Record Vacancies, Subleasing in LA Office Market

While net absorption treaded water in the Los Angeles office market in the third quarter, vacancies climbed to a record of 20% and available sublease space surged to a new high of 10.7M SF, which is nearly 5% of the current office inventory, according to Newmark’s Q3 report for the industry.

Newmark said cost-cutting measures by the tech sector is inducing tech players to reduce their office footprints in LA.

“Most tech company valuations have suffered notable losses in recent month. This is leading to cost-cutting measures, notably among firms that aggressively staffed up in recent years and exponentially grew their real estate footprints,” Newmark’s report said.

Notable sublease listings added in Q3 included Honey, with 132K SF in DTLA; Netflix, which listed 121K SF in Burbank—increasing the streaming giant’s sublease total in LA to 188K SF; and Herbalife’s listing of 98K SF in DTLA.

The market report indicates there are likely to more sublease listings added to the total in Q4. “Hiring freezes, slowdowns and layoffs are on the race,” Newmark said.

The only bright spot in the market report—and it’s barely a glimmer—is that net absorption in LA’s office sector leveled off at negative 2K SF in the third quarter, an improvement over the absorption amount of negative 261K SF in Q2. This was overshadowed by the surge in sublease space in Q3.

“Sublease availability has more than doubled from pre-pandemic levels and finding a tenant to backfill the average sublet offering is difficult amid a crowded [sublease] market,” Newmark’s report said.

“To mitigate against this, some tenants are opting to terminate leases and return spaces to landlords to list directly,” the report said.

Newmark also noted that landlords are exploring “alternative solutions.” It cited as an example landlord JPMorgan Chase allowing the Westfield Group to terminate its lease on two floors the company had listed for sublease at 2049 Century Park E. in Century City to sign a direct long-term deal with Kirkland Ellis for 57K SF.

Newmark expects sublease availability to increase in the quarters ahead as more companies slash their overhead.

“While this will further crowd the market, it is worth noting that trophy sublease offerings are in demand. High-end plug-and-play space is desirable in an environment where tenant improvement construction timelines are protracted and both material and labor costs are rich,” the market report said.

Newmark noted that return-to-office mandates are increasing from companies seeking to reestablish their corporate culture, but those issuing the mandates are trying to do it quietly without provoking a public backlash from employees.