LA Trophy Office Market Softens

Los Angeles Office Market Grapples with Rising Vacancies, Tenant Downsizing

LOS ANGELES – Los AngelesS premier office market is facing headwinds as increasing vacancy rates and a trend of major tenants reducing their footprints create challenges for landlords, according to recent data.

The vacancy rate for Class A office spaces in Los Angeles County reached 23.6% in the first quarter of this year, with Class B properties not far behind at 16.9%, commercial real estate services and investment firm CBRE reported. The overall office vacancy rate for the city stands at a concerning 24.2%.

These figures, first reported by Bisnow, underscore the shifting dynamics within the Los Angeles commercial real estate landscape.

Net absorption figures, which measure the change in occupied space, paint a similarly discouraging picture. Class A buildings experienced negative absorption of 698,000 square feet, while Class B offices posted a loss of 207,000 square feet.

In total, the Los Angeles office market recorded negative absorption of 1.1 million square feet during the first quarter, continuing a trend seen in six of the last seven quarters. This sustained period of negative absorption indicates that more space is being vacated than occupied, putting downward pressure on rental rates and property values.

While the term “flight to quality” – the idea that tenants are moving to newer, more desirable buildings – continues to circulate, the reality in Los Angeles appears to be more complex, according to industry experts.

Blake Mirkin, vice chairman at CBRE, suggests that the rise in vacancies among Class A properties isn’t solely driven by tenant dissatisfaction.Rather, he attributes it to the evolving needs of larger companies.

“The really large,successful companies that are taking 50,000 square feet and more are generally looking to Class A because they can — they’re successful,they can pay the rent,” Mirkin told Bisnow. “But many of them are downsizing.”

This trend is exemplified by several high-profile moves,including fast-fashion retailer Forever 21’s exit from its offices at brookfield’s california Market Center. Wedbush Securities, a financial services firm, recently relocated its headquarters from downtown Los Angeles to a smaller office space in Pasadena.

Entertainment giant Disney is also poised to vacate its space at the Fox lot in Century City as part of a consolidation effort within its existing properties. The move will leave a meaningful vacancy in the desirable Century city submarket.

Despite these changes, Mirkin argues that tenants aren’t necessarily abandoning high-quality buildings altogether adding, “Higher vacancy and negative absorption for Class A space don’t necessarily contradict the flight-to-quality mantra. They’re still in Class A — just not as much of it.”

Several large lease transactions, exceeding 100,000 square feet, did occur during the quarter, including both new leases and expansions. However, these deals were not enough to offset the overall negative trend, and initial expectations for a robust rebound at the start of the year were not met.

“It really did feel as though January was going to be a resurgence of activity,” Mirkin told Bisnow. However, unforeseen obstacles, such as wildfires on L.A.’s Westside, disrupted this momentum. “The first quarter was not as exciting as we thought it was going to be.”

The Los Angeles office market finds itself at a critical juncture, requiring landlords and developers to adapt to the evolving needs of tenants and the broader economic landscape.As companies re-evaluate their office space requirements in the wake of hybrid work models and economic uncertainties, the future of the city’s office market remains a topic of keen interest and ongoing analysis.

what innovative solutions do you think landlords should make to tackle these challenges?

Interview: Navigating the Shifting Sands of the Los Angeles Office Market

Archyde News Editor,in conversation with Alexandra Sterling,Commercial Real Estate Analyst at Sterling & Vance Consulting,about the challenges facing the Los Angeles office market.

The Current State of affairs

Archyde: Alexandra, thanks for joining us. Recent data paints a concerning picture for the Los Angeles office market.Can you summarize the key challenges?

Alexandra Sterling: Certainly. The primary issue is the rising vacancy rates, particularly in Class A office spaces, which are nearing 24%. We’re also seeing negative net absorption, meaning more space is being vacated than occupied. This downward trend puts pressure on rental rates and property values across the los Angeles office market.

Decoding “Flight to Quality”

Archyde: the term “flight to quality” has been circulating. Though, the reality seems more complex. What’s your take?

Alexandra Sterling: The idea that tenants are simply moving to newer buildings isn’t the full story. While some tenants might potentially be seeking newer or more modern options, a critically important factor contributing to Class A vacancies is tenant downsizing. Successful companies are reducing their footprints, which is more of a factor than tenants abandoning quality altogether.

Downsizing and Consolidation

Archyde: Could you elaborate on specific examples of downsizing within the Los Angeles commercial real estate landscape?

Alexandra Sterling: We’ve seen this trend with Forever 21, leaving the California Market Center, and Wedbush Securities relocating to a smaller space. Disney, too, is consolidating its space, leaving a meaningful vacancy in century City. It’s a definite shift.

the Impact of Hybrid Work and Economic Uncertainties

Archyde: Hybrid work models and economic uncertainties must influence the market. How are these factors playing into the shift?

Alexandra Sterling: Absolutely. Companies are reevaluating their space needs in light of remote and hybrid work possibilities. Economic uncertainties add another layer of caution, as businesses are more conservative with their real estate investments, opting for smaller spaces or seeking to renegotiate leases. This impacts both Class A and B properties.

Looking Ahead: what’s Next for Landlords and Developers?

Archyde: What are the key takeaways for landlords and developers as they navigate these changes in the Los Angeles commercial real estate market?

Alexandra Sterling: Adaptation is essential. Landlords need to be flexible, considering tenant needs, and potentially offering incentives. Developers should consider projects tailored to the evolving demands. Focusing on tenant engagement, incorporating amenities and flexible space designs are vital for long-term success.

A Thought-Provoking Question

Archyde: Considering the various factors, what adjustments do you believe are crucial for the revitalization of the Los Angeles office market?

Alexandra Sterling: Successful landlords are working with tenants in innovative ways and adapting. I believe a blend of creative lease structures alongside creative work spaces is a critical path going forward. What innovative solutions do you think landlords should make to tackle these challenges?

Archyde: Thank you, Alexandra, for your insights. This has been a very insightful discussion.