Downtown LA’s office market drifts in down cycle

Hollowed out offices. Free-falling building values. A commercial market that appears as stalled as traffic on an L.A. freeway.

Despite the strong headwinds for Los Angeles landlords and office brokers, panelists hashing out “Commercial Challenges: Inside LA’s office struggles and newest opportunities” saw rays of hope. The panel was part of The Real Deal’s LA Real Estate Forum at the London West Hollywood hotel on Sept. 21.

“I’m an optimist,” declared panelist Christopher Rising, co-founder and CEO of Rising Realty Partners, which has numerous office investments in Downtown.  “Real estate cycles. We’re in a down cycle. I remember the early ‘90s, there were shootings in Westwood, Downtown L.A. was crime-ridden. We came back from that.

“We’ll have new leadership …. Leadership wins. With the Olympics, L.A. will be a different place.”

The discussion panel, moderated by Senior Reporter Isabella Farr and featuring participants Rising and Laura Stumm, vice chair at brokerage Newmark, covered office real estate across Los Angeles with special emphasis on Downtown.

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For Rising, the big question is getting workers back to the office, starting with government workers returning to Downtown — the center of the spoke and the only market with a real transportation system — is key. Before the pandemic, 500,000 workers commuted into Downtown, half of them government workers.

“It’s absolutely outrageous that the government can’t require a quarter of a million people to come to work,” said Rising. He added that a turnaround may require the government to clean up the streets and make Downtown safe. And it may require the government to create a program to buy troubled assets for new office ownership.

Travails Downtown include the KBS sale of Union Bank Plaza for $160 a square foot after listing it for $400 a square foot six years ago. And they include Brookfield writing down the value of its Wells Fargo Tower in Downtown by 26 percent. The Toronto-based firm has defaulted on $1.1 billion in loans tied to three office towers, including two now in receivership.

At the same time, prospective tenants demand new offices and amenities to lure workers back to the office, but landlords don’t want to spend the money on those upgrades, creating a chicken-egg dilemma for new lease deals.

However, the office market in L.A.’s upscale Century City remains strong, and many tenants have followed a “flight to quality.” 

“Century City has been a bright spot,” said Stumm, a member of Newmark’s capital markets team in L.A. “Essentially, you’ve got two streets. It’s a small office market. You’ve got an upscale mall. You’ve got the West Side.

“You’ve got walkability. And a lack of crime.”

On the finance side, as institutional investors have cooled on L.A. commercial real estate, family offices from around the world have stepped up for deals ranging from $15 million to $160 million, Stumm said, with the potential to go as high as $300 million.

She called these “hard money lenders” who judge deals with looser time frames and different metrics than traditional institutional investors.

“My buyer pool has gone from 100-percent institutional to 100-percent family office,” she said. “I was expecting three or four bids on a deal on the commercial side … and got 10 bids.

“So there is a market, there is a floor. … There is capital out there.”