Soft leasing in second quarter signals “bifurcated” LA office market

Office leases have slowed and rents have fallen across greater Los Angeles, with distress in the market sector expected to rise through the year.

Some 2.7 million square feet of office leasing deals closed across Los Angeles County in the second quarter, 18 percent fewer than the prior period, according to the Commercial Observer, citing a report from Savills.

Before the pandemic in 2020, tenants regularly leased more than 4 million square feet of offices during each three-month period.

“Leasing activity continues to be mostly expiration-driven as occupiers remain highly focused on controlling costs,” Savills said.

Of the top 10 office leases signed from April through June, only one was for a new tenant location, through a sublease deal. Three of the top 10 leases were for expansions.

Average asking rent across greater L.A. fell to $3.90 per square foot, from $3.94 the previous quarter. At the same time, the average Class A asking rents rose by 7 cents to $4.10 per square foot.

“The Los Angeles office market remains bifurcated with some submarkets such as Century City seeing historically high asking and effective rent, while in softer markets such as Downtown L.A., effective rents have been decreasing due to higher landlord concessions,” the Savills report said.

Because of higher borrowing costs, more office landlords in L.A. are expected to default on loans and surrender their properties to lenders before the year ends.

That will put more negative pressure on leasing, according to Savills, resulting in more “flight to quality” and “flight to capital” as tenants seek properties unburdened by debt.

The “bifurcation” between the haves and have-nots may force more landlords to find their properties are no longer competitive, leading them to consider office conversions or redevelopment, the report added.

The top five leases in the quarter were on L.A.’s Westside, including three in Century City, according to the Observer. Terms of the leases were not disclosed.

The largest lease was by Universal Music Group, which signed a renewal deal for 225,800 square feet at 2220 Colorado Avenue in Santa Monica. Trailing in second was a deal by  law firm Latham & Watkins to lease 98,800 square feet at 10250 Constellation Boulevard in Century City.

Third was a deal by FPM Development to sublease 94,100 square feet at 3101 West Exposition Boulevard in Culver City. 

— Dana Bartholomew

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