Big trouble ahead for the LA office market: report

A Q1 analysis by NAI Capital saw office vacancy rose to 10.4%, but full effects of the virus will also mean more landlord concessions, and a slowdown in new construction

The LA office market vacancy rate climbed to 10.4% in the first quarter, but the full impact of the economic slowdown is expected to be felt in Q2 and beyond (Credit: iStock)
The LA office market vacancy rate climbed to 10.4% in the first quarter, but the full impact of the economic slowdown is expected to be felt in Q2 and beyond (Credit: iStock)

In the Los Angeles office market, all the arrows are now pointing in the wrong direction.

From January through March, vacancy ticked up to 10.4 percent, and while 4.4 million square feet of space was under construction, just 46.7 percent of it was preleased.

That’s according to commercial brokerage NAI Capital, which said the full effects of the pandemic are expected to show in the second quarter, when vacancy will rise and landlords will offer more concessions and renegotiate leases to keep and attract tenants, according to the Q1 office report.

More bad news: NAI also predicted asking rents, sale prices, new construction and sale/leasing volumes would fall in the months to come.

The coronavirus has decimated the nation’s economy in just a matter of weeks, though its impact could only be partially seen in the January through March numbers.

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“The businesses that comprised a significant portion of recent growth are likely to shrink their footprints or put excess spaces on the market for sublease,” according to the report. “As office tenants close or work from home and social-distance for an indefinite period because of the coronavirus threat, vacancies are expected to rise and rents to be adjusted downward.”

Meanwhile, NAI reported average asking rents ticked up 2.1 percent in the first quarter compared to the same period in 2019, to a record $3.34 per square foot. Around 2.4 million square feet of space was delivered in the first three months of the year.

Office rents were flat in the first quarter in the city’s premier office markets of West and Central L.A. compared to the end of 2019. West L.A. still had the highest sales volume and leasing activity of any other submarket. About 700,000 square feet of space valued at $451 million was traded from January through March, and 1.5 million square feet was leased.

Activity in the San Fernando Valley and other northern L.A. markets ticked up in the first quarter as tech and media tenants in particular searched for cheaper alternatives to crowded markets like Hollywood.

Leasing transaction volume shot up nearly 20 percent from the fourth quarter and 1.7 percent year-over-year. Media production company ITV America signed the biggest lease of the quarter — 42,172 square feet at Lankershim Plaza in North Hollywood. It’s unclear how the pandemic could impact that trend.