LA Tech Hubs Leading Subleasing, But One Area Could Be Turning A Corner

Los Angeles, like many other cities around the country, is seeing an increase in sublease space, but the Westside seems to be getting hit especially hard.

LA’s office market was strong prior to the coronavirus pandemic lockdown, with office rents in several major hubs on the rise, but the immediate future of the office remains murky as work-from-home continues indefinitely.

The commercial real estate data company CoStar said this month that there is 9M SF of available sublease space in LA County, over 3.5M SF of it on the city’s Westside. This time last year, LA County had about 5.4M SF of available sublease space, with just 1.8M SF of it on the Westside.

CoStar’s data shows sublease space in Marina del Rey and Venice together account for 8% of that submarket’s total office inventory. Santa Monica’s sublease space accounts for 7.3% of its total office inventory. Across the LA metro, the average is 2.2%, CoStar said. 

Though the increase in sublease space has been notable across the board, the dominance of a few Westside hubs points to a specific type of tenant, CoStar Group Director of Analytics Ryan Patap said.

“That speaks to a tech focus, because the startup world is concentrated there,” Patap said.

Similar findings appeared in a third-quarter report from JLL, which found Westside tech hubs of Santa Monica and Playa Vista leading the pack for most sublease space. Tech accounts for 28% of all sublease space across the city, the report found.

“At one point, 60% of the new subleases coming in were adjacent to or west of the 405 Freeway,” JLL Managing Director Josh Wrobel said. 

While the sheer amount of sublease space is certainly notable, what would really impact LA’s market is if large blocks of space in Class-A buildings were hitting the sublease market en masse, Wrobel said. And that’s not happening yet. Instead, the majority of the subleases from March to date have been for smaller spaces, 23.5K SF on average. And 40% were in smaller, stand-alone Class-B or C buildings, Wrobel said.

JLL’s research showed that compared to other major cities, the percent of office inventory that was available for sublease in LA was in line with or less than other major markets. In Austin, 4.3% of office inventory was available for sublease according to JLL; in San Francisco, 8.2% of office space was up for sublease.  In LA, that number was just 3%.

"It could be worse" seemed to be the takeaway from CBRE’s Tech-30 report too. Published Oct. 22, the report looked at 30 of the nation’s leading tech markets and found that Los Angeles wasn’t among the cities with the highest risk of seeing sublease space push down rents. A big reason for that seems to be the city’s media contingent. 

“Los Angeles is the home of much of the entertainment content we have been consuming and although sublease space has increased in the market during this time, the content and ‘Hollywood’ infrastructure is holding the market in a lower-risk quadrant,” said Lexi Russell, director of research and analysis for CBRE’s Mountain-Northwest Division. 

San Francisco was at the top of the list of cities where sublease space was expected to have a negative effect on office rents. According to CBRE, the city has seen its amount of available office space double this year to 14.6M SF, with more than 5M SF of the newly available space up for sublease. 

“When you look at the office cycle until the downturn, you had three categories that were creating occupancy gains: tech, media and coworking,” CoStar's Patap said, speaking about Los Angeles. “I do think we’re lucky to have entertainment as a driver in this city.”

He said he sees that media connection as something that’s going to continue to be key to LA’s office market.

Since 2016, media and entertainment companies have melded into the tech category, and the combined footprint of tech and media in LA has increased by almost 7M SF, said CBRE Vice Chairman Jeff Pion, who is based in LA. Streaming content companies alone have grown their space by almost 4M SF in that time, CBRE said. 

“This sector has performed incredibly well and will continue to do so in this market for the foreseeable future,” Pion said in a statement.

The fog might even be lifting for more traditional tech companies on the Westside. Wrobel said he is seeing a shift in the last month or so, with sublease concentration moving from west of the 405 Freeway east, toward Central LA. But with reports that a huge chunk of tech companies across the country plan to take up less office space in the next year to 18 months, it isn't likely LA or any city is out of the woods yet.