Lee Central Coast Q3 2016 Market Report

The Lee Central Coast Brief

Q3 2016

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

155% increase

in transaction volume over 5 years

Lee & Associates Overview

$12+ billion

870

transaction volume 2015

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.

agents

CANADA

and growing nationwide

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

2 National Economic Overview

GLOBAL ECONOMY In the past two quarters we have been describing the global economic outlook as troublesome. The International Monetary Fund must agree, as it has twice reduced its estimate of global growth this year. The stakes remain high and the outcome of the current global economic conundrum is largely unknown. Energy exporting nations are reeling from the sharp decline in oil prices, but they can’t seem to get on the same page on production levels to support a price recovery. Iran is back in the oil business, which has added unneeded supply and Saudi Arabia keeps pumping to keep the price down in an effort to squeeze out US and Canadian production, which is more expensive. That strategy has worked, but every nation that exports oil has taken a huge hit as a result. Venezuela, Brazil and Russia have been hit particularly hard. Venezuela is near complete collapse economically and politically, while Brazil is grappling with runaway inflation and government scandals. Nations that export other commodities have also suffered from price collapses relating back to slower growth in China, the world’s largest manufacturer. When the UK made its surprise decision to vote for an exit from the European

GLOBAL ECONOMY National Economic Overview

Union, the long term survival of the EU became a major topic. Few gave the Brexit vote a chance and the shock wave from the vote was felt immediately. Europe’s political union in constant crisis mode these days and there is no governing body with the real authority to enforce anything. Sovereign debts are mounting, unemployment is persistently high and GDP growth in Europe is nearing recession territory. Calls for austerity from nations swimming in debt have been largely ignored, and the ongoing refugee crisis has whipped up nationalist fervor throughout Europe. The Euro and British Pound have taken a beating of late, and central bankers are taking drastic steps to stimulate business and consumer spending. Oil-rich Middle-Eastern countries, including Saudi Arabia, are burning through cash reserves to cover revenue shortfalls precipitated by the falling price of oil. China is issuing sovereign bonds to help it cope with its massive transition from total dependence on the exportation of manufactured goods.

In the past two quarters we have been describing the global economic outlook as trou

None of this sounds like good news and that must is undeniably correct. the US economy is in its much better shape Monetary Fund agree, as However, it has twice reduced estimate ofrelatively globalspeakgrowth th ing. Once again, the world views the US as the safe haven of choice. That keeps capital moving into the US and much of that finds high and the outcome of the current global economic conundrum is largely unknown. its way to the commercial real estate market. In fact, foreign demand for US real estate assets continues to contribute to gains in asset prices, as it increases competition in all product types. Foreign investors are willing to pay a premium to assure the preservation of their Energy exporting nations are reeling from the sharp decline in oil prices, but they can capital.

page on production levels to support a price recovery. Iran is back in the oil business, w supply and Saudi A EURO AREA REAL GDP2 keep the price down (QUARTER-ON-QUARTER PERCENTAGE CHANGES) US and Canadian p expensive. That strat nation that exports o a result. Venezuela, been hit particularly complete collapse ec while Brazil is grapp and government sca other commodities price collapses relatin China, the world’s lar

When the UK made i for an exit from the term survival of the EU became a major topic. Few gave the Brexit vote a chance an vote was felt immediately. Europe’s political union in constant crisis mode these days

2 National Economic Overview

GDP GROWTH

US GDP, the benchmark that tracks the total output of US goods and services, is perhaps the most closely watched statistical barometer in the world. Our economy is the largest on the planet and we consume more foreign goods and services than any other nation. So, the fortunes of those nations who depend on exporting goods and services to the US are inextricably linked to our own. Unfortunately, US GDP growth over the past several quarters has been dismal, running just above stall speed despite massive intervention by our central bank. In the fourth quarter of 2015, the US economy grew at an annualized rate of just .8%. In Q1, the economy expanded by just .9%, followed by a 1.4% rate in Q2. Even if things pick up in the second half of the year, it is unlikely that the US will achieve even a 2% rate of growth. In 2015, GDP grew at a 2.4% clip.

GDP GROWTH

National Economic Overview

The current estimate of Q3 growth offered by the Atlanta Fed’s GDP Now tracker, is at 2.9% and has been trending down each week. As poor as our economic growth is, it’s better than it is in Europe and Japan, where governments are resorting to drastic measures to keep their economies from sliding into recession. The central banks of the EU and Japan have resorted Negative Interest Rate Policy (NIRP) and massive bond-buying programs to encourage corporate borrowing. Political turmoil, civil unrest and economic challenges around the world have dampened expectations here at home. There is no denying the effects of globalization and things are not going well outside our borders. So, only die hard optimists are predicting much near term improvement in the US GDP growth rate. USThe GDP, benchmark that tracks the total output of US goods and services, is perhaps theaccept mostit closely biggerthe question now is whether or not US companies and consumers will acclimate to a lower growth model and as the “new normal.” watched statistical barometer in the world. Our economy is the largest on the planet and we consume more

foreign goods and services than any other nation. So, the fortunes of those nations who depend on exporting Volatility equities hastobeen riseinextricably in 2016, as USlinked companies grapple goods andin services theon UStheare to our own.with sluggish market conditions. Corporate earnings have

declined repeatedly the last six quarters and companies have been resorting to cost-cutting and stock buyback programs to increase profits and earnings per share. Reducing operating costs means job cuts and that means reduced consumer spending, which accounts Unfortunately, US GDP growth over the past several quarters has been dismal, running just above stall speed for roughly 70% of GDP. As we pointed out the last two quarters, US consumers have become more cautious. Retail sales growth, a despite massive ofintervention by ourhascentral bank. In the fourth quarter 2015, the USIncome economy at an large component consumer spending, been spotty at best. Sluggish wage growth of remains a problem. growthgrew is running annualized rate of just .8%. In Q1, the economy expanded by just .9%, followed by a 1.4% rate in Q2. Even just above the rate of inflation, which remains stubbornly below the Fed’s target of 2%. Even auto sales, which have been very strong if things up in the second half of the year, it isevidence unlikelythat that the USconfidence will achieve a 2% rate of growth. In in thepick past couple of years, are seeing a drop-off, further consumer couldeven use a boost.

2015, GDP grew at a 2.4% clip.

QUARTER-TO-QUARTER GROWTH IN REAL GDP

2 National Economic Overview

EMPLOYMENT

Job growth, which was running at over 200,000 per month on a rolling twelve month average, has slowed down and become more volatile in recent months. Q3 started strong with a total new job count of 252,000. However, August and September were both disappointing, posting job counts of 167,000 and 156,000, respectively. The low point for 2016 came in May when only 11,000 new jobs were recorded. The best month of the year thus far came in June, when 271,000 new jobs 2 were created. Wild swings in job growth is certain to affect consumer spending and that makes CEOs more cautious and less National Overview inclined to implement aggressive growth strategies. If that isEconomic so, then we can expect job growth to stay on its current trajectory.

EMPLOYMENT

Despite erratic job growth numbers, the U3 unemployment rate (the index most widely used) has only ticked up slightly from its low of 4.7% back in May. As Q3 closed, the U3 unemployment rate stood at 5%, which historically is indicative of a fully employed economy. However, that number is deceiving because so many of the jobs being created are either part time or at the lower range of the wage scale. The U6 unemployment rate, which accounts for part-time workers who would prefer to work full time in their field, is still at 9.7%. This index perhaps more telling of our employment picture because it makes clear the fact that too many people are working at Job growth, which was running at over 200,000 per month on a rolling twelve month average, has slowed down jobs that donâ&#x20AC;&#x2122;t pay the bills. This reduces discretionary income and negatively impacts consumer expenditures. Concerns over slowing and become more volatile in recent months. Q3 started strong with a total new job count of 252,000. However, domestic growth and the prospect of recessions abroad is prompting employers to hire more part time and temporary workers. The August and September were both disappointing, posting job counts of 167,000 and 156,000, respectively. The cost of health care pursuant to the Affordable Care Act (ACA) is also contributing to part time employment problem, as employers are low point for 2016 came in May when only 11,000 new jobs were recorded. The best month of the year thus far inclined to hire workers just under the 30 hour per week threshold that would require them to provide health benefits. came in June, when 271,000 new jobs were created. Wild swings in job growth is certain to affect consumer spending and that makes CEOs more cautious and less inclined to implement aggressive growth strategies. If The Labor Participation Rate, the metric that measures the percentage of those eligible for employment between the ages of 16 and 64 that is so, then we can expect job growth to stay on its current trajectory. who are currently working, also remains stagnant. Choppy job growth reports and the early exit of Baby Boomers, have combined to keep just 62.9% of potential workers Despite erratic job growth numbers, the U3 unemployment rate (the index most widely used) has only ticked in active production. It is important up slightly from its low of 4.7% NATIONAL UNEMPLOYMENT to note that Labor Participation has back in May. As Q3 closed, the moved of a five decade low, but it U3 unemployment rate stood may begin to move back down in the at 5%, which historically is coming quarters as the rate of retirindicative of a fully employed ing Baby Boomers increases. Wage economy. However, that number growth is another problem that has is deceiving because so many dogged the US economy. Full-time, of the jobs being created are high-paying jobs are in short supply either part time or at the lower and wage growth overall is tracking range of the wage scale. The at a rate of approximately 2.6%, U6 unemployment rate, which marginally above the current rate of accounts for part-time workers inflation. That kind of wage growth who would prefer to work full offers little relief to workers at or near time in their field, is still at 9.7%. the minimum wage level who are This index perhaps more telling struggling to make ends meet. Itâ&#x20AC;&#x2122;s of that ourso many employment picture no wonder middle class because it makes clear workers are disillusioned with a re- the thatfeel toohasmany people covery fact that they left them on are working at in. jobs that donâ&#x20AC;&#x2122;t pay the outside looking Many of them the bills. This reduces discretionary income and negatively impacts consumer expenditures. Concerns over come from the manufacturing sector, slowing domestic growth andforthe recessions abroad is prompting employers to hire either. more Upwards part timeof which has been steadily shedding jobs theprospect past year. of Layoffs in the energy sector has not helped the job picture, and temporary workers. The cost of health care pursuant to the Affordable Care Act (ACA) is also contributing 700,000 full time positions have been eliminated since oil prices declined sharply back in 2014. Many of these jobs are high-paying to positions part timethat employment employers inclined just higher underthan the current 30 hour per we week technical are not easilyproblem, replaced as in other businessare sectors. Until to oil hire pricesworkers move much levels, can threshold that would require them to provide health benefits. expect more of the same kind of job losses.

The Labor Participation Rate, the metric that measures the percentage of those eligible for employment between the ages of 16 and 64 who are currently working, also remains stagnant. Choppy job growth reports and the early exit of Baby Boomers, have combined to keep just 62.9% of potential workers in active production. It is important to note that Labor Participation has moved of a five decade low, but it may begin to move back down

2 National Economic Overview

MONETARY POLICY

In December of last year, the US Federal Reserve Bank finally pulled the trigger and boosted the Fed Funds rate by 25 basis points to .5%. Since that time, our central bankers have chosen not to take further action, citing any number of reasons to sit on their hands and continue the longest monetary stimulus in Fed history. Some believe our central bankers were caught off guard when their first move on rates roiled world markets and sent the US Dollar soaring. A strong dollar makes US exports more Economic expensive and raises the cost of payNational Overview ing back dollar-denominated loans from around the world. That first move on rates also sent US equities markets into a slide that many had been predicting. But, the Fed walked back their plans for regular rate hikes throughout 2016 and yield-chasing investors poured back into the equities markets, driving up stock prices back up despite six consecutive quarters of earnings declines. Now the chatter about another rate hike this December is getting louder and most experts believe there is at least a reasonable chance for a single rate hike after the Presidential election but before the end of the year. However, few will be surprised if the Fed kicks the interest rate can again. While the talk here is about when to raise rates, central bankers around the world have been going in the opposite direction.

MONETARY POLICY

In December of last year, the US Federal Reserve Bank finally pulled the trigger and boo basis points to .5%. Since thatterritory, time, our central bankers have chosen The European Central Bank (ECB) by has25 taken its benchmark rate into negative as has the Bank of Japan. That meansnot thatto take number of has reasons sit on their hands and theinvestment longest monetary stimulus in Fe borrowers get paid for borrowing money, which raised to legitimate concerns within thecontinue business and communities. Both our central were caught off guarddebt, when their further first move on rates roiled those central banks are buying corporate bonds bankers in addition to their own sovereign raising concerns over the longworld term market consequences of actions that are based on unproven economic models.US The exports most outspoken critics of central policy calling soaring. A strong dollar makes more expensive andbank raises theare cost of paying b out individual central bankers they believe panicking doubling onfirst failed policies save also their academic reputations. Given into a s loansare from aroundbythe world.down That move onto rates sent US equities markets the current state of economies around the world,But, that argument is sounding more reasonable all regular the time. rate hikes throughout 2016 and predicting. the Fed walked back their plans for poured back into the equities markets, driving up stock prices back up despite six consecu Back here in the US, Fed Chairdeclin US TREASURY RATES man Janet Yellen and her Board about of Governors have slowly but Dece surely been painting themselves and into a corner by continuing their there current easy money policy. With chanc GDP growth near stall speed, after concerns over what action the but b Fed can take if we fall into reyear. cession. With a Fed Funds rate surpr of .5%, just two 25 basis-point decreases take it to 0%. If that intere

doesnâ&#x20AC;&#x2122;t adequately stimulate GDP growth, then there may be While no place to go but into negative when territory, which is completed unbanke charted territory. That will send have economic uncertainty to new levoppos els and cause declines in consumer spending and business investment. If that happens, the Fed may be out of ammunition and may European Central Bank (ECB) has taken its benchmark rate into negative territory, as has leave the federal government with no other choice but to increase spending to stimulate the economy. That means bigger federal means that borrowers get paid for borrowing money, which has raised legitimate concerns deficits that are already on the rise and on their way back to over $1 Trillion per year. Bottom line: the Fed has itself in a pickle and is investment communities. Both those central banks are buying corporate bonds in additio running out time and ideas to get the economy back on a track of healthy growth.

debt, raising further concerns over the long term consequences of actions that are based models. The most outspoken of policy central bank policy arerates calling individual cent Real estate borrowers are still reaping the benefits of the Fedâ&#x20AC;&#x2122;s current critics monetary direction. Mortgage haveout remained at are panicking by doubling down on failed policies to save their academic reputations. G historic lows, and borrowers are in a position to lock in those low rates for up to 25 years. Most lenders use a spread over the yield on economies the world, thatlong-term argument is are sounding more reasonable allrange. the time. the 10 Year T-bill (now at approximately 1.7%) toaround set mortgage rates. So, loans still readily available in the 4%

Until the Fed does more than talk about raising rates, it will still be a good time to borrow money. Clearly, keeping a close eye on what central bankers are up to around the worldhere is a good measures areYellen being taken every day somewhere around the slowly Back in theidea. US,More Fed drastic Chairman Janet and her Board of Governors have world, including the newest tool, negative interest rates. for the privilege of loaning someone else money. Sound crazy themselves into aImagine corner paying by continuing their current easy money policy. With GDP growth ne to you? If it does, you are not alone.over what action the Fed can take if we fall into recession. With a Fed Funds rate of .5%

decreases take it to 0%. If that doesnâ&#x20AC;&#x2122;t adequately stimulate GDP growth, then there may b

US INDUSTRIAL MARKET Industrial Market Finds Anothe US INDUSTRIAL MARKET 2

National Economic Overvie

National Economic Overview

US INDUSTRIAL MARKET Industrial M P

For owners and developers of industrial real estate, the third quarter of 2016 was cause for ECON celebration. Just when the experts were starting to wonder about the market getting long in the tooth, it took off again. Net absorption was sharply higher, rent growth was strong, vacancy DR declined and new deliveries were way up. What makes it even more remarkable is the fact that US owners of estate industrial real estate, the third quarter of 2 and global economic growth is For anemic and concerns over a real correction are spreading. 2and developers Major US corporations have reported declining earnings for six straight quarters, and central celebration. Just when the experts were starting to wonder about For owners and developers of industrial real estate, the third quarter of 2016 was cause for celebration. Just when the experts were start- the ma National Economic Overview banks across oceans arelong printing money experimenting with negative interest rates the it took off Net absorption washigher, sharply higher, growth w ing to wonder aboutboth the market getting intooth, the tooth, it tookand off again. again. Net absorption was sharply rent growth wasrent strong, EM to keep their and economies from slipping into recession. Ourremarkable own central bankers repeatedly vacancy declined new deliveries were way up. What makes more is theup. factWhat that UShave and global economic growth declined and newit even deliveries were way makes it even more remarkab isthreatened anemic and concerns overup a real estate correction are spreading. Major USis corporations have reported declining earnings for six corre to tighten on their cheap money policygrowth by raising interestand rates, but that has been and global economic anemic concerns over a real estate straight quarters, and central banks across both oceans are printing money and experimenting with negative interest rates to keep MONETA nothing but talk since Major US corporations have reported declining earnings for six their straight q economies fromRATES slippingBY intoBUILDING recession. Our own central bankers have repeatedly threatened tothey tighten up on their cheap money policy VACANCY TYPE 2001 - 2016 made a single banks across both oceans are printing money and experimenting with neg by raising interest rates, but that has been nothing but talk since they made a single rate hike late last year. GDP growth has GLOBAL Total Market Flex Warehouse rate hikeDomestic late last to keep their from slipping into recession. Our own slowed substantially in the past year. But, despite all of it, theeconomies industrial market just keeps on exceeding expectations quarter after central quarter. bank year. for Domestic GDP interest rate ners and developers of industrial realthreatened estate, the to third quarter of their 2016cheap was cause tighten up on money policy by raising If you’re a tenant, owner/user slowed tion. Just when the experts were starting to wonder about the market gettinggrowth long in has ECONOMIC noth buyer or investor, you are substantially in the past h, it took off again. Net absorption was sharply higher, rent growth was strong, vacancy VACANCY RATES BY BUILDING TYPE 2001 2016 having a tough go of it. With they DRIVERS But, despiteTotalall of d and new deliveries were way up. What makes it even more remarkable is the factyear. that US vacancy declining in almost Market Flex Warehouse rate it, the industrial market bal economic growth anemic and concerns over a real estate correction are spreading. every primary andis secondary yea keeps on exceedingGROWTH US corporations have reported central market, quality space offered declining earnings for six straight quarters, andjust gro A LO for lease is getting tougher money and experimenting with negative interest expectations quarter across both oceans are printing rates sub EMPLOYMENT to find, and many are into recession. Our own central bankers have repeatedly after quarter. their economies fromtenants slipping yea forced to settle for older propned to tighten up on their cheap money policy by raising interest rates, but that has been it, th erties, many with elements MONETARY POLICY nothing but talk since of just CY RATES BY BUILDING TYPEowner/user 2001 - 2016 If functional you’re a obsolescence. tenant, buyer or investor, you theyaremade a single FUTURE DELIVERIES For those tenants fortunate exp Total Market having a tough goWarehouse of it. With vacancy declining in rate almosthikePRELEASED Flex GLOBAL SCHEDULED ECONOMY TO DELIVER late & UN-LEASED last SF IN PROPERTIES enough to secure first generafte Un-Leased Pre every primary and secondary market, quality space year. offeredDomestic GDP 120 ation space, rates are up and growth slowed for lease is gettinglon-tougher to find, and many tenants are has landlords are demanding 105 substantially in the past forced to settle for older properties, many with elements ger terms and stronger credit. 90 If you’re a tenant, owner/user buyer or you are year. But, despite all investor, of FUTURE of functional obsolescence. For those tenants fortunate 75 PRELEASED & having a track. tough go values of it.it,have With vacancy declining in almost the industrial market Owner/user buyers are frustrated in every market we Property skyrocketed and the supply has dwindled to zero in enough to secure first generation space, rates are up and 60 market, quality space offered some markets. Still, they keep hunting forevery the rare primary opportunity and buy secondary with as littlekeeps as 10% down with long term loans with fixed interest just on exceeding landlords are demanding longer terms and tostronger credit. 120 rates in the low 4% range. Many markets have recorded double-digit appreciation for owner/user buildings the past three or four A LOOK expectations quarter for lease is getting tougher to find,45 and many tenants areAHEAD 105 years. Yet, demand keeps moving higher. For investor buyers, the odds for successful acquisitions are not much better. Competition for afterproperties, quarter. forced to settle for older many with elements 30 Owner/user buyers are frustrated market we track. 90 industrial investment property is fierce and tradesinareevery being made above asking prices at cap rates running as low as 4%. of functional obsolescence. Property values have skyrocketed and the supply has For 15those tenants fortunate 75 enough to secure first generation space, rates are up and 0 e a tenant, owner/user buyer or investor, you are 60 RECENT DELIVERIES FUTURElonger DELIVERIES 20 landlords are demanding terms and stronger 2016 2017 credit. 2017 PRELEASED & UN-LEASED SF IN PROPERTIES SCHEDULED TO DELIVER a toughLEASED go of it. With declining & UN-LEASED SF INvacancy DELIVERIES LAST 5 YEARS in almost Q

INDUSTRIAL MARKET 14%

BC CANADA

Vacancy Rate

12%

10%

WEST

MIDWEST

SOUTHWEST

16%

14%

12%

Vacancy Rate

2% 0%

2001 Q4

2002 Q4

2003 Q4

2004 Q4

2005 Q4

2006 Q4

2007 Q4

10%

2008 8% Q4

2009 Q4

2010 Q4

2011 Q4

2002 Q4

2003 Q4

2004 Q4

2012 Q4

2013 Q4

2014 Q4

2015 Q4

6% 4% 2% 0%

2001 Q4

2005 Q4

2006 Q4

2007 Q4

2008 Q4

2009 Q4

2010 Q4

2011 Q4

2012 Q4

2013 Q4

BC CANADA

WEST

2014 Q4

MIDWEST

2015 Q4

EAST

SOUTH

SOUTHWEST

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

M illio ns SF

2002 Q4

Industrial Market Finds Another Gear

16%

primary and secondary market, Un-Leased quality spaceLeased offered 120 250 30 Owner/user are frustrated everymarkets. market Still, we track. to zero ininsome they keep hunting se is getting tougher to find, and many tenants buyers are dwindled 105 225 Property values rare have skyrocketed supply hasdown with 15 opportunity to buyand with the as little as 10% lo to settle for older properties, many with elements 90 200 loans with fixed interest rates in the low 4% range. Many 0 ctional obsolescence. For those tenants RECENTfortunate DELIVERIES 75 175 recorded double-digit appreciation for owner/user b to secure first generation space, rates up andSF have LEASEDare & UN-LEASED IN DELIVERIES LAST 5 YEARS 150 60 the past three or four years. Yet, demand keeps moving ds are demanding longer terms and stronger credit. Un-Leased Leased 250 125 45 dwindled to zero in some 100 225 buyers, the odds for successful acquisitions arew n 30 user buyers are frustrated in every market we track. For investor rare opportunity to buy 75 200 property is fierce an y values have skyrocketed and the supply has better. 15 Competition for industrial investment loans with fixed interest r 50 175 are being made above asking prices at cap rates running as lo 0 have recorded double-di 0 T DELIVERIES 2017 150 2016 2017 2017 2013 2012 2014 2015 2016 UN-LEASED SF IN DELIVERIES LAST 5 YEARS the past three or four ye Q3 Q4 Q1 Q2 Preleased

M illio ns SF

Un-Leased

Leased

lee-associates.com

125

100

dwindled to zero in some markets. Still, they keep hunting for the the 1 LEE OVERVIEW 2 NATIONAL SNAPSHOTS 4 SIGNIFICANT TRANSACTIONS 3 KEY MARKET OVERVIEW 5 LEE For investor buyers, od

National Econo

National Economic Overview

Even secondary markets are experiencing a huge imbala are in high demand. The institutional players are focused tenants. They also like multi-tenant business parks, but h assets. Add value deals are also in play. Those deals are troubles securing quality sites for ground-up developmen to get So, with all thattypes in mind, let’sdemand. take a look a Even secondary markets are experiencing a huge imbalance of supply andentitled. demand. All industrial product are in high

The institutional players are focused on big distribution buildings occupied by strong credit tenants. They also like multi-tenant business parks, but have to compete with local and regional players for those Add valuethe dealskey are driver also in play. dealsit are Netassets. absorption, thatThose makes all often go, was w the target of developers who are having their own troubles securing quality sites for ground-up development, as land becomes more absorption was recorded nationwide. That is an increase expensive, scarce and harder to get entitled. So, with all that in mind, let’s take a look at the numbers for Q3.

net occupancy in years. E-commerce players, the big sh

Net absorption, the key driver that makes it all go, was way up in Q3. Over 112 million square feet of positive net absorption was along with major retailers. The big push for “Last Mile” lo recorded nationwide. That is an increase of 37% over Q2’s total and the biggest quarterly gain in net occupancy in years. E-commerce Amazon.com has retailers. been opening multiple fulfillmen players, the big shippers and 3PL operators are the biggest contributors, along with major The big push for “Last major Mile” loca1 has million squaremultiple feet. Walmart is also making a push to d tions is making a difference in markets big and small. Amazon.com been opening major fulfillment centers each quarter, with many of them near or over 1 million square feet. Walmart iscompete also makingwith a push to do the same, as the world’s largest retailer Amazon, the goliath of the e-commerce m ramps up to compete with Amazon, the goliath of the e-commerce movement. Without the e-commerce boom, the market would have would have a very different look and feel. But, the sector a very different look and feel. But, the sector may be at just the beginning of its expansion phase, as online sales are still only a small online sales are still only a small fraction of overall retail fraction of overall retail sales across the country.

NET ABSORPTION

* For Top 42 Markets

90 80

86,006,146 80,585,745

70 60 Millions SF

New deliveries for both speculative and build-to-suit projects for Q3 reached 81.5 million square feet in 475 buildings. That is a 48% increase over the previous quarter and the highest total in the past year. That brings total US industrial property inventory up to 21.85 billion square feet. As the quarter ended, another 234.4 million square feet was still in the construction pipeline. Development activity is far from evenly distributed. Infill markets like Los Angeles and Long Island New York, have virtually no construction, while land rich markets like Dallas, Houston, Atlanta, Philadelphia, Chicago and Southern California’s Inland Empire have up to 20 million square feet underway at the same time.

50 40 30

51,536,320

52,752,912

New for Tha high pro qua the eve Isla rich Chi to 2

A good balance between spec and build-to-suit construction has helped keep market metrics in balance. New deliveries 20 are running just short of net absorption, which bodes well for continued equilibrium in most markets around the country. 10 A go 2016 2016 2016 2015 At this time, no primary or secondary market in the US is Q1 Q2 Q3 Q4 has considered overbuilt. That gives developers the confidence are running just short of net absorption, which bodes we to keep on building without fear of being overextended if the country. At this time, or secondary market in market finally does cool off. In the markets with high levels of speculative construction, tenantsno areprimary able to expand quickly if needed. the confidence to keep on building without fear of being They may have to pay more, but they continue to show a willingness to do so, as long as they get space that helps improve efficiency. For the past two quarters we reported that a disproportionate amount of market activity waslevels concentrated in big deals byconstruction, big tenants markets with high of speculative ten in big buildings. That didn’t change much in Q3. The warehouse sector accounted for 104 million of the 112 million square feet of have to pay more, but they continue to show a willingnes net absorption recorded in Q3. Most of that was in bulk distribution deals. Think Amazon. However, that doesn’t mean every big deal efficiency. is a big e-commerce player. The biggest building under construction right now is a manufacturing plant for Volvo in Charleston, South Carolina. The national vacancy rate for warehouse and flex space combined has been falling steadily, and that trend continued in Q3 with another 20 basis point drop to finish the period at 5.6%.For In the fourtwo quarters, the vacancy rate has fallen by a 40disproportio basis thepast past quarters we reported that points, but several major market areas have vacancy rates in the 2% range, including Central Los Angeles, Long Island, New York andchange deals by big tenants in big buildings. That didn’t California’s Orange County.

million of the 112 million square feet of net absorption rec Think Amazon. However, that doesn’t mean every big d under construction right now is a manufacturing plant for

2 National Economic Overview

US INDUSTRIAL MARKET

Not coincidentally, those markets have nominal amounts of new construction. The base inventory of industrial product is actually shrinking in some mature markets, as land is being repurposed to so-called higher uses. asking rate continued its five year long move up. In Q3, rents rose another $.08 to $6.01 per square foot. Markets with the most construction are experiencing more rapid rent growth, as tenants continue to pay a premium for first generation space that offers greater efficiency. That includes major distribution hubs like Atlanta, Dallas, and Southern California’s Inland Empire.

LOOKING AHEAD The US industrial market should finish 2016 as it began; high demand, low supply, rising prices and declining vacancy. Weak economic growth, confusing monetary policy and political theater around the globe is yet to put the brakes on US industrial market growth. But, if interest rates don’t move up soon, our central bankers will have little room to maneuver in the event of market correction. When the Fed Funds Rate moves up, cap rates may move in the same direction, if not in lockstep. That means that even markets with the strongest rent growth would see valuations decline. That possibility is not lost on investors, expanding businesses and developers who will take pre-emptive action to protect their interests. Internationally, there is no good news. Period. The global economy is on its heels right now and there is little indication that things will get better before they get worse. Post-Brexit impact on the EU is still a big unknown. China and other emerging economies are struggling. The US economy is doing better, but only by comparison. GDP numbers are falling behind 2015 levels, job creation is trending down and our manufacturing sector is struggling to keep from sliding backward. Is this enough to slow the industrial market down? To date, the answer is no. The market has a head of steam that will be hard to cool down. Barring a “significant” economic event, we should all expect the industrial sector continue to expand. Even at half its current pace, market growth would be significant. The US is still the preferred safe haven for foreign investment and owning US Dollar-denominated assets is a good bet. So, capital will keep flowing into the US, which would mitigate the impact of a slowdown in industrial market activity. Vacancy will keep moving lower and more markets will look Central Los Angeles where vacancy is running at 2% and construction is essentially non-existent. Net absorption should stay near record levels in most markets, but may moderate in markets that lack quality options for expanding tenants. More tenants will be forced to renew and average lease rates will continue to move higher, especially in those markets with the first generation space. Construction will stay at current levels in areas with ample supply of land, but will decline in markets with fewer available sites and higher levels of regulatory controls. Expect the entitlement process to become longer and more expensive.

National Economic Overview National Economic Overview

US OFFICE MARKET Another Win for the Office Marke US OFFICEUSMARKET OFFICE MARKET Another Win for US OFFICE MARKET Another Win for the Office Market 2

National Economic Overview

After a lackluster start to the year, the US office market surged in Q2, and followed up with another strong ECONOMIC National showing in Q3. Vacancy continued to decline, rentsEconomic kept movingOverview higher and net absorption remained After a lackluster start to the year, the US office market surged in Q2, and followed up with another strong showing in Q3. Vacancy DRIVERS well into positive territory. New deliveries maintained momentum, as well. In many ways, the second Click below for info on... continued to decline, rents kept moving higher and net absorption remained well into positive territory. New deliveries maintained and third quarter numbers mirror imagesand of one the other hand,images a handful of other hubOn the other hand, momentum, as well. In manyare ways, the second thirdanother. quarter On numbers are mirror of one another. LOOK AHEAD markets tech liketheSan Francisco, and Raleigh/Durham made big gains in gains in Q1.AThe a handfulfor of the other hubindustry markets for tech industry likeSeattle San Francisco, Seattle Raleigh/Durham madeinbig After a lackluster start to the year, theand US office market surged Q2, and followed up with an The similarities similarities are most evident in the absorption numbers. In Q3, a gain in occupied space ofQ1. 36,110,000 square feet was realized, a rents kept moving higher and net VACANCY RATES BY CLASS 2001-2016 showing in Q3. Vacancy continued to decline, GDPabsorpti GROWTH are back most scant 20,000 square foot difference from Q2’s total. That is more than double Q1’s total and in lineevident with the 38 million square well into positive territory. New deliveries maintained momentum, as well. In many ways Class A Totalup Market Class B office Class Cin After afeet lackluster starttallied to theinyear, the US market Q2,ongoing and followed with another in the strong absorption of net gains Q4 of last year. This clearlysurged indicates the demand for office space nationwide. ECONOMIC EMPLOYMENT and third quarter numbers are mirror images of one another. showing in Q3. Vacancy continued to decline, rents kept moving higher and net absorption remained numbers. In Q3,Onathe other hand, a handful DRIVERS markets for momentum, the tech industry like and Raleigh/Durham made b Of note, however, is the fact that well into positive territory. New deliveries maintained as well. In San manyFrancisco, ways, second gaintheinSeattle occupied Click below for info on... Q1. Th two quarter of the country’s office and third numberslargest are mirror images of one another. On the other hand, a handful of other hub space of 36,110,000 VACANCY RATES BY CLASS 2001-2016 are m A LOOK AHEAD markets, City and markets for theNew techYork industry like ChiSan Francisco, Seattle and Raleigh/Durham madesquare big gains feetin was Class A Total Market Class B Class C in the cago, have each posted close to 1 Q1. realized, The similarities a scant VACANCY RATESfeet BYofCLASS 2001-2016 number GDP GROWTH million square negative net are 20,000 most evident square foot absorption this year. Almost evgain in Class A Total Market Class B Class C in the absorption difference from Q2’s ery other primary and secondary EMPLOYMENT space o MONETARY POLICY numbers. Q3,is amore total. In That market coast-to-coast, has square gain than in occupied double Q1’s experienced net gains in occupied realized spacetotal of 36,110,000 and back in space. Market leaders in absorption 20,000 line with the 38 million square feet of net gains tallied in Q4 of last year.square This clearly feetindicates was the ongoing demand include Boston at 3.9 million square differen for office space nationwide. Of note, however, is the fact that two of therealized, country’s alargest scantoffice markets, New York feet, Seattle/Puget Sound at 3.5 miltotal. T City square and Chicago, have each posted close to 1 million square feet of negative absorption 20,000netsquare foot this year. Almost every lion feet, Dallas/Fort Worth d other and secondary market coast-to-coast, has experienced net difference gains in occupied in from Q2’sspace. Market leaders than at 3.4 primary million square feet, Greater total a MONETARY POLICY absorption Bostonsquare at 3.9 million square feet, Seattle/Puget Sound total. at 3.5 That million Worth is square more feet, Dallas/Fort Los Angeles include at 3.3 million line with the 38 million square feet of net gains tallied in Q4 of last year. This clearly at 3.4 square feet, Greater Los Angeles at 3.3 million feet and million Detroit at 3 million square than double Q1’s for office space nationwide. Of note, however, is the fact that two of the country’s la DELIVERIES square feetHouston, and Detroit at 3 million square feet. Even Houston, FUTUREtotal feet. Even has positively and back SCHEDULED in PRE-LEASED & UN-LEASED SF IN PROPERTIES TO DELIVER and have each posted toindicates 1 million square feet of negative year-to-date, but momentum there is Chicago, still declining due to the ongoing energy sector slowdown. Massive amounts of net ab line absorbed with the space 38 million square feet of netCity gains tallied in Q4 of last year. This close clearly the ongoing demand has positively absorbed space year-to-date, but momentum there Un-Leased Preleased other primary and secondary market coast-to-coast, has experienced net gains in occ sublease space pouring thenote, market in the nation’s energy capitol are of certain impact market performance there going 55 to for office nationwide. however, is the fact slowdown. that two the country’s largest office markets, Newforward. York is stillspace declining dueonto to Of the ongoing energy sector absorption include 3.9 due million square Seattle/Puget Sound at 3.5 millio San Francisco/Silicon Valley market, superheated over the pastBoston several years tonet tech sectorfeet, job growth, mayAlmost finally beevery cooling City The and Chicago, haveofeach posted close to 1 onto million square feet ofat negative absorption this year. Massive amounts sublease space pouring the market in the 45 at 3.4 million square feet, Greater Los Angeles at 3.3 million as job energy gains low vacancy limits absorption gains. By building balance, as Class otheroff primary andmoderate secondary coast-to-coast, hasperformance experienced netclass, gainsnetinabsorption occupiedremains space. inMarket leaders in A, nation’s capitol and aremarket certain to impact market FUTURE DELIVERIE 35 square feet and Detroit at 3 million square feet. Even Houston, B and C product all reported strong Q3 and year-to-date gains. absorption includeforward. Boston atThe 3.9 San million square feet, Seattle/Puget Sound at 3.5 million square feet, Dallas/Fort Worth there going Francisco/Silicon Valley market, PRE-LEASED & UN-LEASED SF IN PRO has positively but momentum there at 3.4 million square feet, Greater Los Angeles at 3.3absorbed million space year-to-date, 25 55 RECENT DELIVERIES is still due to FUTURE the ongoing energy sector slowdown. DELIVERIES squareLEASED feet& UN-LEASED and Detroit atLAST 3 5million square feet.declining Even Houston, SF DELIVERIES YEARS PRE-LEASED15 & UN-LEASED SF IN PROPERTIES SCHEDULED TO DELIVER Massive amounts there of sublease space pouring onto the market in the 45 has positively absorbed space year-to-date, but momentum Leased Un-Leased Un-Leased Preleased nation’s energy capitol are certain to impact market performance 85 5 55 is still declining due to the ongoing energy sector slowdown. 35 there going forward. The San Francisco/Silicon Valley market, Massive75amounts of sublease space pouring onto the market in the 0 45 25 2016 2017 2017 2017 nation’s energy capitol are certain to impact RECENT market performance DELIVERIES Q4 Q1 Q2 Q3 65 35 LEASED & UN-LEASED SF DELIVERIES LAST 5 YEARS there going forward. The San Francisco/Silicon Valley market, 15 17%

16%

15%

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13%

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12%

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15%

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14%

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10%

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8% 7%

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LEASED & UN-LEASED SF DELIVERIES LAST 5 YEARS

65 55 45

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35 25 15

2012

2013

lee-associates.com

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superheated over the past several years due to tech sector 15 75 0 job growth, may finally be cooling off as job gains moderate Leased 2016 5 Q4 and low vacancy limits absorption gains. By building class, 65 net absorption remains in balance, as Class A, B and C 0 55 2017 2017 2017 product all2016 reported strong Q3 and year-to-date gains. Q4 Q1 Q2 Q3 superheated over the past 45 2015 2016 job growth, may finally be c 35 andtolow vacancy superheated over the past several years due tech sector limits abso 2 NATIONAL OVERVIEW 3 KEY MARKET SNAPSHOTS 4 SIGNIFICANT TRANSACTIONS LEE OVERVIEW LEE OFFICE 5 NATIONWIDE net absorption job growth, may finally be cooling off as job gains moderateremains in 25 all class, reported stron and low vacancy limits absorption gains. product By building Millions SF

Millions SF

RECENT DELIVERIES

2 National Economic Overview

US OFFICE MARKET 2

National Economic Overview

Millions SF

In terms of Suburban versus CBD performance, over 90% of the Q3 net absorption was recorded in the suburbs. However, many suburban submarkets around the country are developing over urban90% hubsofthat a growingwas number of employers are In terms of Suburban versus CBD performance, theareQ3attracting net absorption recorded in the who suburbs. intent on being close to millennial workers who prefer higher density areas because it allows them to live, work and play within walking However, many suburban submarkets around the country are developing urban hubs that are attracting a growing distance. Average asking lease rates for number of employers who are intent on being close to millennial workers who prefer higher density areas because the US moved sharply higher in Q3, up it allows them to live, work and play $.40 to $23.97 per square foot. That ABSORPTION & DELIVERIES PAST 7 QUARTERS is within a 1.7% walking increase indistance. just three months. Rents are moving up in most office mar35 Average leasebutrates kets around asking the country, therefor arethe US moved sharply higher in Q3, significant differences in the trajectory 29.5 to $23.97 per markets square as foot. 30 ofup rent$.40 growth within local 26.2 tenants move between building classes That is a 1.7% increase in just three 25 and submarkets to realize operational 23.0 months. Rents are moving up in 22.7 22.4 21.2 efficiencies. most office markets around the 20

16.9 country, but there are significant 16.1 15.4 15.3 14.9 The quest to do more with less is ondifferences in the trajectory of rent 15 12.6 going. Tenants acrosslocal all sectors are as 10.9 growth within markets 10.7 looking for ways to leverage advances tenants move between building 10 in communication and computing techclasses and submarkets to realize nologies to occupy less space. If space 0 operational efficiencies. The quest 2015 2016 2016 2015 2015 2015 2016 is going to keep getting more expensive, Q4 Q2 Q3 Q2 Q3 Q1 Q1 to do more with less is ongoing. savvy business owners and CEO’s are Tenants across all for sectors sure to continue looking ways toare looking for ways to leverage advances in communication and computing technologies to occupy less space. If shrink their facilities footprints. Markets

Dollares/SF/Year

with more active tech and healthcare sectors tend to see bigger rent gains. Energy markets are finally seeing rent declines. The loomHISTORICAL RENTAL RATES 2000-2015 ingBASED problem there EQUIVALENT is the large of space that have been coming back on the market for sublease. That pressure on rents and ON FULL-SERVICE RENTALblocks RATES net absorption, Class is likely to persist untilClass theBslack in demand caused tightens back up. The level of new deliveries A Class C by under-utilization Total Market remained steady in Q3 at just over 20.1 million square feet in 424 new buildings, after the delivery of 19.4 million square feet in Q2. $35 The amount of space under construction rose by 5 million square feet in Q3. The quarter ended with 147.5 million square feet of space in the construction pipeline, with more than half of that total concentrated in the nation’s ten largest markets. New York City is at the $30 top of that list with nearly 13.5 million square feet underway. Dallas/Fort Worth is not far behind at 11.8 million square feet, followed by Washington DC at 10.7 million square feet and South Bay/San Jose (Silicon Valley) at 10.1 million square feet. Another tech-heavy $25 Seattle/Puget Sound, rounds out the top five at 8 million square feet. market, The$20 largest project underway in Q3 was the 3 World Trade Center tower in Manhattan. That building is set for delivery in early 2018. Developers continue to focus on mixed-use projects in urban core areas that are near public transit and entertainment venues, which are high priorities for millennials. However, high land prices, rising construction costs and more cautious loan underwriting is keeping $15 speculative development in check, which limits the risk of overbuilding. Institutions and private investors, both large and small, have been chasing short supply of office product for sale. $10

2001 2002 2003 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Cap rates to 2004 record lows assets hands 5%. Although there in Q4 remain Q4 compressed Q4 Q4 Q4 and core Q4 Q4 are trading Q4 Q4 belowQ4 Q4 Q4 are signs Q4 of a change Q4 Q4 market trajectory, and investors are well-advised to increase efforts to underwrite local market metrics before paying the current premium. Some markets may be in termsmore of rentexpensive, growth and savvy if cap rates begin to move higher, that combination significant risk, as space is going to peaking keep getting business owners and CEO’s are sure toposes continue looking for theways rise intocap rates may be mitigated by growth in net operating income. Foreign keep pouringsectors capital into US to assets their shrink theirnot facilities footprints. Markets with more active techbuyers and healthcare tend seeinbigger ongoing efforts Energy to protectmarkets capital that see as being at greater risk around the world. Investors still see theblocks US as the rent gains. arethey finally seeing rent declines. The looming problemeverywhere there is the large ofsafest space ofthat safe havens to stash capital as prospects for global economic growth become more uncertain. have been coming back on the market for sublease. That pressure on rents and net absorption, is likely to

persist until the slack in demand caused by under-utilization tightens back up.

Millions SF

23.0 months. Rents are moving up in 22.7 22.4 21.2 most office markets around the 20 2 16.9 country, but there are significant 16.1 15.4 15.3 14.9 15 differences in the trajectory of rent National Economic Overview 12.6 10.9 growth within local markets as 10.7 tenants move between building 10 classes and submarkets to realize 0 operational efficiencies. The quest 2015 2016 2016 2015 2015 2015 2016 Q4 Q2 Q3 Q2 Q3 Q1 Q1 to do more with less is ongoing. Tenants across all sectors are looking for ways to leverage advances in communication and computing technologies to occupy less space. If

Another Win for the Office Market HISTORICAL RENTAL RATES 2000-2015

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space is going to keep getting more expensive, savvy business owners and CEOâ&#x20AC;&#x2122;s are sure to continue looking for ways to shrink their facilities footprints. Markets with more active tech and healthcare sectors tend to see bigger rent gains. Energy markets are finally seeing rent declines. The looming problem there is the large blocks of space that have been coming back on the market for sublease. That pressure on rents and net absorption, is likely to persist until the slack in demand caused by under-utilization tightens back up.

LOOKING AHEAD

The level of new deliveries remained steady in Q3 at just over 20.1 million square feet in 424 new buildings, after the of 19.4 million feet in Theforamount of being spacebut under rose by 5 million squareonfeet Thedelivery US office market has asquare good head of Q2. steam the time US construction employment growth has been slowing a intwelve-month Q3. The quarter with 147.5 million square spacetoinbethe construction pipeline, more thannew half rollingended average basis. Over 100,000 newfeet jobsofneed created each month just towith keep up with ofentries that total the nationâ&#x20AC;&#x2122;s is at the of that list nearly into concentrated the workforce.inWith monthly ten job largest growth markets. averaging New just York over City 150,000 newtop positions, thewith impact on 13.5 net absorption in 2017 should be measurable. Fortunately, a good percentage of the jobs being created are generated by 1 LEE OVERVIEW KEY MARKET SIGNIFICANT TRANSACTIONS NATIONWIDE LEE OFFICES NATIONAL OVERVIEW 3number lee-associates.com office-using tenants, but recent results indicate 2a disproportionate of SNAPSHOTS jobs being4 generated in the retail,5 healthcare services and restaurant sectors. Many of these positions pay less, are offered on a part time basis and do not increase the need for office space. Wage gains have also been lackluster, running just ahead of core inflation, which is currently hovering at 1.7%. Poor wage growth is a drag on consumer spending, the key component of the GDP equation. Rent growth will continue, especially in major markets where big employers continue their efforts to upgrade their workplace designs to attract and retain a workforce that is getting younger each quarter as baby boomer retirements increase. Without a substantial increase in construction, which is not expected in 2017, vacancy should continue to decline in 10-20 basis-point increments in the next several quarters. Markets more dependent on the energy sector will see vacancy move in the other direction, as more sublease space hits the market.

National 2 Economic Overview

US RETAIL MARKET RETAIL SECTOR KEEPS PACE IN National Economic Overview

US RETAIL MARKET

2 The US retail property market kept pace in Q3, duplicating Q2’s strong performance after ECONO National Economic a disappointing start to the year. Net absorption nearly equaled the Q2 tally, the vacancy DRIV rate declined further and average asking rents rose again. Construction activity was The US retail property market kept pace in Q3, duplicating Q2’s strong performance after a disappointing start to the little year. Net absorpthe the retail industry continues toand experience significant change, as traditional G tion nearlychanged. equaled theStill, Q2 tally, vacancy rate declined further average asking rents rose again. Construction activity was little department stores struggle to right-size and giant brick-and-mortar retailers like Walmart changed. Still, the retail industry continues to experience significant change, as traditional department stores struggle to right-size and make big moves more with e-commerce Amazon, which giant brick-and-mortar retailersto likecompete Walmart make bigeffectively moves to compete more effectivelybehemoth, with e-commerce behemoth, Amazon, which EMPLO continues to expand at an extraordinary pace. In a huge mid-year move, Walmart acquired continues to expand at an extraordinary pace. In a huge mid-year move, Walmart acquired Jet.com to enhance its online capabilities Jet.com todistribution enhance its online capabilities and it is leasing distribution facilities around and it is leasing major facilities around the country to increase “last major mile” efficiency. MONETARY The US retail property market kept pace in Q3, duplicating the country to increase “last mile” efficiency. a disappointing start to the year. Net absorption nearly equ VACANCY RATES BY BUILDING TYPE 2006-2016 rate declined further and average asking rents roseGLOBAL again.ECO Power Center Specialty Center General Retail Shopping Center Total Retail T changed. Still, the retailMallindustry continues to experience sig 12% department stores struggle to right-size and giant brick-an 11% make big moves to compete more effectively with e-comme 10% continues to expand at an extraordinary pace. In a huge mid 9% Jet.com to enhance its online capabilities and it is leasing maj 8% the country to increase “last mile” efficiency. 7% P GD

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VACANCY RATES BY BUILDING TYPE 2006-2016

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The US retail property market kept pace in Q3, duplicating Q2’s strong7%performance after a disappointing start to the year. Net absorpUS retail sales in September rose by 2.7% compared to t tion nearly equaled the Q2 tally, the vacancy rate declined further and6%average asking rents rose again. Construction activity was little NET ABSORPTION same period last year, but combined Q3 results were ve changed. Still, the retail industry continues to experience significant change, as traditional department stores struggle to right-size and 5% disappointing. September sales rose .6%, but that cam 35 * For Top 42 Markets giant brick-and-mortar retailers like Walmart make big34.6 moves to 33.4 compete more effectively with e-commerce behemoth, Amazon, which 4% after a decline of -.2% in August and a modest gain continues to expand at 29.5 an extraordinary pace. In a huge mid-year move, 3% Walmart acquired Jet.com to enhance its online capabilities 30 .1% in July. None of the 13 major retail categories post 26.6 and it is leasing major distribution facilities around the country to increase “last mile” efficiency. 2%

significant gains in September. Although, sal 2007 2009 2010 2011 2013 2008 2008 2009 2010 2011 gas 2012station 2012 Q3 Q3 Q3 Q1 Q1 Q1 Q3 Q1 Q1 Q3 Q1 Q3 rose by 2.4% after experiencing major declines in rece US retail sales in20 September rose by 2.7% compared to the months. Overall consumer spending was very strong 4.1 same period last year, but combined Q3 results were very 15.3 US first reta in Q2, but slipped by half in Q3, according to the 15 disappointing. September sales rose .6%, but that came NETthree ABSORPTION same p estimates of Q3 US GDP. Uneven results in bo after a decline of 10 -.2% in August and a modest gain of disappo 35 * For Top 42 Markets consumer and retail sales is making it tough on retaile 34.6 .1% in July. None of the 13 major retail categories posted 33.4 after a to plan for expansion. 0 29.5 significant gains in September. Although, gas station sales 30 2016 2016 2015 2016 2015 .1% in J 26.6 rose by 2.4% after experiencing major declines in recent Q1 Q3 Q4 Q2 Q3 signific The vacancy rate declined again in Q3, shedding anoth 25 months. Overall consumer spending was very strong 4.1% rose by 20 basis points to settle at 5.0%. In the past year, vacan in Q2, but slipped by half in Q3, according to the first 20 months has moved 40 basis points lower. As reported last quarter, vacancy is sharply higher in secondary submarke of three estimates of Q3 US GDP. Uneven results in both 15.3 in Q2, 15 posted the lowest vacancy of all retail property General retail (freestanding, general purpose properties) typb consumer and retail sales is making it tough on retailers to threein eQ at 3.0%, down 30 basis points in the quarter, followed closely by Power Centers at 4.7%, up 20 basis points plan for expansion. 10 due to big box closures in the sporting goods industry. Shopping Center (neighborhood, communityconsum and str to plan centers combined) rates are still highest at 8.0% despite another 30 basis point decline in Q3. Excess supp 0 The vacancy rate declined again in Q3, shedding another 2016 2016 2015 2016 2015 in this category is concentrated in suburban submarkets that have fallen out of favor with expanding retaile Q1 Q3 Q4 Q2 Q3 20 basis points to settle at 5.0%. In the past year, vacancy Theinvac Though it is important to note that the shopping center category is the least vulnerable to the growth t has moved 40 basis points lower. As reported last quarter, 20 basi e-commerce sector. vacancy is sharply higher in secondary submarkets. Genhas moved 40 basis points lower. As reported last quarter, va eral retail (freestanding, general purpose properties) postGeneral retail (freestanding, general purpose properties) pos 4 SIGNIFICANT OVERVIEW KEYquarter, MARKET SNAPSHOTS TRANSACTIONS NATIONAL lee-associates.com ed the lowest vacancy of all retail property types1 atLEE3.0%, down2 30 basisOVERVIEW points in3the followed closely by Power Centers5atLEE NETWOR at 3.0%, down 30 basis points in the quarter, followed closely 4.7%, up 20 basis points in Q3 due to big box closures in the sporting goods industry. due to big box closures in the sporting goods industry. Shop centers combined) rates are still highest at 8.0% despite ano 2007 Q1

Millions SF

2 National Economic Overview

RETAIL SECTOR KEEPS PACE IN Q3 Shopping Center (neighborhood, community and strip centers combined) rates are still highest at 8.0% despite another 30 basis point decline in Q3. Excess supply in this category is concentrated in suburban submarkets that have fallen out of favor with expanding retailers. Though it is important to note that the shopping center category is the least vulnerable to the growth in the e-commerce sector. Urban areas continue to account for a greater share of net absorption performance as more retailers look to younger consumers for sales growth. This group prefers multifamily housing near public transportation, hip restaurants, cool bars and entertainment venues over the “sleepier” suburban submarkets they grew up in. They are less enamored with home and automobile ownership, opting instead for the convenience of living closer to work and amenities within walking distance or a short Uber or cab ride. Q3 net absorption marginally outpaced a robust Q2 performance, finishing the period with a net gain in occupied space of just over 43 million square feet. In the past four quarters, 122.5 million square feet of net absorption has been recorded, which is impressive considering choppy retail sales numbers in the same period. Wage growth has picked up slightly and that may portend further absorption gains going forward.

National Economic Overview

The overall average asking rate moved up another $.17 to $15.66 per square foot in Q3. Over the past four quarters, retail rents across all product types and locations moved up by 2.68%, but rent growth remains concentrated in urban locales. Suburban retail Urban areas that continue account a greater of netgrowth absorption as more re centers, especially mid-block strip centers cater toto mom and popfor retailers, have share seen weaker and moreperformance persistent vacancy. younger consumers for salescore growth. Thisa group prefers multifamily near years. public trans The rate of rent growth suffers as distance from an urbanized increases, trend that has been ongoing for housing the past several restaurants, cool barssquare and feet, entertainment venues over the “sleepier” submarkets the New deliveries for the quarter totaled 19.5 million bringing the total of completed inventory in thesuburban past four quarters to They are less enamored with home and automobile ownership, opting instead for the conven 85.5 million square feet. Another 79.3 million square feet is currently under construction, a significant rise over Q2’s construction closer to work within remains walkingondistance or we a short Uberreporting or cab ride. queue. Construction activity in urban localesand andamenities mixed use projects the rise. As have been over the past two years, brick and mortar and online retailers continue to move toward greater balance to boost sales. Online retailers are adding Q3 net absorption outpaced a robust performance, finishing physical locations just as more traditional retailers marginally are boosting their online presence andQ2 closing stores. Macy’s, Walmartthe and period Sears with occupied space of just over 43 million square feet. In the past four quarters, 122.5 million squa have all announced major store closings, while big sporting goods retailers Sport Chalet and Sports Authority decided to call it quits in absorption hasfeeling beentherecorded, which isonline impressive considering choppygiant retail sales number the first half of the year. Office Depot is also pinch from increased competition. The office products has decided period. growth has across picked slightly and that may portend further absorption gains goi to consolidate operations by closingWage 300 more locations theup country.

Millions SF

The overall average asking rate moved up another $.17 to $15.66 per square foot in Q3. Over quarters, retail rents acros HISTORICAL DELIVERIES 1994 - 2016 types and locations moved but rent growth remains Average Delivered SF in urban locales. Suburban Deliveries 300 especially mid-block strip cater to mom and pop r 250 seen weaker growth and m vacancy. The rate of rent g 200 as distance from an urb increases, a trend that has b 150 for the past several years. 100

New deliveries for the qu 50 19.5 million square feet, total of completed invento 0 four quarters to 85.5 m 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 feet. Another 79.3 million currently under constructio rise over Q2’s construction queue. Construction activity in urban locales and mixed use projec the rise.

As we have been reporting over the past two years, brick and mortar and online retailers cont

2 National Economic Overview

US RETAIL MARKET LOOKING AHEAD The US retail market will keep growing, but further gains will be hard fought. Weak GDP and wage growth are an ongoing drag on retail sales volume. Consumer spending and retail sales growth are choppy at best, moving up and down significantly one reporting period to the next. Imported goods will remain cheap due to the strength of the US dollar, and that will keep the discounters opening new locations. Central banks around the world have resorted to negative interest rate policies to reduce the risk of a deflationary cycle, but results continue to disappoint. The US central bank has maintained its own cheap money campaign, and that should keep interest rates on loans for major purchases like autos, homes, furniture and appliances low. Import prices have been falling consistently since the dollar spiked at the end of the year when the Fed made its lone rate hike. Markets around the world were rocked and it took most of Q1 to get things settled down. That spooked the Fed into holding off on further planned rate hikes. Low oil prices have been with us for more than two years, but the expected boost in retail sales has been disappointing. Job growth is decelerating in terms of the 12 month rolling average. Q3 earnings were down for the sixth straight quarter. Some of the best profit results came from companies that were focused on cost cutting rather than top-line revenue growth. Without bigger gains in retail sales, vacancy, net absorption and rental rates are likely to track on their current course for the next few quarters. Little has been said about projections for 2016 sales growth. Port delays due to the Hanjin bankruptcy did not give the season a good start. 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. Expect lenders to get more cautious, especially for shopping centers in secondary suburban submarkets. Foreign investors will keep giving demand a boost, as they look for a place to preserve capital.

3 Key Market Snapshots

SANTA BARBARA VACANCY RETAIL

VACANCY INDUSTRIAL Total

6.00%

Quarter

5.00%

4.00%

3.00% 2.00%

2.49% 1.64%

1.95%

1.94%

2.10%

1.48%

1.62% 0.93%

1.00%

0.00% Q3 2015

Q4 2015

Q1 2016

Q2 2016 Q3 2016

Quarter

6.00% 5.00%

3.20%

1.10%

Q3 2015

Q4 2015

Q1 2016

Q2 2016 Q3 2016

MARKET HIGHLIGHTS Total

3.21%

1.17%

0.00%

VACANCY OFFICE

4.00%

Quarter

3.00% 2.00%

1.00%

Total

6.00%

3.63%

3.92%

4.41%

• The Multi-Family/Student Housing market continues to see high demand. Inventory remains low with quality properties receiving multiple all-cash offers. • Downtown Santa Barbara retail remains weak as department stores and smaller shops work to compete with online retailers. Landlords are largely resistant to lower asking rents, but will need to adjust expectations in order to fill vacancies. • Paseo Nuevo and La Cumbre Plaza Mall both have remodel and renovation plans in process with hopes of renewing vibrancy to these stagnant properties.

3.00% 2.00%

• Office rents have stabilized after a slight uptick in the second quarter. More subleases are coming available as companies downsize or shift to upgraded space. Subleases consist of approximately 25% of all new inventory.

1.00% 0.00% Q3 2015

Q4 2015

Q1 2016 Q2 2016

Q3 2016

VACANCY RATE

RETAIL

OFFICE VACANCY RATE

INDUSTRIAL VACANCY RATE

2.49%

4.41%

1.10%

3 Key Market Snapshots

SAN LUIS OBISPO VACANCY RETAIL

VACANCY INDUSTRIAL Total

6.00%

Quarter

5.00%

Quarter

5.00%

4.00%

3.28%

2.72%

3.00% 2.00%

Total

6.00%

3.00%

2.27%

2.12%

1.99%

1.62%

4.00%

2.00%

1.00%

1.63%

1.80%

1.52%

1.00%

0.00% Q3 2015

Q4 2015

Q1 2016 Q2 2016 Q3 2016

0.00% Q3 2015

Q4 2015

Q1 2016

Q2 2016 Q3 2016

MARKET HIGHLIGHTS VACANCY OFFICE

Total

Quarter

6.00% 5.00% 4.00%

3.46%

3.59%

3.71%

3.86% 3.22%

3.00% 2.00% 1.00%

• The San Luis Obispo industrial market remains supply constrained. With low inventory, many Commercial Service and Manufacturing users are unable to secure vital space. • A 20-acre commercial service land parcel located on Tank Farm Road was purchased mid-quarter by an out-of-area buyer. The new owner intends to offer land parcels for sale and or build-to-suits to meet area demand.

0.00% Q3 2015

Q4 2015

Q1 2016

Q2 2016 Q3 2016

VACANCY RATE

RETAIL

OFFICE VACANCY RATE

INDUSTRIAL VACANCY RATE

3.28%

3.22%

1.80%

leecentralcoast.com

3 Key Market Snapshots

PASO ROBLES VACANCY RETAIL

VACANCY INDUSTRIAL Total

Total

Quarter

9.00%

8.00%

7.00%

6.00% 5.00%

4.93% 4.29%

4.00%

4.08%

4.16%

Quarter

8.88%

9.22%

6.00% 5.00% 4.00%

3.39%

3.00%

2.00%

1.00%

1.54%

1.70%

Q3 2015

Q4 2015

1.95%

0.00%

0.00% Q3 2015

Q4 2015

Q1 2016 Q2 2016

Q3 2016

Q1 2016 Q2 2016 Q3 2016

MARKET HIGHLIGHTS VACANCY OFFICE

Total

Quarter 9.00%

• The office and retail sectors have healthy demand from tenants with vacancy rates in the 4-6% range.

8.00% 7.00% 6.00% 5.00% 4.00%

• Paso Robles vacancy remains high with a sizeable 220,000-sqaure-foot industrial remaining vacant.

3.31%

3.92%

4.61% 3.28%

3.47%

3.00%

• The service station on the corner of Spring Street and 24th was one of the highest grossing transactions in the Tri-Counties with a sale price of $10,280,000. The former Valero was sold to 7-Eleven as a part of a 78 property portfolio. • Paso Robles’ vineyard land is still the area’s prominent asset. The Robert Hall winery, complete with a 160 acre vineyard and winery, sold for $16,952,000.

2.00% 1.00% 0.00% Q3 2015

Q4 2015

Q1 2016 Q2 2016

Q3 2016

VACANCY RATE

RETAIL

OFFICE VACANCY RATE

INDUSTRIAL VACANCY RATE

4.93%

3.47%

9.22%

3 Key Market Snapshots

SANTA MARIA VACANCY RETAIL

VACANCY INDUSTRIAL Total

Total

Quarter

9.00%

9.00% 8.00%

8.00% 7.00% 6.00%

5.46%

5.58%

7.00%

6.02%

5.91%

5.24%

Quarter 7.43%

7.03%

6.00%

5.00%

4.00%

3.00%

2.00%

1.00%

5.40%

5.28%

5.07%

0.00%

0.00% Q3 2015

Q4 2015

Q1 2016 Q2 2016

Q3 2015

Q3 2016

Q4 2015

Q1 2016 Q2 2016 Q3 2016

VACANCY OFFICE Total

Quarter

9.00% 8.00% 7.00%

6.20%

6.00%

6.79% 5.86%

6.77%

5.73%

5.00% 4.00% 3.00% 2.00% 1.00% 0.00% Q3 2015

Q4 2015

Q1 2016 Q2 2016 Q3 2016

VACANCY RATE

RETAIL

OFFICE VACANCY RATE

INDUSTRIAL VACANCY RATE

5.91%

6.77%

5.07%

leecentralcoast.com

3 Key Market Snapshots

LOMPOC

VACANCY INDUSTRIAL

VACANCY RETAIL 10.00%

9.86%

9.46%

9.00%

Quarter

6.00%

8.23%

8.07%

8.00%

Total

9.88%

5.00%

7.00%

4.00%

6.00% 5.00%

3.91% 3.01%

3.00%

4.00% 3.00%

2.30%

2.00%

2.27% 1.52%

1.00%

1.00% 0.00% Q3 2015

Q4 2015

Q1 2016 Q2 2016

Q3 2016

0.00% Q3 2015

Q4 2015

Q1 2016 Q2 2016 Q3 2016

VACANCY OFFICE Total

Quarter

6.00% 5.02%

5.00%

4.60% 4.39%

4.00% 3.14% 2.64%

3.00% 2.00% 1.00% 0.00% Q3 2015

Q4 2015

Q1 2016 Q2 2016 Q3 2016

VACANCY RATE

RETAIL

OFFICE VACANCY RATE

INDUSTRIAL VACANCY RATE

8.23%

4.39%

1.52%

3 Key Market Snapshots

Development Projects Central Coast tare

Average Unit-Size Density Incentive Program On

Legend ta i n

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Ocean Related/Medium High Residential (15-27 du/acre)

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Calle Real

Commercial/Medium High Residential (15-27 du/acre)

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San Roque

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La Cumbre Rd

Office/Medium High Residential (15-27 du/acre)

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192

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Hope Ave

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Hotel/Medium High Residential (15-27 du/acre)

re ie r

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NAD 1983 State Plane California V FIPS 0405 (Feet)

City of Santa Barbara Average Unit-Size Density Incentive Program Map

Map prepared by City of Santa Barbara, Planning Division, July 2013

Path: H:\Group Folders\GIS\WORK\an\arcmap\PlanSB Implementation\AUD Maps\General Plan - Incentive Program Map 11x17 Dec 2014.mxd

In 2013, Santa Barbara City Council approved the Average Unit-size Density (AUD) Incentive Program Ordinance. The intent of the Program is to support the construction of smaller, more affordable residential units near transit and within easy walking and biking distance to commercial services and parks. Increased densities and development standard incentives are allowed in most multi-family and commercial zones of the City to promote additional housing. The AUD Program has an initial duration of eight years or until 250 new units under the Program have been constructed in the High Density Residential or Priority Housing Overlay areas, whichever occurs first. Housing Element Implementation • 38,393 Existing Units in 2014 • +1,208 Units Projected by 2023 = 39,601 Units by 2023 At the end of Q3, the following residential units are pending, or have been approved or constructed under the AUD Program. Residential units that are pending, or have been approved or constructed under the AUD Program.

PENDING UNITS*

Medium-High Density Area*** High Density/Priority Overlay

72 340

APPROVED UNITS

BUILDING PERMIT ISSUED UNITS COMPLETED UNITS**

41 164

151

*Includes all pending projects that have an application with the planning division. Some projects may not have been deemed complete. **Projects that have received a certificate of occupancy. ***Units located in the medium-high density area are shown for informational purposes only.

leecentralcoast.com

3 Key Market Snapshots

Hotel Californian ~ Santa Barbara The 247,953-sq. ft. Entrada Hotel project is located on three parcels of land at the corners of Mason and State Streets. The 114-room 4-star luxury hotel has nine vacation units and ±20,000-square-feet of Commercial space with 264 parking spaces. Originally built as The Hotel California in 1925, the La Entrada will restore the original front façade designed in the Spanish Colonial Revival style. Completion Date: Summer 2017

2 The Marc ~ Santa Barbara The Marc is a 136,000-square-feet Mixed-Use development featuring eighty-nine residential apartments and 2,500-square-feet of ground floor commercial space. This will be the first completed project under the city of Santa Barbara’s new Average Unit Density Program. Adjacent to The Marc is a new condominium development project located at the old Sandman Hotel site. The new area projects will bolster the commercial activity in the upper state street sub-market. Completion Date: November 2016

1298 Coast Village Road ~ Montecito The old 76 gas station located at 1298 Coast Village Road has been demolished and work is nearing completion of a new three story mixed-use building featuring 5,000-square-feet of highly desirable ground floor retail space and eight luxury hotel units above. While the project was met with much opposition from residents, the development will be beneficial to restauranteurs and retailers looking to relocate to the highly sought-after Coast Village Road. Completion Date: Winter 2017

Miramar Hotel ~ Montecito The property was purchased over 10 years ago. Only Five-Star Hotel directly on the sand in Southern California. Operated by Rosewood Hotels.122 guest rooms and 48 suites, many of which will be in single-story cottages and bungalows with as many as four bedrooms. Site Size: 16 acres of land. Estimated Construction costs: $200 Million. Open Date: Summer 2018

5 Hilton Garden Inn ~ Goleta Construction is underway at the new 138-room Hilton Garden Inn. Located at th[e corner of Hollister Avenue and Storke Road in Goleta. This hotel sits on one of the main thoroughfares to University of California at Santa Barbara. The new 95,678-square-foot hotel sits on a three acre parcel. Completion Date: Spring 2017

6 Enos Ranchos ~ Santa Maria New retail development located at the intersection of Betteravia Road and Highway 101 adjacent to the Cross Roads Center. Santa Maria Ranch is a 350,000-square-foot power center featuring a California contemporary design. In all, the project will consist of 350,000-square-feet of retail space comprised of several anchor tenants along four in-line stores, seven pad buildings and an outdoor seating area. Confirmed tenants include Costco Wholesale, Lowe’s Chick-fil-A, Buffalo Wild Wings and The Habit Burger. In addition to the 156,000-square-foot building, Costco plans to install a 24-pump gas station. Completion Date: ???

Chinatown Project ~ San Luis Obispo Construction is nearing completion at the mixed-use project located in the heart of downtown San Luis Obispo. The new development will feature 46,000-square-feet of retail space with additional office and residential units. Tenants joining the new development include a Lululemon Athletica, H&M, Williams-Sonoma and Paso Robles Bistro. Completion Date: Summer/Fall of 2016.

8 San Luis Ranch ~ San Luis Obispo San Luis Ranch, a 131 acre master planned project in San Luis Obispo, is moving through the entitlement process. The development will feature 90,000-square-feet of retail, residential, hotel and office components. Ground Breaking: June 2017.

Pine Street Promenade ~ Paso Robles After a one-year hiatus, the Pine Street Promenade is proceeding with phase one. The master-planned project is located on a 2.4-acre lot in downtown Paso Robles, the former site of the Hayward Lumber yard. The project will include retail components in addition to a 120-room hotel. The master-plan, which originally included a public market, parking structure and performing arts center, have since been refined with details pending. According to architect Steven Puglisi, construction is expected to begin within a year.

3 Key Market Snapshots

WINE COUNTRY

The fall harvest is in full swing. In California the majority of harvesting occurs in late August to early October with some grapes being harvested throughout the autumn. The overall state crop was estimated to be near the historical average of 3.9 million tons by the California Department of Food and Agriculture as of August 2016. While activity has tapered off due to the harvest, there are a few notable transactions that occurred during the quarter. In mid-August, Sea Smoke purchased the 201-acre State-of-the-art, high-density Rita’s Crown Vineyard for $3,290,000. The vineyard is located on the southwest slopes of Santa Rita Hills AVA and includes 61 acres of planted grapes suited for producing world-class Pinot Noir and Chardonnay. This cool–climate site is adjacent to the biodynamic Sea Smoke Estate & Vineyard. Sea Smoke will transition Rita’s Crown to organic farming, and will continue to be a source for a number of wineries, including wines made by Babcock, Ken Brown and Sandhi.

Pacific Ocean

Rita’s Crown Vineyard

720 ft

471 ft

422 ft SLOPE DIRECTION

218 ft

231 ft

S an ta Y nez Ri

Pinot Noir

SOUTH

ver

Chardonnay

The Terrain Elevation: 220 - 650 feet Slope: 8.75% (5°) to 36.4% (20°) Aspect: South (189.4°)

leecentralcoast.com

The Soil Depth: 6 - 20 inches Base: Semi-siliceous shale with calcareous strata, diatomite Top: Botella, Gazos and Lopez clays, Ballard, Metz

The Geology Formation: Monterey/Sisquoc Age: 14 Million Years Epoch: Upper-Middle Miocene

The Grapes Variety Acres Pinot Noir: Chardonnay:

135.6 8.4

Total 144.0

3 Key Market Snapshots

On August 7th, The Alcohol and Tobacco Tax and Trade Bureau (TTB) the Federal wine regulatory body approved the application to expand the Santa Rita Hills AVA by 2,296-acres on the eastern border, about 4 miles west of Highway 101 in Buellton. The controversial expansion will bring Santa Rita Hills AVA to a total acreage of 35,676. The petition to expand the Sta. Rita Hills AVA was filed by the owners of John Sebastiano and Pence Ranch vineyards. The original eastern boundary of the Sta. Rita Hills split Sebastiano and Rio Vista vineyards. While Pence Ranch, owned by Blair Pence, planted just outside the eastern border of the AVA. The expansion approval was finalized on Sept. 21, 2016. Transcendence Wines has opened a new tasting room in the Santa Rita Hills Wine Center, located at the corner of Highway 246 and Highway 1 in Lompoc. Transcendence offers cool-climate Syrah, Pinot Noir and Chardonnay from some of the finest vineyards in Santa Barbara County’s Santa Ynez Valley and Santa Rita Hills wine growing regions. Robert Hall Winery located east of Highway 46 in Paso was purchased by O’Neill Vinters & Distillers for $16 million. The sale includes 160 acres of vineyards, 19,000-square-foot caverns, hospitality center and inventory producing approximately 60,000 cases per year. The buyer, O’Neill Vinters & Distillers was founded in 2004 by Jeff O’Neill, former CEO of Golden Vintners and a third generation California wine maker. O’Neill Vintners contracts over 15,000 acres of vineyards in the premier wine growing regions of California. O’Neill, which is the seventh-largest wine producer in California by volume has grown to be one of the premier custom wine producers in the industry. Spear Vineyard is constructing a new winery using a historic 1930’s barn emulating the original Pierce Ranch barn. Owner, Ofer Shepher designed a structure that would maintain the unique footprint and roof line of the original building. The new winery will feature an underground barrel storage area with an open tasting room overlooking the vineyard. Planted in 2014 along the Highway 246, this vineyard is among the highest elevation plantings in the St Rita Hills appellation with 32 acres in production representing six different grape varieties. “RECOVERED SIDING WILL ULTIMATELY BE THE FINAL TOUCH ON THE EXTERIOR, ESSENTIALLY BRINGING THE ORIGINAL BACK TO LIFE TO FOR COUNTLESS GENERATIONS IN THE FUTURE.”

1 PINOT NOIR 14.4 ACRES CLONES:

943, SWAN, 115, 2A, 667, 777, POMMARD

2 CHARDONNAY 9.5 ACRES CLONES:

4, 96, WENTE, MOUNT EDEN, 95

3 GRENACHE

3.9 ACRES

4 SYRAH

2.6 ACRES

CLONES:

362

470, ALBAN, 383

5 GRUNER VELTLINER CLONES:

6 VIOGNIER CLONES:

Spear Winery

.5 ACRE ALBAN

.9 ACRE

4 Significant Transactions

NOTABLE SALES Q3 2016 333 E ENOS, SANTA MARIA Property: Multi-Family Size: 156,590 SF Sale Price: $37,000,000 Sale Price/SF: $236.29 Sale Date: 08/2016

536 W CARRILLO ST., SANTA BARBARA Property: Multi-Family Size: 33,500 SF Sale Price: $14,875,000 Sale Price/SF: $444.03 Sale Date: 09/2016

2340 SPRING ST., SAN LUIS OBISPO

6100 HOLLISTER AVE., GOLETA Property: Land Size: 629,878 SF Sale Price: $8,704,000 Sale Price/SF: $13.82 Sale Date: 08/2016

Property: Retail Size: 3,750 SF Sale Price: $10,280,000 Sale Price/SF: $2,741.33 Sale Date: 07/2016

29 ANAPAMU ST., SANTA BARBARA Property: Office Size: 18,200 SF Sale Price: $6,950,000 Sale Price/SF: $381.87 Sale Date: 07/2016

265 MEISSNER LANE, SAN LUIS OBISPO Property: Land Size: 853,776 SF Sale Price: $6,400,000 Sale Price/SF: $7.50 Sale Date: 08/2016

5 SANTA BARBARA

SAN LUIS OBISPO

LOMPOC

NUMBER OF SALES 27 PRICE/SF AVG $586.93 PRICE/SF HIGH $1,170.79 PRICE/SF LOW $170.83

NUMBER OF SALES 9 PRICE/SF AVG $472.11 PRICE/SF HIGH $907.11 PRICE/SF LOW $218.57

NUMBER OF SALES 8 PRICE/SF AVG $460.67 PRICE/SF HIGH $1,851.85 PRICE/SF LOW $142.81

SANTA MARIA

PASO ROBLES

NUMBER OF SALES 9 PRICE/SF AVG $179.41 PRICE/SF HIGH $285.00 PRICE/SF LOW $100.00

NUMBER OF SALES 7 PRICE/SF AVG $598.86 PRICE/SF HIGH $2,741.33 PRICE/SF LOW $59.94

4 Significant Transactions

NOTABLE LEASES Q3 2016 7402 HOLLISTER AVE., GOLETA

7406 HOLLISTER AVE., GOLETA

Tenant: inTouch Health Property: Office Size: 28,025 SF Lease Date: 07/2016

Tenant: inTouch Health Property: Office Size: 24,254 SF Lease Date: 07/2016

760 MCMURRAY RD., BUELLTON Tenant: Platinum Performance Property: Industrial Size: 13,251 SF Lease Date: 06/2016

3 10 E. YANONALI ST., SANTA BARBARA Tenant: Impact Hub Property: Office Size: 10,044 SF Lease Date: 09/2016

5 122 W. FIGUEROA ST., SANTA BARBARA Tenant: US Government GSA Property: Office Size: 7,650 SF Lease Date: 07/2016

3977 S. HIGUERA ST., SAN LUIS OBISPO Tenant: Trader Joeâ&#x20AC;&#x2122;s Property: Retail Size: 12,000SF Lease Date: 08/2016

4 3042 INDUSTRIAL PKY. SANTA MARIA Tenant: Atlas Copco Mafi Trench Inc. Property: Office Size: 7,650 SF Lease Date: 07/2016

6 AVERAGE ASKING RATES (GROSS) SANTA BARBARA $2.87 SAN LUIS OBISPO $1.85 LOMPOC $1.03 SANTA MARIA $1.23 PASO ROBLES $1.51

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

Q3 leecentralcoast.com

2016

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, o City of Santa Barbara, Spear Vineyard, TTB, Sea Smoke and Lee Propriety Data. ÂŠ Copyright 2016 Lee & Associates All rights reserved.