About 4 million square feet of office space was leased in Los Angeles in the first quarter, a sharp year-over-year drop and another example of the toll the coronavirus crisis has taken on the economy. Real estate pros say more trouble is ahead.
In addition to the 15.4 percent dip from Q1 2019, the new L.A. office market report from Savills showed availability jumped 18.4 percent, reversing four quarters of steady declines.
One bright spot: Total leasing for the first quarter was slightly higher than the 3.8 million square feet reported from October through December.
Around 62 percent of the top lease deals in the first quarter were renewals, Savills noted. The biggest was advertising agency Rubin Postaer and Associates’ 186,900-square-foot renewal at Boston Properties’ 1 million-square-foot Colorado Center in Santa Monica.
Technology, advertising, media, and information companies made up 38 percent of the top transactions, according to the report. Co-working firms continued their pullback on new leases — which began in the fourth quarter of 2019 — after having gobbled up space in Downtown in recent years.
From January through March, those firms “ground to a halt,” according to Savills and “are likely to face additional challenges as the current pandemic situation unfolds.” The report added that it was likely some of the 5 million square feet of flex office inventory now on the market would open up.
WeWork has tried to keep its branches open in coronavirus-hit areas, but has reportedly been swamped with calls from its sub-tenants seeking to drop their spaces, or from those who are refusing to pay rent. WeWork itself has also asked its own landlords to cut its rents.
California remains under a statewide stay-at-home order that has severely disrupted all aspects of the economy, with mass layoffs and commercial and residential tenants now struggling to pay April rents. The order only took effect March 20, however, and industry experts expect that the second quarter numbers will show more pain.
For the first quarter, Savills reported asking rents up, to $3.65 a foot from $3.25 over the same period in 2019. Class A space rose actually jumped, to $3.82 a foot from $3.43 in Q1 last year.
While overall availability rose for the first time in a year, the figure is still lower than where it was in the first quarter of 2019, and some submarkets still remained tight.
Where availability is low
Century City’s overall availability of 7.6 percent is the lowest it has been there in a decade. Burbank also showed a low availability rate, of just 8.1 percent.
With coronavirus-related economic uncertainty expected to continue, Savills noted to “expect availability to increase and rents to plateau.” The report said tenants will seek to “retrench” as the city remains under the stay-at-home order, with all non-essential businesses closed.
For office tenants who can afford to look long-term, concessions could become more drastic, but so could pre-leasing, especially in the sought-after Westside, according to the report. Developers will want to lock in tenants as soon as possible.