9.9 9. 9 .9 . 8.8 The level of new deliveries has beenfour within 1 million for the quarters, while square Class B feet vacancy has past four quarters. In Q1, 21.3 million square feet of new declined in each of the last four office space was delivered, compared to 20.3 million square feet periods in Q4 of 2016, 20.9 million square feet in Q3 and 20.1 million to end Q1 at 9.7%. Suburban and CBD 2015 2016 201 016 2016 201 16 20 2017 201 0 7 201 0 5 2016 201 20 016 2015 201 16 square feet in Q2. This has allowed the market to expand with minimal risk201 of overbuilding. The quarter ended 154.4 Q2 Q4 Q1 Q1 Q4 Q3 with another vacancy is just 10 basis points apart at 9.7% Q3 million square feet of space under construction, with most of that total concentrated in the nation’s ten largest markets. New York City and 9.8%, respectively.

Dollares/SF/Year

is at the top of that list with over HISTORICAL RENTAL RATES 2002 - 2016 15.75 million square feet underBASED ON FULL-SERVICE EQUIVALENT RENTAL RATES Class Cla Cl C ss A Class Cla Cl C ss B Class C Total Market T way. Dallas/Fort Worth is not far $35 behind at 11.9 million square feet, followed by Washington DC $30 at 11 million square feet, South Bay/San Jose (Silicon Valley) at $25 9.9 million square feet and San $20 Francisco at 8.1 million square feet. Another tech-heavy mar$15 ket, Seattle/Puget Sound, rounds out the top five at just under 8 $10 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 million square feet. The largest Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 Q4 project underway in Q1 is still 3 World Trade Center, a 2.86- Average asking lease rates for the US moved up again in Q1, adding another $.13 to $24.44 per square foot. That is a .5% increase for the period. Asking rents keep moving up in most office markets around the country, but there million-square-foot tower in are significant differences in the trajectory of rent growth within local markets as tenants move between building Manhattan. That building is set for delivery in the first quarter of 2018 and iseffi 37% preleased. Five of across the sixalllargest currently classes and submarkets to realize operational ciencies. Office occupiers sectorsprojects are finding new ways to leverage advances in communication and computing technologies in order to use less space. Markets with more under construction in the US are located in Manhattan. active tech and healthcare sectors tend to see bigger rent gains, but energy markets are still seeing rent declines

Developers to focus on mixed-use projects in concessions, urbanized, mainly amenity-rich that will bring thesublease highestspace rents. Land and with construction and bigger to due toareas large blocks of long term that compete direct space erings. costs have been steadily rising andoff the entitlement process is more expensive and takes longer to navigate through. Lenders are tightening up on underwriting and preleasing requirements make purely speculative projects harder to make happen. Unlike their industrial counterparts who can rely on the e-commerce and 3PL sectors to keep expanding in large space increments, office build1 LEE 4 SIGNIFICANT OVERVIEW SNAPSHOTS TRANSACTIONS 5 NATIONWIDE LEE OFFICES 3 KEY MARKET NATIONAL OVERVIEW lee-associates.com ers don’t have a particular user type to count on to gobble up large blocks of2 space. Institutional and private investors still have good quality office buildings at the top of their wish lists. That, and the appetite of foreign capital for US office property assets, has driven cap rates to historical lows. However, as a tighter monetary policy matures, yields in other asset classes should rise. A 50 basis point rise in the going-in cap rate in a 5%-cap world really moves the value needle and that is weighing heavier on the minds of prudent investors. If rent growth slows as it has in some markets across the country, the loss in property values could be substantial. Foreign buyers are the wild card, as their motivation lean toward capital preservation over yield.

LOOKING AHEAD

The US office market lost some momentum in the last two quarters, and needs some good news in Q2 to get back on track. US employment growth has been sporadic of late and that has experts wondering if the market expansion can be sustained going forward. Job growth in office-using sectors drives net absorption and the twelve month rolling average of jobs created each month has declined. After two good months to start the year, March job growth fell significantly to just 98,000, well below the threshold needed to absorb new entrants into the workforce. Wage growth has improved somewhat over the past year, but the increase in inflation, touted by our central bankers, is neutralizing those gains. Rent growth will continue, but probably at a more tepid pace going forward. Tenants will keep looking for new ways to do more with less by leveraging communication technologies and preference for open floor plans preferred by their employees. They will trade higher rental rates for space efficiency. Owners of older properties not in proximity to preferred amenities and public transportation, will be under pressure to upgrade their buildings or be forced to lower rents and boost concessions.

2 National Economic Overview

SANTA BARBARA

VACANCY RATE

RETAIL

INDUSTRIAL VACANCY RATE

OFFICE VACANCY RATE

5.54%

1.09%

4.94%

AVAILABLE Store fronts for Lease or Sale in Downtown Santa Barbara.

NOTABLE SALES

NOTABLE VACANCIES:

1 35 Anacapa St.

22,216 SF $3,500,000

9,526 SF $7,200,000

15,146SF $8,635,000

Santa Barbara

5.00% 4.00%

3.92%

1.00%

4.46%

4.94%

2.75%

3.00% 2.00%

5.54%

4.41%

2.10% 1.17%

2.49% 1.28%

1.10%

1.09%

0.00% Q2 2016

Q3 2016 Industrial

Q4 2016 Office

Retail

Available: 20,575 SF

2 29 E. Cabrillo Blvd. 3 GRANADA TOWER

6.00%

1 1001 State St.

Q1 2017

2 701 State St.

Available: 150,000 SF

3 Key Market Snapshots

ISLA VISTA

The Hive at Breakpointe and the Coronado Apartments, two multi-family properties, located at 6672 Abrego and 6626 Picasso Rd, in Isla Vista sold for a combined purchase price of $51 million. The 151-unit student housing project was acquired by The Carlyle Group, a Washington D.C. based institutional investor. The Carlyle Group, was the majority partner in the deal, while Manda Partners-a national owner/operator with over 30 properties, served as the minority and operating partner in the transaction. Manda Partners now owns or operates eight properties in Isla Vista under its umbrella known as â&#x20AC;&#x153;The Hive IV.â&#x20AC;? Located in the unincorporated community of Isla Vista, adjacent to the University of California at Santa Barbara (UCSB), the multi-family properties are positioned within walking distance to the beachside campus.

BREAKPOINTE 96 UNITS | $351K PER UNIT

33,700,000

CORONADO: 55 UNITS | $329K PER UNIT

18,100,000

3 Key Market Snapshots

SAN LUIS OBISPO SAN LUIS OBISPO 6.00% 4.85%

5.00% 4.00% 3.00% 2.00%

3.86% 3.28%

5.09%

4.70%

3.28% 3.22%

4.18% 1.80%

1.80%

2.27%

1.73%

1.00% 0.00% Q2 2016

Q3 2016 Industrial

VACANCY RATE

RETAIL

INDUSTRIAL VACANCY RATE

OFFICE VACANCY RATE

4.18%

1.73%

5.09%

Q4 2016 Office

Q1 2017

Retail

MARKET HIGHLIGHTS • Pacifica Investments acquired an industrial building at 705-709 Fiero Ln for $11,250,000. The fully leased investment property occupied by Fedex, Underwriters Laboratories, and Apria Healthcare, is suitably located near the San Luis Obispo Airport in the South Broad Street corridor. • The largest lease transaction of the quarter was the 32,000 square feet industrial lease at 3580 Sueldo Lane to Empirical Systems Aerospace, Inc., an aerospace design and manufacturing company. They will be using the facility for testing, design, and manufacturing of their products. • The area continues to see high construction and labor costs leading to lofty TI allowance requirements; making it harder for tenants and landlords to make agreements.

3 Key Market Snapshots

PASO ROBLES

PASO ROBLES 12.00% 10.00%

8.88%

9.22% 7.62%

8.00% 6.00% 4.00%

6.63% 4.61% 4.16%

4.93%

4.59%

3.47%

2.82%

2.00%

4.62%

3.25%

0.00% Q2 2016

Q3 2016 Industrial

VACANCY RATE

RETAIL

INDUSTRIAL VACANCY RATE

OFFICE VACANCY RATE

4.62%

7.62%

3.25%

Q4 2016 Office

Q1 2017

Retail

MARKET HIGHLIGHTS • 145,000 SF of industrial space remains available at Ramada Drive in Paso Robles. The rumored conclusion is that the space will be absorbed for beer or wine processing. • Office vacancy has contracted. Smaller office suites in the 1000-2000 SF range are being leased consistently.

3 Key Market Snapshots

SANTA MARIA

SANTA MARIA 12.00% 10.00% 8.00% 6.00% 4.00%

6.79% 6.02% 5.28%

6.77%

6.63%

5.91%

6.34% 4.13%

5.07%

6.86% 6.10% 3.18%

2.00% 0.00% Q2 2016

Q3 2016 Industrial

Q4 2016 Office

Q1 2017

Retail

MARKET HIGHLIGHTS

VACANCY RATE

RETAIL

INDUSTRIAL VACANCY RATE

OFFICE VACANCY RATE

6.63%

4.13%

6.34%

• Santa Maria Industrial Vacancy has declined further in Q1 2017. Oxnard based AgRx, a supplier of agricultural products, leased 12,240 square feet of industrial/warehouse space at 939 W. Boone St in Santa Maria. • Two 25,000 SF Office/R&D buildings are proposed for construction next to the airport at 2811 Airpark Dr. in Santa Maria. The existing building on site already houses San Luis Obispo based health-tech company MindBody and the addition of the two Class A buildings will form the first corporate tech campus of its kind in Santa Maria. The proposed buildings are currently under environmental review and are estimated for delivery in Q4 of this year.

3 Key Market Snapshots

LOMPOC

LOMPOC 12.00% 10.05%

10.00% 8.07%

8.00% 6.00% 4.00% 2.00%

4.23%

4.39%

4.60% 2.27%

9.71%

8.23%

5.25%

5.09%

3.68%

1.52%

0.00% Q2 2016

Q3 2016 Industrial

RETAIL VACANCY RATE

INDUSTRIAL VACANCY RATE

OFFICE VACANCY RATE

9.71%

3.68%

4.23%

Q4 2016 Office

Q1 2017

Retail

MARKET HIGHLIGHTS • Woodstone Apartments, A 204 unit complex located at 401 W Pine St in Lompoc, was sold for $33,000,000. The property was purchased at the end of the quarter by Vintage Housing- a Newport Beach based investor and operator specializing in affordable housing for seniors and families. • Lompoc industrial vacancy has increased slightly due to 20,000 SF of vacant space at 1637 W Central Ave and approximately 12,000 SF of vacancy at 1641 W Central Ave. 1637 W. Central Ave is a 20,000 SF building formerly used by a cabinet manufacturer, and 1641 W Central Ave is a larger 50,000 SF steel framed industrial building. Both buildings are located on the west end of Lompoc. The “Wine Ghetto” remains quite strong with close to zero vacancy.

3 Key Market Snapshots

WINE COUNTRY

As expected, California wine sales are poised for another prodigious year with trends suggesting a 7% increase in wine production fueled by the premium wine sector. Silicon Valley Bank annual State of the Wine Industry Report predicts sales of premium wine in the US to grow between 10% to 14% in 2017. The higher sales bode well for major producers like E & J Gallo, Foley Family Estates & Constellation Brands.

1,300 Acre | 175 Individual Parcels

SOLD

E & J Gallo, the world’s largest family-owned wine company announced the purchase of Stagecoach Vineyards, the largest contiguous vineyard in the Napa Valley for an undisclosed amount. The 1,300-acre site is uniquely located in Foss Valley, overlooking Napa Valley on the westernmost region of the Atlas Peak appellation. The site is situated on 600 acres of vines in 175 uniquely individual blocks among four designated regions. Known for its Cabernet Sauvignon and Bordeaux varietals, the acquisition highlights the wine industry’s move to “premiumization,” bridging ultra-premium wines and function to the mass market. Stagecoach will continue to be a source to over ninety wineries, including wines made by Fess Parker/Epiphany, Orin Swift and Caymus Vineyards. We continue to see vineyard acquisitions in the North San Luis Obispo County area. Paso Robles based Sran Vineyards Inc., purchased the 159-acre Home Vineyard from Robert Hall Winery for $4 million. The Paso Robles site is located off Highway 46, just above the Estrella Plain adjacent to Hunter Ranch Golf Course. The site was Halls largest and most mature vineyard, producing Cabernet Sauvignon, Merlot, Zinfandel, Grenache Blanc, Chardonnay, and a variety of others. Falcon West Vineyards & Winery, has sold their 149 acre vineyard to 3IN Winery Inc. for $2.1 million. The land parcel located on Union Road, in Paso Robles is comprised of 55.5 acres of planted grapevines producing Cabernet Sauvignon, Merlot, Syrah. _________________ *Employment statistic provided by the USDA California Growers Association California Wine Institute 2015 Economic Impact Report on Wine prepare by John Dunham & Associates, New York

3 Key Market Snapshots

HOME VINYARD WINERY VARIETALS (ACRES) SAUVIGNON BLANC 35.96 MERLOT 31.05 CABERNET SAUVIGNON 27.51 CHARDONNAY 20.14 ZINFANDEL 7.01 ORANGE MUSCAT 6.23 SYRAH 5.14 VIOGNIER 4.47 GRENACHE BLANC 2.21

Despite the projected sales growth, labor shortages continue to be a pressing issue for wineries. The wine industry currently employs 325,000 jobs in California with $17.2 B in annual wages. In addition to the growing labor concerns, wineries are faced with the legalization of marijuana; potentially offering consumers an alternative to alcoholic beverages. Currently, eight states, including California have legalized marijuana for recreational use, with a total of twenty-eight states approved for medical use. The wine industry potentially stands to lose field workers to the growing cannabis industry; luring laborers with higher wages, primarily in cash.

139.72 ACRES

4774 Mill Road | Paso Robles

SOLD

CANNABIS

Key Market Snapshots

The passage of Prop. 64 allowing for adult recreational use, has the cannabis industry gearing up for Californiaâ&#x20AC;&#x2122;s state licensing program, set to begin issuing licenses by January 1, 2018. The anticipation of the recreational cannabis measure has created an increased demand for both greenhouse and industrial space. This is particularly true in the small oceanside city of Carpinteria. Located in southern Santa Barbara County, Carpinteria has historically been home to a number of thriving greenhouse operations; several of which have already been converted to an unknown number of medicinal cannabis farms. In late 2016, Carpinteria City Council approved an ordinance regulating commercial growing for recreational use. The outcome accelerated the demand for outdoor grow space, especially by veteran growers, as outdoor grow operations tend to be more affordable than urban warehouse spaces. In the last twelve months, over 68 acres of greenhouse space has been sold, totaling $26 million in transaction volume, with a remaining available inventory exceeding 55 acres. On average, area greenhouse space is trading at $14 per-square foot.

CARPINTERIA GREENHOUSE SALES 5/1/2016 - 3/31/2017 TOTAL ACRES SOLD 68.41 AC TOTAL SALES VOLUME $26,024,000.00 SOLD PRICE PER ACRE (AVERAGE) $522,707.96 SOLD PRICE (AVERAGE) $4,337,333.33 GREEN HOUSE SOLD IN CARPINTERIA:

5601 Casitas Pass Rd., Carpinteria, CA 93013 ACRES: 4.83 SALE PRICE: $4,000,000

3804-3890-3982 Via Real, Carpinteria, CA 93013 ACRES: 17.98 SALE PRICE: $6,324,000

5360 Foothill Rd., Carpinteria, CA 93013 ACRES: 9.85 SALE PRICE: $3,800,000

5775 Casitas Pass Rd., Carpinteria, CA 93013 ACRES: 4.83 SALE PRICE: $2,000,000

5138 Foothill Rd., Carpinteria, CA 93013 ACRES: 6.0 SALE PRICE: $6,000,000

6 CARPINTERIA GREENHOUSES ON-MARKET TOTAL ACRES ON MARKET 55.35 AC TOTAL ASKING PRICE $38,800,000.00 ASKING PRICE PER ACRE (AVERAGE) $637,252.19 ASKING PRICE (AVERAGE) $9,700,000.00 TOTAL GREENHOUSE LAND IN CARPINTERIA 624.04 AC % OF GREENHOUSE LAND TRADED IN LAST YEAR: 10.96% % OF GREENHOUSE LAND ON MARKET: 8.87%

5300 Foothill Rd., Carpinteria, CA 93013 ACRES: 24.92 SALE PRICE: $3,900,000 GREEN HOUSE AVAILABLE IN CARPINTERIA:

3804-3890-3982 Via Real, Carpinteria, CA 93013 AVAILABLE ACRES: 17.98 SALE PRICE: $21,000,000.00

4920 Foothill Rd., Carpinteria, CA 93013 AVAILABLE ACRES: 7.42 SALE PRICE: $2,800,000.00

4711 Foothill Rd & 1495 Sterling Ave. Carpinteria, CA 93013 AVAILABLE ACRES: 14.77 SALE PRICE: $8,500,000.00

4098 Via Real, Carpinteria, CA 93013 AVAILABLE ACRES: 15.18 SALE PRICE: $6,500,000.00

12 4

CA SIT AS

Carpinteria

2 RD3 PA SS RD .

FOO TH ILL

5 63 14

3 Key Market Snapshots

MEDICAL MARIJUANA STOREFRONT COLLECTIVE DISPENSARIES PERMITS Meanwhile, surrounding municipalities are developing their own local zoning ordinances for medical marijuana storefront dispensaries. The ordinances major provisions commonly drive storefront locations to heavy industrial zones causing limited availability, driving market prices up. As of March 6, 2017, the City of Santa Barbara has two approved medical marijuana dispensaries; one in the upper State Street area, located at 3617 State Street, and the other at 118 N. Milpas Street. In addition to, the City also has two pending applications; Upper De la Vina area at 2609 De la Vina Street, and one at 128 W. Mission Street.

STOREFRONT COLLECTIVES ALLOWED

MEDICAL CANNABIS DISPENSARIES OUTER STATE STREET | SANTA BARBARA

S HOPE AVE

S LA CUMBRE LN

STATE STREET

TO SEE ALL CITY STOREFRONT ALLOWED PLEASE CLICK HERE: Industry concerns are overwhelmingly focused on local bans followed by restrictive zoning ordinances. The lack of available real estate, a dominating barrier to entry, will continue to be a common theme across the commercial real estate market. Commercial real estate brokers routinely field inquiries from the cannabis industry seeking available sites. The surging demand for marijuana cultivation and distribution space may put further pressure on an already compressed market.

*Employment statistic provided by the USDA California Growers Association California Wine Institute 2015 Economic Impact Report on Wine prepare by John Dunham & Associates, New York

4 Significant Transactions

NOTABLE SALES Q1 2017

Property: Multi-Family 6672 & 6690 ABREGO RD. GOLETA Size: 71,534 SF Sale Price: $33,700,000 Sale Price/Unit: $351,041.67 Sale Date: 01/2017

6626 PICASSO RD. GOLETA Size: 42,275 SF Sale Price: $18,100,000 Sale Price/Unit: $329,090.91 Sale Date: 01/2017

TOTAL PRICE: $51,800,000 TOTAL UNITS SOLD:151 TOTAL AVERAGE PRICE/UNIT: $343,046

1826 DE LA VINA ST., SANTA BARBARA Property: Multi-family Size: 24,128 SF Sale Price: $18,600,000 Sale Price/Unit: $465,000.00 Sale Date: 02/2017

401 W. PINE AVE., LOMPOC Property: Multi-family Size: 146,580 SF Sale Price: $33,100,000 Sale Price/Unit: $162,254.90 Sale Date: 03/2017

2 26 CASTILIAN DR., GOLETA Property: Office Size: 75,237 SF Sale Price: $13,625,000 Sale Price/SF: $181.09 Sale Date: 01/2017

3 3025 DE LA VINA ST., SANTA BARBARA Property: Retail Size: : 18,436 SF Sale Price: $12,500,000 Sale Price/SF: $678.02 Sale Date: 01/2017

705-709 FIERO LN., SAN LUIS OBISPO Property: Industrial Size: 57,858 SF Sale Price: $$11,250,0000 Sale Price/SF: $194.44 Sale Date: 03/2017

5 SANTA BARBARA

RETAIL $757.00 INDUSTRIAL $200.02 MULTI-FAMILY (P/UNIT) $342,454.55

lOMPOC

RETAIL $277.00 INDUSTRIAL $150.00 MULTI-FAMILY (P/UNIT) $124,699.00

PASO ROBLES

RETAIL $158.69 OFFICE $227.00

OFFICE $420.00

SANTA MARIA

RETAIL $139.00 OFFICE $275.00 INDUSTRIAL $166.00 MULTI-FAMILY (PRICE/UNIT) $199,909.09

SAN LUIS OBISPO

RETAIL $406.67 OFFICE $290.00 INDUSTRIAL $194.00 MULTI-FAMILY (PRICE/UNIT) $177,777.78

4 Significant Transactions

NOTABLE LEASES Q1 2017 3580 SUELDO ST., SAN LUIS OBISPO

SANTA MARIA TOWN CENTER MALL

Tenant: Empirical Systems Aerospace, Inc. Property: Industrial Size: 32,400 SF Lease Date: 01/2017

Tenant: Rockin Jump Property: Retail Size: 17,550 SF Lease Date: 02/2017

1 460 WARD DR., SANTA BARBARA

939 W. BOONE, SANTA MARIA

Tenant: Arthrex, Inc. Property: Industrial Size: 13,500 SF Lease Date: 03/2017

Tenant: Ag Rx Property: Industrial Size: 12,240 SF Lease Date: 02/2017

5531 EKWILL ST., SANTA BARBARA

4675 THREAD LN., SAN LUIS OBISPO

Tenant: The Regents of the University of California Property: Industrial Size: 11,200 SF Lease Date: 03/2017

Tenant: Barnick Wood Design Property: Industrial Size: 10,000 SF Lease Date: 03/2017

6 AVERAGE ASKING LEASE RATES (GROSS)

SANTA BARBARA (per/SF)

RETAIL $4.21 OFFICE $3.00 INDUSTRIAL $1.90 SANTA MARIA

SAN LUIS OBISPO (per/SF)

LOMPOC

RETAIL $2.47 OFFICE $1.89 INDUSTRIAL $1.05

RETAIL $1.40 OFFICE $1.13 INDUSTRIAL $0.76

(per/SF)

RETAIL $1.94 OFFICE $1.41 INDUSTRIAL $0.77

PASO ROBLES

(per/SF)

RETAIL $1.32 OFFICE $1.60 INDUSTRIAL $1.01

5 Lee Offices

THE LEE & ASSOCIATES CENTRAL COAST TEAM PRINCIPAL TEAM

STEVE LEIDER

CLARICE CLARKE

MARTY INDVIK

BROKER TEAM

ALLEN SEGAL

ANTHONY KUHNS

TOM DAVIDSON

ROB ADAMS

CHRISTI VIOR

NATALIE V. WAGNER

JEFF ALLEN

PAUL DAVIES

OFFICE SUPPORT TEAM

SHARIF ELSEIFY Research Analyst

KAREN HELTON Administrative Director

ANA STORK Marketing Manager

5 Nationwide Lee Offices

Arizona Fred Darche 602.956.7777 Phoenix, AZ 85018

New Jersey Rick Marchiso 973.475.7055 Elmwood Park, NJ 07407

California Clarice Clarke 805.898.4362 Santa Barbara, CA 93101 (Central Coast) Brian Ward 760.346.2521 Palm Desert, CA 92260 (Greater Palm Springs) John Hall 949.727.1200 Irvine, CA 92618 Mike Tingus 818.223.4380 LA North/Ventura, CA 91302 Craig Phillips 323.720.8484 Commerce, CA 90040 (LA Central) Robert Leveen 213.623.1305 Los Angeles, CA 90071 (LA ISG) Greg Gill 562.354.2500 Long Beach, CA 90815 (Los Angeles) Aleks Trifunovic 310.899.2700 Santa Monica, CA 90404 (LA West) Steve Jehorek 949.724.1000 Newport Beach, CA 92660 Craig Phillips 562.699.7500 City Of Industry, CA 91746 Craig Hagglund 510.903.7611 Oakland, CA 94607

New York Jim Wacht 212.776.1202 New York, NY 10022

California (contâ&#x20AC;&#x2122;d) Craig Phillips 323.720.8484 Pasadena, CA 91101

Georgia Dick Bryant 404.442.2810 Atlanta, GA 30326

Mike Furay 925.737.4140 Pleasanton, CA 94588

Victor Segrest 404.781.2140 Atlanta, GA 30328 (Appraisal)

Dave Illsley 951.276.3626 Riverside, CA 92507

Idaho Matt Mahoney 208.343.2300 Boise, ID 83703

Dave Howard 760.929.9700 Carlsbad, CA 92008 (San Diego North)

Illinois James Planey 773.355.3014 Rosemont, IL 60018 (Chicago)

Steve Malley 858.642.2354 San Diego, CA 92121 (San Diego UTC)

Indiana Scot Courtney 317.218.1038 Indianapolis, IN 46240

Tom Davis 209.983.1111 Stockton, CA 95206

Maryland J. Allan Riorda 443.741.4040 Columbia, MD 21046

Dave Illsley 951.276.3626 Murrieta, CA 92562 (Temecula Valley)

Michigan Jon Savoy 248.351.3500 Southfield, MI 48034

Don Brown 760.241.5211 Victorville, CA 92392

Minnesota Chris Garcia 952.955.4400 Minneapolis, MN 55401

Denver John Bitzer 303.296.8770 Denver, CO 80202

Don Kazanjian 909.989.7771 Ontario, CA 91764

Florida Jerry Messonnier 239.210.7610 Ft. Myers, FL 33966 (Naples)

Bob Sattler 714.564.7166 Orange, CA 92865

Tom McFadden 321.281.8501 Orlando, FL 32839

lee-associates.com

Ohio Brad Coven 216.282.0101 Pepper Pike, OH 44124 (Cleveland)

1 LEE OVERVIEW

2 NATIONAL OVERVIEW

Missouri Thomas Homco 314.400.4003 St. Louis, MO 63114 Nevada Lyle Chamberlain 775.851.5300 Reno, NV 89501 3 KEY MARKET SNAPSHOTS

Tim Kelton 614.923.3300 Dublin, OH 43017 (Columbus) Pennsylvania John Van Buskirk 717.695.3840 Camp Hill, PA 17011 South Carolina Bob Nuttall 843.747.1200 Charleston, SC 29492 Randall Bentley 864.704.1040 Greenville, SC 29601 Texas Trey Fricke 972.934.4000 Addison, TX 75001 (Dallas/Fort Worth) Chris Lewis 713.660.1160 Houston, TX 77027 Wisconsin Todd Waller 608.327.4000 Madison, WI 53713 Canada Chris Anderson 604.684.7117 Vancouver, British Columbia Gerald Eve James Southey +44 (0) 20 7333 6226 www.geraldeve.com

*Please contact individual managers for information in specific markets. 4 SIGNIFICANT TRANSACTIONS

5 LEE NETWORK

The Lee Central Coast Brief

Q1 leecentralcoast.com

2017

The information and details contained herein have been obtained from third-party sources believed to be reliable; however, Lee & Associates has not independently verified its accuracy. Lee & Associates makes no representations, guarantees, or express or implied warranties of any kind regarding the accuracy or completeness of the information and details provided herein, including but not limited to the implied warranty of suitability and fitness for a particular purpose. Interested parties should perform their own due diligence regarding the accuracy of the information. The information provided herein, including any sale or lease terms, is being provided subject to errors, omissions, changes of price or conditions, prior sale or lease, and withdrawal without notice. Third-party data sources: CoStar Group, Inc., The Economist, U.S. Bureau of Economic Analysis, U.S. Bureau of Labor Statistics, Congressional Budget Office, European Central Bank, GlobeSt.com, CoStar Property, City of Santa Barbara, and Lee Propriety Data. Employment statistic provided by the USDA California Growers Association California Wine Institute, 2015 Economic Impact Report on Wine prepare by John Dunham & Associates, New York. ÂŠ Copyright 2017 Lee & Associates. All rights reserved.