Data Courtesy of CoStar™
Headwinds endure in Los Angeles' office market in the second quarter, with fundamentals at their worst position in decades. Vacancy, 16.1%, continues to rise from around 10% in early 2020, reaching new heights. Tenant activity has been relatively restrained in recent quarters, with leasing volumes trending around 80% of the average activity seen during 2015-19, the five years preceding the pandemic.
While most office markets nationally have also weakened during the past several years, Los Angeles has endured greater occupancy losses than most metros. A higher proportion of leases executed pre-pandemic have expired compared to most U.S. markets. This has resulted in the market facing more adverse impacts from the trend seen nationally of many firms downsizing, often utilizing hybrid work strategies. Additionally, the area's elevated unemployment rate and recent job losses in the entertainment and tech sectors, key office tenancies, have restrained tenant demand.
Softer leasing levels have been insufficient to offset the numerous tenants vacating or downsizing their office footprints, whether upon lease expiration or by putting space on the sublease market. The amount of sublease space, 2.8% of the office market's square footage, is at its highest level recorded.
12 Mo Deliveries in SF
12 Mo Net Absorption in SF
Vacancy Rate
12 Mo Asking Rent Growth
12 Mo Sale Volume
Unsurprisingly, given current market conditions and the challenging financing environment, developers have exercised caution when starting new office developments, which has resulted in the space under construction, 3.1 million SF, declining from a recent high of 8.7 million SF in 2020. 550,000 SF delivered in the past 12 months, expanding space in the market by less than 0.2%. Demand has had a more significant impact than supply on the market's weakening.
Most speculative projects underway are small to midsize, mid-rise creative office projects hoping to attract tenants with the latest-generation space. Developers hope to capitalize on the current dynamic of newer buildings witnessing greater relative tenant interest. A prime example is 1950 Avenue of the Stars in Century City, which is 85% preleased even though construction will not finish until 2026.
Cooler tenant activity has resulted in rents seeing minimal movements since early 2020. One may have thought landlords would have lowered rents significantly given record market vacancy. However, rents can only go so low before executing deals fail to make financial sense. Also, many tenants today expect elevated concessions and tenant improvement dollars. According to local market experts, even 10-year leases may have to offer packages worth five to six years of the total rent collected during the lease to attract tenants.
The outlook for Los Angeles' office market is sobering. With vacancy anticipated to rise even further during the next several years, the forecast calls for rents to soften in the near term. Developers and investors will likely continue to show restraint in today's environment.
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