LA Sublease Volume Inches Lower From Record Highs

Though the Labor Day return to offices didn't go as expected, the past three months have offered a few glimmers of hope for LA’s office market, Q3 reports from commercial real estate brokerages indicate. 

The market still has a long way to go toward recovering from the uncertainty that more than a year and a half of working from home has created for office users and their landlords, but even with a long road ahead, many of the reports found the decreasing volume of sublease space something to be optimistic about as it dropped in Q3 from its record high.

The overall amount of sublease space is still high, but the fact that there was a decrease at all was notable, reports from JLL, Newmark and Savills said. The decrease came as some companies took advantage of lower rental rates for the large spaces in trophy markets that sublease space offers, and others that had previously put sublease space on the market withdrew it, Newmark manager Kevin Watson said. 

A couple of big leases in the quarter — video game developer Activision’s 90K SF lease at the Pen Factory in Santa Monica and Technicolor’s 66K SF lease in Culver City — helped take a bite out of LA’s available sublease space. 

For the first time since the start of the coronavirus pandemic, more sublease space was leased than was added to the market. The result was a net decrease of about 84K SF over the previous quarter, the authors of Newmark’s report wrote. By Savills’ count, available sublease space at the end of Q3 totaled 8.8M SF, a drop from 9.2M SF at the end of Q2 2021.  

Newmark and JLL clocked total vacancy at 19.2%. Savills, which measures availability but not vacancy, found that 24.1% of office space in LA was advertised as available. 

Savills and JLL found asking rents across the city averaged $3.87 and $3.82 per SF, respectively. By Newmark’s count, the average Q3 asking rent was $3.65 — a slight drop from the $3.67 per SF average that it found in the previous quarter but up over Q3 2020’s $3.59 per SF. 

Asking rents have stayed largely the same over the past year, but average taking rents have decreased, Savills Southern California Region Research Director Michael Soto said, adding that Savills doesn't officially track or publish taking rents.

Savills’ report found that, across the board, landlord concessions on things like tenant improvement allowances have continued to proliferate as a way to attract tenants without lowering asking rents. But in a few lucky submarkets, concessions aren’t as big a part of the equation as they are elsewhere in the city, Cushman & Wakefield Executive Director Suzanne Lee said. 

“It’s a bifurcated scenario in those active locations on the Westside or in Burbank or El Segundo,” Lee said. 

“Anecdotally, we find that trophy, Class-A space, particularly in West LA, is in very high demand,” Newmark Director of Research Dain Fedora said.

Newmark’s report highlighted established corridors for tech, entertainment and media companies, like Santa Monica and Culver City. In those trophy spaces, concessions for that product and free rent for those properties are still far less common than they would be in a Class-B high-rise in Downtown LA.

The decline of asking rents tends to lag behind a slowdown in the economy, Fedora said. Rents have begun to decline slightly and with factors like high vacancy and still-high sublease availability, it looks likely that asking rents will start to drop as the change in market conditions eventually catches up, Fedora said. 

Office leasing activity in LA continues to slowly rebound. By Savills’ count, it increased to 3.2M SF, but that is still below the 4M SF of activity that Savills measured in Q1 2020 and the five-year quarterly average, which is also 4M SF. Cushman & Wakefield’s Lee noted that 2021 leasing activity to date, 6.9M SF by her firm’s count, has surpassed leasing activity for the whole of last year. 

Because there is still uncertainty about future restrictions related to the coronavirus and about how much space office occupiers will need, many office users continue to put off office space-related decisions or are only making short-term decisions, Kidder Mathews Executive Vice President John C. Anthony said. 

“Things are just sitting stagnant as office tenants are still making a lot of decisions regarding their future,” said Anthony, who specializes in office leasing from the landlord representation side and sales in LA. “If you’re a landlord, you cannot risk losing an existing tenant. Therefore, you’re allowing people to do short-term solutions while they figure it out.”