As Distress Reigns In Downtown LA, Tenants Keep Checking Their Landlords' Books
The so-called flight to capital, in which tenants seek to verify the financial viability of a potential landlord before signing a lease, is alive and well in Los Angeles.
The shift toward hybrid work schedules and the resultant dip in demand for most office space has given tenants an advantage.
And as distress continues to work its way through the Los Angeles office market, tenants are using that advantage to ask for assurances that their landlords are financially sound, according to panelists at Bisnow's Los Angeles Office and Workplace Market Outlook event. Specifically, tenants want to know their landlords aren't going to hand over the keys to their building anytime soon.
“The short answer is yeah, you’ve got to tell them. You’ve got to say, ‘We're committed to this, we have the money to do it, we have the allocation of our bank, we haven't drawn down on TIs,’” Lowe Executive Vice President Marty Caverly said at the event, held Wednesday at SAG-AFTRA Plaza. “You have to show that if you want to stay vibrant.”
Owners are still expected to provide desirable amenities like food, coffee, programming and a gym, but they are increasingly required to demonstrate solid financial footing, AEW Capital Management Director Leslie Walling said.
“Tenants and prospective tenants’ brokers are focusing, rightly, on that now: How are you going to be able to operate the building going forward? Are you the kind of operator that's going to be willing to sponsor the sorts of amenities that are going to continue to draw the employees back into the market?” Walling said.
Some owners said they had gone so far as to offer rent escrow arrangements, though they didn't say whether those arrangements were for a set term or for the duration of the lease.
It has been about a year since the tenant representation firm Savills first said tenants were concerned about the finances of their landlords and using those concerns to guide where they signed new leases or renewed existing ones.
In the time since, especially in Downtown Los Angeles, high-profile instances of distress have continued to crop up, doing little to calm tenants' concerns about landlords’ balance sheets.
“Especially since what's happened with Downtown LA — those tenants and what they experienced with some of the defaults down there — that's what they want to know,” CIM Group Regional Vice President Linda Potts said.
CIM Group scored legal services tenant Sheppard Mullin for 119K SF in Downtown LA, the firm announced in December. Sheppard Mullin moved from Bank of America Plaza, also in Downtown, where its lease was set to expire at the end of this year.
A $400M CMBS loan secured by Bank of America Plaza had been on the radar of Fitch Ratings since June of 2023 amid concerns about declining vacancy and challenges to refinancing it, The Real Deal reported at the time. The loan is set to mature in September.
