Los Angeles Commercial Office Market Report as of October 1, 2023

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This is Manuel Angeles with Exp Commercial.?

Here is an update on the current commercial office real estate market in Los Angeles County, CA:

Los Angeles' office market continues to face pains not seen in decades in the fourth quarter. Vacancy, 15.1%, is at its highest level since 1993 and up from 10.1% in early 2020. Recent leasing activity continues at a pace below historical activity, with year-to-date volumes trending around 70-75% of the average activity seen during 2016-19, the years leading up to the pandemic.

Tenant commitments have, at best, mitigated the continued rise in vacancy, as numerous tenants continue to vacate or downsize space, whether upon lease expiration or posting space on the sublease market to recoup real estate costs. Sublease space, 11.8 million SF, although having reached a plateau in 2023, is still near its highest level recorded on CoStar and represents 2.7% of inventory. Looking ahead, the outlook for occupancies remains bleak, with vacancy anticipated to continue to reach new heights in the coming years.

Rents have seen little movement since early 2020 and have witnessed losses of -0.4% during the past 12 months. Considering the market's weakness, one may have thought landlords would have reduced asking rates during this time. 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.

Weak market conditions have resulted in developers exercising restraint when commencing new office projects, which has allowed the space under construction, 3.4 million SF, to come down from a recent high of 8.8 million square feet in 2020. Office starts over the past 10 quarters, just over 4 million SF, is 45% of the starts activity seen from 17Q4 through 20Q1, the peak 10-quarter period for starts during the last development cycle. Except for 1950 Avene of the Stars, a 731,000-SF tower underway in Century City, most speculative projects have been small-to-mid-sized mid-rise creative office projects hoping to attract tenants with the latest generation space. Developers have noticed that newer buildings have fared better with tenant interest since early 2020.

Market weakness and questions on the long-term trajectory of office space demand have resulted in modest sales activity. Year-to-date dollar activity is around half the volume seen from 2016-19. Notable sales this year demonstrate a stratification in pricing achieved. A handful of properties have achieved relatively strong pricing. The sale of the Pen Factory for $165.5 million ($755/SF) stands out. The result was driven by the asset being a creative office conversion that finished in 2017 (latest generation space), was 100% leased, and was in a strong location in Santa Monica, historically one of L.A.'s most sought-after office locations.

On the other hand, distressed pricing has been seen with several larger sales. In late June, the Trust Building in Downtown Los Angeles traded for $40 million ($140/SF). The sale price is half what the seller, JV partners Rising Realty Partners and Lionstone Investments, paid for the property in 2016. The sellers also spent several years and $40 million renovating the property. It saw little leasing activity after renovations completed in 2019.

Downtown Los Angeles' office market has especially suffered during the past few years. According to local leasing brokers, this is largely due to the acute homeless situation and increased concerns around crime. As the most prominent example of distress in the Los Angeles office market, Brookfield, the largest owner of office buildings in Downtown Los Angeles, defaulted this year on three of its towers, 777 Figueroa, Ernst & Young Plaza, and Gas Company Tower. Ernst & Young Plaza went into receivership in May, and Gas Company Tower went into receivership in April.

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Here are several graphs illustrating the current commercial office market in Los Angeles county:

Access the full Los Angeles county commercial office market report here: https://d2saw6je89goi1.cloudfront.net/uploads/digital_asset/file/1170821/Los_Angeles_-_CA-Office-Capital_Market-2023-10-02_a_compressed.pdf ? Data includes: Sale price per unit distribution, cap rate distribution, cumulative sales volume by year, months to sale, recent significant sales, vacancy rates, market rent per square foot, construction deliveries/demolitions, economy, ?job growth. population growth, and Los Angeles county sub-market activity. Access exclusive commercial real estate market reports in Los Angeles county here: https://lacre.manuelangeles.com/

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