Data Courtesy of CoStar™
Headwinds endure in Los Angeles' office market in the first quarter, with fundamentals at their worst position in decades. Vacancy, 16.2%, continues to rise from around 10% in early 2020, reaching new heights. Recent tenant activity has been relatively restrained, with leasing volumes trending around a quarter less than 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 more significant occupancy losses than most metros. A higher proportion of leases executed pre pandemic have expired compared to most U.S. markets, which has resulted in the market facing more adverse impacts from the trend of tenants contracting. 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 footprints, whether upon lease expiration or by putting space on the sublease market. The amount of sublease space, 2.7% of the market's space, is around 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 commencing office developments, which has resulted in the space under construction, 2.8 million SF, declining from a recent high of 8.9 million SF in 2020. Total office space in the market changed by -420,000 SF during the past 12 months. 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 around 75% preleased even though construction will not finish until 2026.
Cooler tenant activity has resulted in minimal rent movements since early 2020. Given record market vacancy, one may have thought landlords would have lowered rents significantly. However, rents can only go so low before executing deals fail to make financial sense, resulting from factors including occupiers expecting elevated concessions and inflation raising tenant buildout costs. 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 see soft momentum for at least the next several years. Developers and investors will likely continue to show restraint in today's environment.
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