Investment Outlook. Creative build-out brings additional returns to aging industrial assets and potentially for new product. Los Angeles Fall 2015

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1 Investment Outlook Creative build-out brings additional returns to aging industrial assets and potentially for new product Los Angeles Fall 2015

2 2 Industrial Creative July 2015 By utilizing the intrinsic design elements associated with industrial properties in in-fill markets, owners can unlock greater property value as tenants preferences shift towards open space, concrete floors, exposed ceilings and more natural lighting. Not to mention, there are often unique fixtures inside these facilities that create a one of a kind experience that is practically irreplicable. Given that most in-fill areas in many Metropolitan Statistics Areas (MSA s) around the country contain an abundance of mature product in land constrained industrial markets, there is a struggle on what owners and investors can do to better monetize their aging industrial assets. Given the fact that there is a finite, or limited supply of authentic industrial facilities to convert, most major markets are seeing a spike in interest from users and investors to acquire these buildings. Not only is there inherent value given what the replacement cost would be, but this is also an eco-friendly trend through building reuse, which helps the environment by reducing consumption of building materials and natural resources.

3 Industrial Creative July Creative build-out brings additional returns to aging industrial assets In-fill industrial properties are often located in high-density population centers served by robust public infrastructure with diversified industry clusters and thus present a unique opportunity to unlock value by attracting a broader tenant base. In-fill properties also typically maintain higher occupancy levels. With user demand for higher quality and newer product, this begs an important question for owners of what is now considered obsolete or inferior industrial space: How can an owner position existing assets to better compete with new, state of the art developments? The answer can be found in the growing trend of flight from traditional work space environments by a wide array of office and tech, tenants that want a more creative work environment. Not only does this present an opportunity for property owners of obsolete industrial assets a chance to make their assets competitive again, but is also providing owners an edge over traditional office space. With simple fixes, such as polishing concrete, sandblasting interior roofs, exposing brick, and adding ceiling fans, owners can transition their tired space into an asset that is highly prized in today s marketplace in both user sales and leasing activity.

4 4 Industrial Creative July 2015 The following case studies highlight higher returns on initial investments across Class A, B, and C asset classes achieved after creative improvements are implemented. Class C Product Case Studies minimal improvements allows repositioning of asset and higher returns 3000 South Hill Street, Los Angeles 14,575 s.f. former silk screening facility An investor purchased the asset off-market from an owner user The seller leased back approximately half of the premises at a market rate, while allowing the remainder to be put on the market for lease Only improvements made were to demise space and paint exterior of the property Building Bones Ceiling Height: Construction: Masonry Former Use: Silkscreen manufacturer Result: JLL was hired to brand the marketing materials as creative and target users other than traditional manufacturers or industrial users. Within three weeks of marketing the property as creative, the listing team produced and landed a tenant for the remaining half that was not occupied by the previous owner at a lease rate that was 40% above the fair market rate agreed to by investor and seller only a month before for the leaseback. The new owner found a local artist who agreed to do a mural on the building frontage for free to promote their art. As a result of the mural and only six months after the investor s closing he received an unsolicited offer to lease the remainder of the space on an as-is basis (no TI s, no free rent) at a price that was 35% above the fair market value established only six months prior. The building is now fully stabilized on an effective rate that is 38% over market from simple rebranding of marketing materials and adding a cost free mural Sichel Street, Los Angeles 18,142 s.f. former furniture manufacturing facility The investor put in approximately $12 per foot in tenant improvements, which included repainting the exterior walls black, sandblasting the bow truss roof, upgrading existing bathroom finishes, installing wood laminate in mezzanine office area, rehabbing existing HVAC, exposing brick that was previously covered, re-installing two skylights that had previously been covered, and new paint in the mezzanine office Return on Investment Source: JLL Brokerage 40% Building Bones Ceiling Height: Construction: Masonry Year Built: 1953 Former Use: Furniture Manufacturer Result: Within 30 days of completion of these improvements, ownership received purchase offers that would have netted the owner at least a 36% profit. Instead, ownership elected to execute a five year lease agreement with an event planning company at a lease rate that was 40% higher than what class C industrial product was trading for in the market.

5 Industrial Creative July N Main Street, Los Angeles 14,830 s.f. former food facility Bought by a group of local investors Invested $6.75 per foot worth of improvements including exposing ceilings, sandblasting roof, rehabbing of existing HVAC, and restrooms upgrades Return On Investment Source: JLL Brokerage 63% Building Bones Ceiling Height: Construction: Masonry Year Built: 1950 Former Use: Food Processing Facility Result: Sold the asset after improvements were complete to a creative owner-user for a 63 % profit versus their initial acquisition price and accounting for improvement costs. Class B Product Case Study achieving above market lease rates 2710 Media Center Dr., Los Angeles A 66,000 s.f. Class B, 24 feet clear, flex facility with substandard loading An institutional investor acquired multiple assets in an industrial park with one large vacancy of approximately 35,000 s.f. Demolished all interior partitions Rebranded marketing materials from standard industrail to creative office Lease Rate Achieved Above Market 44% Source: JLL Brokerage Building Bones Ceiling Height: Conswtruction: Concrete Tilt Up Year Built: 2000 Former Use: Flex User Result: The listing team generated a tremendous amount of activity and was able to competitively bid up the rate and signed a 10 year deal that was 44 % higher than what comparable industrial product was leasing for in the submarket.

6 6 Industrial Creative July 2015 The future implications for Class A industrial product Not only is the creative route something that is applicable in smaller and inefficient industrial product, but some of the larger institutional developers are trying to capture the trend and are working these ideas into some of their spec projects as well. By going creative in the office portions of new construction, a less is more approach is predicted to pay off on several fronts. Benefits from incorporating a more creative approach to the office portions of new, Class A projects are: Meeting the demand and changing trend from users. A premium product creates a more appealing environment for employees A higher IRR for the developer based on the reduced cost Compressed construction schedule Helps differentiate asset from other, seemingly cookie cutter projects After running the numbers, we found the construction schedule for tenant improvements is reduced by 15% and there is a 10% cost savings. Source: Mark D. Payne, Partner, Panattoni Development Company, Inc.

7 Industrial Creative July In conlusion: Urban markets with dwindling supplies of space, escalating rents, and changing tatstes from users present great opportunities for repositioning in in-fill markets. Perceived as less risky than speculative new construction, industrial redevelopment is attracting investors and tenants by providing a unique value proposition in an increasingly competitive commercial real estate market 1. By providing a creative build-out, owners reduce buildout cost while at the same time creating space that is more appealing to tenants. 1 CCIM Institute Image source: JLL Research & CoStar

8 For more information contact: Brokerage Mike Condon Jr., Vice President About JLL JLL (NYSE:JLL) is a professional services and investment management firm offering specialized real estate services to clients seeking increased value by owning, occupying and investing in real estate. With annual revenue of $4 billion, JLL operates in 75 countries worldwide. On behalf of its clients, the firm provides management and real estate outsourcing services for a property portfolio of 3 billion s.f. and completed $99 billion in sales, acquisitions and finance transactions in Its investment management business, LaSalle Investment Management, has $47.6 billion of real estate assets under management. For further information, visit Jones Lang LaSalle IP, Inc. All rights reserved. No part of this publication may be reproduced by any means, whether graphically, electronically, mechanically or otherwise howsoever, including without limitation photocopying and recording on magnetic tape, or included in any information store and/or retrieval system without prior written permission of Jones Lang LaSalle. The information contained in this document has been compiled from sources believed to be reliable. Jones Lang LaSalle or any of their affiliates accept no liability or responsibility for the accuracy or completeness of the information contained herein and no reliance should be placed on the information contained in this document