L.A. Office Market Stumbles in the Second Quarter

The Los Angeles office market has had a bumpy start to its recovery. According to a new report from Avison Young, the office vacancy in L.A. has increased to 17.8% as rents tumble and concessions rise. The metrics show that tenants are exiting office space—not moving to new locations.

Work-from-home policies are the primary reason for the reduction in office usage, but it isn’t the only reason. John Eichler, a principal at Avison Young, also says that business challenges and the co-working sector have both contributed to diminished demand. “A flight to quality among office users is a natural, cyclical trend and not unique to this post-COVID cycle,” says Eichler. “Typically, the industry/user groups that have been most likely to take advantage of this discounted environment are those whose businesses have either thrived or held-up relatively well from both a revenue and employment standpoint. Timely examples of companies with revenues that have surged during the pandemic are of course tech and entertainment users as well as Am Law 100 firms and institutional finance companies.”

It might be normal to see rising vacancy and lower rents following an economic dislocation, but landlords are also offering both monetary and term concessions. “As is typical when vacancies rise considerably, landlords increase monetary concessions including lower rental rates and increase free rent and TI allowances,” says Eichler. “However, in this cycle, landlords are also offering significant term concessions in the form of both lease term reductions and through options for tenants to not only terminate their leases before the scheduled expirations, but also, in some cases, at low fee-penalties for doing so.”

One area of improvement: the sublease market. At the start of the pandemic, some companies shed office space as a reflex, but many of those same industries performed well during the pandemic. “Many sublease-related vacancies were impulsive reactions to the initial stages of the pandemic, when many companies—in some cases the most profitable and growing—were concerned about the recessionary impacts to their businesses,” says Eichler. “However, as many of these same companies ended up thriving during the pandemic, and maintaining their work forces, some have either pulled their sublease offerings or are currently rethinking whether they may need to reoccupy some of the space that they had offered for sublease. Many companies in the advertising industry are contemplating this.”

In response to these trends, the capital markets have hit the pause button. “Within the office sector—both traditional and creative—we should continue to expect muted activity,” says Eichler. “I say this because there is either not a lot of institutional money chasing value-add opportunities, or because owners of core and core-plus properties with “harvestable” gains would have trouble recycling those gains into new opportunities.”