Economic Uncertainty, Hybrid Work Lead To Record-High Availability In LA Office Market
It's a tenant's world in the Los Angeles office market as the availability rate hit a new record high of 26.6%.
Second-quarter data on the market's performance tracked by Savills shows a variety of underperforming metrics linked to depressed demand for office space and a cautious business community.
Leasing activity was just 2.4M SF in the second quarter, a 15% drop from the 2.9M SF the market saw in the first quarter and a 12% decrease from the 2.8M SF reported in the same period of last year, according to Savills.
“The vast majority of office tenants are very cautious right now,” Savills Senior Director and Head of Office Research Michael Soto said. “They're looking to control costs, they don't want to commit to too much space, or they're looking at short-term flexibility.”
There were no new leases in the top 10 lease transactions by square footage that Savills tracked. Instead, there were five renewals, two relocations to sublease space, one standard relocation, one sale-leaseback and one lease extension.
The Savills report chalked the leasing activity slowdown up to “occupiers delay[ing] real estate decisions amidst uncertainty.”
Uncertainty has been the name of the game for more than two years now but especially since the Federal Reserve began raising interest rates in an effort to combat inflation over a year ago. But the climate now is different than the one facing office owners and their tenants when interest rate hikes came on the scene, Soto said.
“Twelve months ago, there was a lot of optimism about trying to get people back into the office,” Soto said.
But now, most workers and their employers have more or less settled into a hybrid workplace setup. That, plus prominent headlines about stubborn inflation, companies cutting costs and a possible recession have had a negative impact on the leasing market, Soto said.
As in previous quarters, tenants that don’t have to make a decision about leasing are holding off, he noted. But the market reaching a new record-high availability level in the last three months is a painful reminder that delaying a decision is a decision in itself, and one that indicates office space is potentially expendable to more than a quarter of occupiers.
In the second quarter of the year, sublease space in the LA market increased to 10.8M SF, an approximately 20% increase year-over-year from the 9M SF posted in the second quarter of last year. It’s also up from 10.4M SF on the sublease market in the first three months of this year.
Also high are asking rents. The overall average asking rental rate rose to $3.84 per SF despite drooping demand and lowered office valuations, which is just slightly below the $3.87 per SF reported at the same time last year. Century City, an outlier in the city’s office submarket, has the highest asking rent at $6.19 per SF and the second-lowest availability at 15.3%, trailing only the San Gabriel Valley, which has an availability rate of 14.6%.
The report does not note effective rents, making it unclear how much of those hefty asking rents landlords are actually getting from tenants. Soto said concessions are still high and that in this tenant’s market, occupiers are not only engaging in a flight to quality office space but making what he calls a "flight to capital," or heading for buildings whose landlords have deep pockets to make cushy concessions and can be relied on to pay tenant allowances.
The report forecast that these “tenant-favorable conditions” were likely to remain “for the foreseeable future” as landlords seek to hold onto their tenants.
Savills did not track sales activity for the second quarter, as Soto says there wasn’t a lot of activity, but a second-quarter report from Kidder Mathews shows just how few properties changed hands. Sales volume declined to 508K SF, a year-over-year decrease of more than 62% from the 1.3M SF that transacted in Q2 2022, Kidder Mathews found.
