Is The Westside Office Reign Coming to an End?

The Westside office market may be loosing its crown. This year, the Westside has seen a rapid increase in its creative sublease supply—including more than 1630,000 square feet of sublease space that came on the market from Snap Inc.—and some softening in tenant demand. While the market is still healthy with low vacancy rates and increasing rental rates, these emerging trends are important to watch. Aleks Trifunovic, a principal and the president of Lee & Associates West L.A., says that the market is returning to an equilibrium and a healthier dynamic for both tenants and landlords. We sat down with Trifunovic for an exclusive interview to talk about the market activity this year in West L.A.

GlobeSt.com: Tell me about the activity in the Westside office market this year.

Aleks Trifunovic: There has been an increase in sublease space on the market. It has been somewhat organic other than the Snap space. That development was significant because there were so many buildings. Although it was one tenant, they had a huge market share. When that product came online, it was a significant glut that hit the market. The other component that we are seeing are sublease spaces sitting on the market for five to six months. I am continually seeing broker blasts for more sublease space that is hitting the market, and you are starting to see a trickle effect of companies that received funding and had taken space or larger tenants that have taken expansion space that they no longer need. Those are the spaces that are hitting the market.

GlobeSt.com: What does this increase in sublease space and the softening in demand say about the Westside office market?

Trifunovic: I think that we are shifting back to a healthier market. The market on the Westside has been a very competitive environment for creative space with four or five tenants competing for a space, and now you are seeing one to two tenants looking at a space. They are the right tenants, but I think that you are seeing a shift toward a healthier market. You are also seeing different options for tenants. El Segundo and Downtown Los Angeles are now alternatives to the Westside. We had such a tight market on the Westside for true creative office, and now these other markets are becoming true creative alternatives. You may see someone moving out of 6,000 square feet in Culver City and they will look in El Segundo or in the Arts District, where they might get concessions and find different types of space availability.

GlobeSt.com: Why is sublease space sitting on the market for so long?

Trifunovic: Good space that comes out for sublease will usually move very quickly. If the space has a strike or two against it, like a shorter term or no ability to lock in a direct deal, you might not see it move as quickly. I had a tenant go bankrupt in a building that I represent and another tenant say that they aren’t going to pay the rent anymore on a sublease opportunity, so you are starting to see people that have had sublease space on the market for a while or space available that are tired of paying the rent as well.

GlobeSt.com: A year ago, you recommended that tenants plan well in advance to look for a new office space. Has your advice to tenants changed with this market shift?

Trifunovic: It depends on the size of the tenant. Tenants still aren’t giving themselves enough time to go through a construction process, and that problem is still there. That is a cultural problem in the tech space specifically. People are used to instant gratification, and if it is a raw space, you are going to have to go through plans and permits, and I don’t think people are giving themselves enough time to go through that process. My opinion has not changed on that, even with a sublease opportunities.

GlobeSt.com: How are sublease deals different than direct lease deals, and who should consider sublease deals?

Trifunovic: Sublease deals are so much harder to do than direct deals due to the fact that you have so many parties involved. You might have a sublease with two years left and now you have a tenant that wants it for five years. Now, you are negotiating not only with your deal but with the landlord. The subtenant and the landlord might have different motivations, or the subtenant is trying to mitigate costs. To lock in a rental rate two years from now, landlords aren’t as interested. A direct deal with a spec build is such an easy deal compared to a sublease. If a tenant is cost sensitive and growing rapidly, a sublease space could be a good option as long as they stay in the sublease term.

GlobeSt.com: Has the sublease supply impacted the direct leasing market?

Trifunovic: We have not seen a reduction in pricing yet. In fact, we have seen pricing continue to go up for creative office. I think that sublease rates will drop. Sublease rates have been fairly competitive with the market, but I think that there will be a break and you will see more of a break for subleases in terms of rates. You are already starting to see broker bonuses and reduced rates.

GlobeSt.com: Is there concern about a bubble in the tech space, and how that bubble might affect the Westside office market, which is largely driven by the tech industry?

Trifunovic: With tech companies, there is a lifespan or a burn rate before they are purchased or go out of business. For that reason, having spec spaces or uniform spaces are important so that you reduce the specialty improvements. The tech space is an area where you could see a pull-back, but there has also been a significant amount of investment and venture capital money is coming into Los Angeles for these tech companies. I would say that the weaker companies will fade out and the stronger ones will continue to grow. There has been concern for years about the tech space, but I don’t see it being like the Dot Com crash. We have tech space as well as commercial production or creative advertising. We have different users in creative office, and creative office is office now, and it is very diverse in terms of its tenant mix now.