Data Courtesy of CoStar™
Headwinds continue to assail Los Angeles's office market in the first quarter, with market fundamentals at their worst position in decades. Vacancy, 15.7%, continues to rise further from 10.1% in early 2020 and reach new heights. Tenant activity has been relatively restrained in recent quarters, with leasing volumes trending around three-quarters of the average activity seen during 2015- 19, the five years preceding the pandemic.
Recent tenant activity is insufficient to offset the numerous tenants still vacating or downsizing their office footprints, whether upon lease expiration or posting space on the sublease market. The amount of sublease space, 2.5% of the office market's square footage, although down from a recent peak in the middle of 2023, rests near its highest level recorded on CoStar. The outlook for the local office market remains bleak, with vacancy anticipated to rise even further in the coming years.
Rents have experienced little movement since early 2020, and the past 12 months have seen rents move by only -0.4%. Given market softness, one may think office landlords would have significantly lowered asking rents. However, rents can only go so low before executing leases fail to make financial sense. In the current environment, many tenants expect elevated concessions and more tenant improvement dollars than obtained before 2020. Inflation in tenant build-out costs during the past several years has also added pressure to lease economics. 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.
12 Mo Deliveries in SF
12 Mo Net Absorption in SF
Vacancy Rate
12 Mo Asking Rent Growth
12 Mo Sale Volume
Unsurprisingly, developers have exercised caution when starting new office developments, which has resulted in the space under construction, 3.3 million SF, coming down from a recent high of 8.8 million SF in 2020. Office starts over the past 12 quarters, around 4.3 million SF, is about 40% of the starts activity seen from 17Q4 through 20Q1, the peak 12-quarter period for starts during the last development cycle. Except for 1950 Avenue of the Stars, a 731,000-SF tower underway in Century City, most speculative projects have been small to midsize, mid-rise creative office projects hoping to attract tenants with the latest generation space. Developers have capitalized on the trend of newer buildings obtaining greater relative tenant interest since early 2020. As a prime example, even though 1950 Avenue of the Stars won't complete until 2026, it is mostly preleased.
Market weakness and questions on the long-term trajectory of office space demand have resulted in modest sales activity. 2023 dollar volumes were around a third of the volume seen from 2016-19. Notable recent sales demonstrate a stratification in pricing. The largest office sale in Greater Los Angeles during 2023, the Pen Factory, sold this past summer for an impressive $178 million ($810/SF). The result was driven by the asset being a creative office conversion that finished in 2017 (latest generation space), was 100% leased, and is in Santa Monica, historically one of L.A.'s most sought- after office locations. Properties with all three attributes represent a small portion of the market.
On the other hand, several recent transactions involving the market's less-than-best office assets are seeing clear discounts relative to what likely would have been achieved before early 2020. The property of 1700 E Walnut in El Segundo traded in November for a 35% discount from its previous sale price in 2017. In Glendale, two buildings, 400 and 450 N Brand, sold in December for 60% less than the asset's previous 2017 price.
The most prominent news about market distress centers on Downtown Los Angeles. Brookfield, the largest office owner in Downtown Los Angeles' office properties, defaulted in 2023 on three towers, 777 Figueroa, Ernst & Young Plaza, and Gas Company Tower. Ernst & Young Plaza and Gas Company Tower are in receivership; 777 Figueroa is currently on the market. In November, One California Plaza, a 1 million-SF tower on Bunker Hill, was valued at $205 million, less than half the 2017 acquisition price.
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