Q&A on LA Market

Jon Azulay is a Corporate Managing Director in Savills downtown LA office. In his real estate career, Jon has successfully negotiated transactions for a wide range of public, private, nonprofit, private-equity and Fortune 500 clients in markets across the country including for Stericycle, Inc., Dover Corporation, Lawson Products, Level Ex, Association of Legal Administrators (ALA), Commercial Law League of America (CLLA), Emergency Nurses Association (ENA), Intelligent Medical Objects (IMO), International Fellowship of Christians and Jews (IFCJ), Warburg Pincus, Outfest, The Point Foundation and Sterigenics/Nelson Labs/Sotera.

Below, he comments on the state of LA office market.

Describe the overall market pre-COVID-19.

The overall Los Angeles commercial real estate market was very strong prior to COVID. In the office, industrial, and multifamily markets, rents and property valuations reached an all-time high as occupancy levels were healthy due to LA’s highly diversified economy, which accounts for over 1/3 of California’s entire economic output.

What were some of the emerging trends in the market in the last few years?

Over the last few years, the major emerging trend in the LA market was the rise of SVOD (Streaming Video On Demand) and the aggressive entry into the office market of the large tech conglomerates, which create streaming content. This huge demand from Netflix, Amazon, Apple, Facebook, etc, has caused established media companies like Disney, NBCUniversal, WarnerMedia, ViacomCBS, etc, to respond by spending billions to keep up. SVOD has acted as a major tailwind in demand for office and studio production space all over the LA market. 

In the industrial sector, the Greater LA market, which includes both Orange County and the Inland Empire, has seen unprecedented logistics demand due to the rise of online shopping (e-commerce). As a result, the industrial property sector has become the most favored by investors, and, due to its sheer size and strong underlying demand drivers, LA industrial rents and property valuations have surged to historic levels.

What’s the market been like in the last few months?

In the last few months, COVID-19 has caused deal activity to come to an unprecedented near halt due to massive economic uncertainty. Even Hollywood production, which over the past 100 years has been considered counter-cyclical, has seen a never-before-seen production shutdown. With LA still - to a great extent - an industry town, the office market has been negatively affected with slowly deteriorating fundamentals. The industrial market has held up better due to e-commerce demand but has not been immune with dozens of brick & mortar retailers filing for Chapter 11 and the negative effects rippling down through the supply chain. Overall, due to low deal volume, the entire market is in a period of “price discovery.” While rents and property valuations remain at all-time highs, they are expected to drop significantly in the months ahead as the entire market begins to re-price.

How has the LA market responded to past recessions?

The LA market has always gone through downturns and returned stronger. In the early 1990’s, the post-Cold War downsizing of the aerospace industry locally was a massive disruption that caused a lot of pain but the regional economy slowly became more diversified, which put the CRE markets on a stronger underlying footing. At the end of the day, smart and talented people continue to want to be in LA and start companies despite the high cost of living and increasing dysfunction in Sacramento. Basically, LA is considered a global “superstar city” and has always come back stronger after market downturns.

Describe the entertainment industry’s impact on the market?

As mentioned above, LA is still to a great extent an industry town even though the regional economy is now highly diversified. The rise of SVOD and the emergence of Big Tech planting its flag locally (e.g., Amazon in Culver City, Netflix in Hollywood, Apple in Culver City, Facebook and Google in Playa Vista) have acted as a tailwind to already-strong underlying office and studio space demand. With regards to studio space, pre-COVID occupancy levels approached almost 100%. More recently, Blackstone entered into a recent $1B+ JV with Hudson Pacific Properties to renovate and expand office and studio facilities in Hollywood. This deal showed how even a group like Blackstone has realized the entertainment industry is worthy of a long-term bet.

How will the market respond in the long-term?

The market will emerge stronger . While some companies might fold and other companies might relocate out of state, there are always hot startups ready to take their place. LA has big city issues but as long as smart and talented people continue to want to move here, we’ll be fine.