Office Availability in Greater LA Market Hits Record 28%

Despite an uptick in office leasing across greater Los Angeles, office availability has hit an all-time high, with landlords facing a sharp decline in office property values.

Office availability rose 0.9 percent to 27.6 percent in the first quarter from the previous period, according to the Commercial Observer, citing a report from Savills. Available sublease space increased to 10.8 million square feet.

“This (availability rate) is another historical high as office space demand has remained below pre-pandemic levels due to hybrid workplace strategies, as well as office-using employment growth that turned negative over the last year,” Savills said.

At the same time, office leasing across metro L.A. rose 45 percent to 3.2 million square feet between January and March, and 13 percent more year-over-year.

But the surge in leasing was mostly due to lease expirations and renewals, according to Savills. Five of the top 10 lease deals were renewals, two were relocation deals, and two were for new locations.

The big tech and media companies that once bolstered L.A.’s office market are now rapidly cutting their office spending and shrinking their footprints nationwide. Last week, Amazon.com said it planned to save $1.3 billion by shedding offices and ending leases early, according to the Observer.

The overall average asking rent for offices in greater L.A. rose to $3.94 per square foot per month last quarter, and was up 2.9 percent from a year ago, according to Savills.

Landlord concessions were also still at historic highs, but Savills expects more landlords will drop their asking rents this year as they get more aggressive at “chasing occupancy.”

Property owners are now girding for significant declines in office property values, with major losses during office building sales.

Late last month, Brookfield Properties cut a deal to sell its 1 million-square-foot 777 South Figueroa Tower in Downtown Los Angeles for $145 million — about half of the remaining debt on the property.

The deal with South Korea-based Consus Asset Management works out to $145 per square foot, in line with other Downtown office trades over the past year.

Two other Brookfield-owned buildings Downtown, the Gas Company Tower and EY Plaza, are both in court-appointed receiverships, and headed to foreclosure sale.

This doesn’t bode well for the future of L.A.’s office market. For investors waiting until the price of office buildings in Los Angeles drops to bedrock, the time is now.

“The long-awaited reset in office building valuations in the Los Angeles office market is only starting as recent distressed sales at low valuations have become increasingly common,” Savills concluded. “For those office properties in a weaker financial position or in a less-desired location, expect fundamentals to continue to deteriorate.

“As a result, 2024 will be the year that more owners decide to sell their properties at a loss or realize that they need to convert or redevelop their properties to non-office use.”

— Dana Bartholomew