LA Office Leasing Activity Depressed As Economic Hits Keep Coming

The Los Angeles office market has a long road to recovery midway through year three of the pandemic, with macroeconomic pressures, including rising interest rates and inflation, along with the threat of a recession, adding to the angst.

Plus, the streaming media and tech sectors that buoyed the office market in LA for the last few years might be on the verge of pulling back, piling on the uncertainty ahead. 

Despite some sizable leases — the largest of which was Amazon’s nearly 208K SF at Water Court in Santa Monica — leasing activity overall was down in the second quarter of this year when compared to the previous quarter, both JLL and Savills found. 

Leasing activity was just under 2.7M SF in the second quarter, down annually from 3.1M, and monthly by 20% from 3.6M, according to Savills, which cited economic uncertainty as a major contributing factor to the slowdown.

JLL found a 10% drop in leasing activity between Q1 and Q2 of this year, attributing the decrease to concerns about the economy as well as "more limited progress in getting employees back into the office," according to its report.

CRE firms all track their data differently, and many define geographic regions in different ways, which often leads to differing metrics, but the reports analyzed for this story indicated similar trends, even if the numbers weren't precisely alike.

In its report, Savills noted that it had found “several anecdotal examples of deals falling out of contract by the end of the quarter,” mainly within the tech sector, and that other active requirements were on hold for the time being.

With hybrid workplaces still very much in effect and the larger economic uncertainty affecting the entire country, the LA office market is likely to be a tenant’s market “for the foreseeable future,” Savills said in its report.  

Kastle Systems' Back to Work Barometer for the week ending July 13 found that occupancy at 50 buildings across LA was 41.8% — below the 44.1% national average and not even half of pre-pandemic levels. 

Not only did leasing slow but the amount of available sublease space grew, hitting record levels by some counts. 

According to Savills, sublease space in the second quarter rose to 9M SF, a significant step up from 8.5M at the same time in 2021. 

Transwestern, which measures the sublease supply as a percent of the overall market, clocked the metric at 1.9%, an “all-time high,” the firm’s report noted. Transwestern Research Manager Thomas Galvin said pre-pandemic, sublease space averaged roughly 1%. By JLL’s count, sublease space was higher, up to about 4.3% of the total market. 

Galvin said he sees a preference on the part of both landlords and tenants for shorter-term deals, and that sublease space might be more attractive to tenants looking for a place they can move into quickly and occupy for a short time. 

“If you're anticipating the market to change, either going up or back to normal or going down, you don't necessarily want to lock in a longer-term deal if what you're thinking is, this is just a short-term dislocation,” Galvin said. 

But Soto said that he’s seeing sublease space just sit on the market, which is worrisome.  

“It’s something to watch very closely,” he said. 

Looking ahead, all eyes seemed to be on the tech and streaming media sector — a slice of the CRE occupier pie that once dominated the quarterly lists of top leases. 

“One of the things we're hearing is that some tech startups that would normally be out in the market being very aggressive and taking space … they're not making those office leasing decisions like they would have six months ago or a year ago,” Soto said. 

This quarter, the roster of top leases a more representative mix, including financial services firms and retailers.

Netflix’s belt-tightening, which included layoffs and putting up at least 180K SF of office space for sublease  — has many watching to see whether its competitors could follow suit. 

“One of the bright spots over [the last two years] has been companies like Netflix, Amazon and Apple taking a lot of space, most notably in Culver City, which has remained one of the most active office markets,” Galvin said.

It’s too early to say what the implications of this heavy-hitting sector pumping the brakes could be, but some early effects have already appeared. 

“The free-spending land grab that has characterized the content wars over the pandemic are over. The next stage involves shoring up resources and ensuring long-term profitability, often by trimming jobs and putting active real estate requirements on hold,” the Transwestern report said.

For everything you need to know about the Los Angeles office market, attend Bisnow's Los Angeles Office Market Outlook on July 26.