LA office building sales plummet 41% in 2023

Expensive debt, Measure ULA and tenant hesitance fuel the slump

LA Office Building Sales Plummet 41% in 2023
(Illustration by The Real Deal with Getty)

Rising interest rates, the City of Los Angeles’ new transfer taxes, remote work and lackluster tenant demand made buyers uninterested in L.A. office buildings last year.

Investors spent about $2.2 billion on L.A. offices in 2023 — a 41 percent decline from 2022, when investors spent $3.73 billion, according to Avison Young reports. 

The 2023 total is also a fraction of the roughly $10 billion that investors spent in the heyday of 2016, when foreign investors poured capital into U.S. commercial real estate and interest rates were lower. 

The average price per square foot for an L.A. office building dipped last year to $247, down from $462 in 2022. Many properties, including towers in Downtown L.A., have sold for significantly less than that — an investment group led by Carolwood bought the AON Center for $134 a square foot. 

“It’s kind of the red-headed stepchild product type right now,” CBRE broker Todd Tydlaska said of office in December. “The most draconian investors are just underwriting the net present value of the in-place leases and assigning very little value to the residual.” 

Measure ULA was a blow to commercial real estate in Los Angeles, given it adds a 5.5 percent transfer tax on all sales above $10 million. Though some managed to sell off assets before the taxes went into effect on April 1, many have been forced to hold, according to brokers and investors.

Many potential buyers are shying away from L.A.’s office market because of weak leasing across the county. 

The fourth quarter of last year marked the sixth consecutive quarter that more office space was put on the market for lease than was taken off, according to CBRE. 

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From October through December, about 2.9 million square feet of leases in the L.A. metro market were signed — down 20 percent from the last quarter of 2022, according to Avison Young. 

Landlords are still offering “heightened concessions” to help get leases over the finish line, CBRE noted in a fourth-quarter report. 

About 22 percent of all office space was available for lease at the end of the year, according to CBRE. Since 2020, when remote work took hold, a new vacancy record has been set every three months. 

Michael Soto, a research director at Savills in Los Angeles, noted that leasing got off to a slow start this year, but he predicted larger deals would close in the first quarter. 

Earlier this month, Snap, the company behind Snapchat, signed a 10-year lease extension for about 467,000 square feet at Boston Properties’ Santa Monica Business Park, a 1.2 million-square-foot office at 3420 Ocean Park Boulevard. 

One thing that might motivate sales this year is maturing debt. 

About $21 billion in commercial mortgage-backed securities loans tied to properties across L.A. and Orange Counties are coming due in 2024, according to data from Morningstar Credit Analytics. About 22 percent of that is tied to office buildings. 

“We can expect increased investment activity throughout L.A. as more loans approach maturity and owners make their decisions to either refinance or sell their assets,” Avison Young wrote in a fourth-quarter report.