2020 L.A. Office Leasing Hits 20-Year Low

The numbers are in, and Los Angeles’ office leasing activity was grim in 2020. According to a new market report from Savills, office leasing totaled only 10 million square feet last year, the lowest in 20 years.

Office leasing transactions were down 44% compared to 2019, when office leasing totaled 18 million square feet in the market. Clearly, the pandemic was the root cause of this fracture in the office, due largely to business closures and work-from-home policies. These policies have at best delayed real estate activity and at worst has catalyzed a fundamental change in office usage.

In 2020, the low leasing activity drove the vacancy rate up to 22.5%, a 10-year high. At the close of 2019, the vacancy rate in Los Angeles was 18.1%. In addition to the meager leasing activity, the increased supply of sublease space also contributed to a higher availability rate. The sublease supply increased 76% to 8 million square feet in Los Angeles.

Despite the high availability rate, increased sublease supply and low total leasing activity, rents have still managed to rise this year, up 6.7% year-over-year to $3.74 per square foot. The Savills report, however, says that this is misleading. New construction deliveries, particularly of trophy assets are driving the overall increase in rates. The firm, however, expects asking and taking rents to decline due to the wide availability of office space.

The end-of-the-year surge in COVID cases—which have made Los Angeles the epicenter of the outbreak—will not help the struggling office market. In the fourth quarter of 2020, leasing activity totaled only 2.1 million square feet, while the vacancy rate increased 240 basis points in the fourth quarter alone. The local economy also took an additional hit at the end of the year. For these reasons, Savills expects restrained leasing activity at least through the first half of 2021.

It isn’t all bad news. The availability of the vaccine has revitalized some industries and restored confidence. In this second wave of outbreak, studio production was deemed essential, providing jobs and improving wages, and technology and life sciences companies have had strong fundraising, which could lead to future expansion and growth. These factors support a strong future office environment once the pandemic has subsided. Overall, Savills is cautiously optimistic.

Los Angels isn’t the only market to suffer a blow to office leasing in 2020. In December, a report Colliers International found a 55% decline in leasing activity for the month of November and an 80% decrease year-over-year. In November, office leasing transactions totaled .79 million square feet in Manhattan, compared to 3.58 million square feet in November 2019. As a result, the market’s vacancy rate increased yet again for the sixth straight month to 13.5%, the highest vacancy rate in the market since 2003.