Is Tech Leasing Enough to Offset Declines in L.A.’s Office Market?

There is some good news coming out of the office sector in Los Angeles: technology and media company leasing activity. According to the recent third quarter report from Newmark, FAANG companies are helping to insulate the market; however, vacancy rates are still continuing to rise as absorption rates fall.

“Tech titans Facebook, Amazon, Apple, Netflix and Google want to develop original content and programming for distribution on their networks, and tech and Hollywood are mixing,” Bill Bloodgood, executive managing director and agency market leader at Newmark, tells GlobeSt.com about what is driving leasing for this tenant group. “Los Angeles has the underlying fundamentals to advance this. Namely, a preexisting film and TV infrastructure; the third largest tech ecosystem for start-up companies in the world; one in eight employees has a creative job; wages are competitive relative to Silicon Valley; substantial venture capital funding; and its beaches and agreeable weather. These qualities also appeal to smaller companies.”

However, this activity might not be enough to offset declines in the office leasing market, particularly compared to more established technology markets, like Seattle. “A broad tenant base and a region of such diverse tenant mix is more susceptible to shifts in the economy,” says Bloodgood. “To phrase it another way: Los Angeles is not a Fortune 500 market from an office occupancy standpoint but rather a multi-tenant market. The region will lag a market like Seattle, where companies including Microsoft and Amazon have dominant footprints.”

However, there is hope for the future of L.A.’s office market. The declines are directly tied to unemployment losses, and Bloodgood expects the market to recover in step with the jobs market. “Newmark is closely monitoring county unemployment, and when employment recovers, and with it, office-using job totals, then overall leasing activity will progressively rebound. The county has a long way to go, when considering September’s 15.1% unemployment rate,” he says. “Although it has improved from May’s record high of 20.%, it is substantially higher than December 2019’s 4%.”

The jobs market has already started to rebound with the return of film and television production, and that trend should help to catalyze activity in the fourth quarter and early next year. However, much of the office-using activity will depend on the course of the virus and the possibility of a vaccine. “While rising vacancy and declining rents are anticipated for the fourth quarter, the progressive return of filming and production will help jumpstart a key segment of the economy,” says Bloodgood. “To speak generally across all industries, most businesses are in a holding pattern as Los Angeles remains under a Tier 4 designation, under Governor Newsom’s four-tiered system that measures COVID-19 transmission rates in the state’s counties. Moving down in tiers allows a county’s economy to reopen further. It is my hope COVID cases do not increase in the months ahead.”