Two and a half years into the pandemic, Los Angeles leasing brokers say they have yet to see a meaningful shift in the city’s office market. Few if any large employers are requiring workers to come back, and sublease space continues to pile up.
“The cardinal truths that we’ve seen for the last 18 months remain the same,” JLL’s Jaclyn Ward said.
Vacancies hit 21 percent in the second quarter, according to Cushman & Wakefield, up from 20 percent at the same time last year. That’s a long way off from what CBRE data says was 14 percent in the second quarter of 2019.
Asking rents, however, suggest that landlords aren’t ready to budge. In West L.A., a relatively pricey submarket encompassing Beverly Hills, Santa Monica and Playa Vista, monthly asking rents averaged $5.02 a square foot in the second quarter, according to Cushman, just four cents shy of the average recorded in the second quarter of 2019.
Even cheaper areas with higher vacancy rates are seeing similar trends. In Downtown L.A., monthly rents averaged $3.75 per square foot in the second quarter, up from $3.72 in 2019.
With nearly 4 million square feet of additional space under construction in Greater L.A., landlords could soon feel pressure to offer more competitive pricing — or lure tenants back in other ways.
Brokers hoped employers would use Labor Day as a turning point to get workers back into the office. But the holiday came and went, and nothing shifted.
“Everyone pointed to Labor Day, and what happened?” said Gary Weiss, who runs the commercial real estate firm L.A. Realty Partners. “Labor Day happened, and not everyone is back to work.”
Subleases mount
Some firms have given up and put portions of their space up for sublease. A handful have reversed course in the last few months.
As of April, Lionsgate was firmly committed to its Santa Monica headquarters. The movie studio behind the “Hunger Games” films signed a short-term extension on its nearly 200,000-square-foot lease at 2600 Colorado Avenue. But by September, the company had put about 20 percent of it up for sublease for $5 a square foot.
“I think everybody is being cautious,” CBRE’s Jeff Pion said. “Like they have been any time there’s an economic correction.”
Almost 10 million square feet of space was available for sublease across L.A. in the second quarter, according to Kidder Mathews — a roughly 4 percent increase from the same time last year.
Netflix, which laid off several hundred employees this year, is seeking subtenants for about 180,000 square feet at 2350 and 2400 West Empire Avenue in Burbank. On the Westside, from Santa Monica to Playa Vista, tenants including NFL Network, Yahoo and Disney-owned 20th Century Studios have all either given up space or listed it for sublease. In Downtown L.A.’s Arts District, PayPal-owned coupon company Honey is seeking subtenants for the entirety of its 130,000-square-foot headquarters.
Ultimately, “landlords and employers have to offer something better than working from home,” Ward said.
The availabilities haven’t led to waves of distress — at least not yet. But in a first sign of trouble last month, lender Oaktree Capital initiated a foreclosure on Coretrust Capital’s 48-story Downtown L.A. office tower at 444 South Flower Street.
Investment giant Brookfield Properties is aiming to reduce its exposure to Downtown L.A., placing its 52-story office tower at 601 South Figueroa Street on the market late last month. It is not yet known what Brookfield is seeking for the trophy property, which is 19 percent vacant, but its asking price could be a barometer of sorts for the submarket.
Some companies are making deals, but they’re being particular about where they want to be.
In July, Amazon added 200,000 square feet to its space at 2450 Colorado Avenue in Santa Monica rather than making a costly move to a different building.
A month earlier, Tishman Speyer notched the priciest office deal in the city this year when it sold a 260,000-square-foot building in El Segundo to FS Investments and Rialto Capital Management for $206 million, or about $790 a square foot.
Other landlords are diversifying. Jamison Properties, one of the city’s largest private commercial landlords, has converted seven office buildings into apartments, creating more than 1,200 units, and says it has more in the works.
“The office market is getting hit right now,” Weiss said. “It’s tough to see.”