The Los Angeles office market kicked off 2024 with a surge in leasing activity, a glimmer of hope in an otherwise subdued landscape. A total of 3.2 million square feet (msf) of office space were leased in the first quarter, a notable 45 percent jump from the previous quarter and a 13 percent increase year-over-year. This unexpected boost was largely fueled by major lease renewals from industry titans like Snap, Lionsgate, and Riot Games, who reaffirmed their commitment to the LA market.
However, beneath this veneer of optimism lies a market grappling with significant challenges, according to a recent industry market report for the Los Angeles market in the first quarter of 2024 by brokerage firm Savills. The availability rate continued its upward trajectory, reaching a historic high of 27.6 percent. This reflects a growing trend of companies embracing hybrid work models and a decline in office-using employment, particularly in the technology and entertainment/media sectors. These once-dominant players have scaled back their office footprints, leaving a void in the market and shifting the leasing landscape towards renewals rather than new deals.
Landlords, facing this new reality, are pulling out all the stops to attract and retain tenants. Historically high concessions are the norm, and some owners are even slashing asking rents in a desperate bid to fill vacant spaces. This aggressive pricing strategy is putting downward pressure on the overall average rental rate, which nonetheless ticked up slightly to $3.94 per square foot (psf) per month due to the availability of higher-priced spaces.
Adding to the complexity, the sublease market is experiencing growth, as well. Sublease space increased to 10.8 msf in Q1 2024, as more companies test the waters for subleasing their unused office space. This trend is expected to continue as businesses reassess their real estate needs in light of evolving work patterns.
The much-anticipated reset in office building valuations is also unfolding. Distressed sales at bargain prices have become increasingly common, particularly for properties in less desirable locations or facing financial difficulties. This trend is poised to accelerate in 2024, with more owners facing the difficult decision to sell at a loss or explore alternative uses for their properties.
The future of the LA office market remains shrouded in uncertainty. Leasing activity is expected to remain largely dependent on renewals, as few industries are experiencing robust growth that would drive demand for new office space. Landlords will likely continue to offer generous concessions and may even resort to further rent reductions to remain competitive.
The ongoing reset in office building valuations will have far-reaching consequences, ultimately reshaping the leasing market’s economics. New owners, acquiring properties at a lower basis, may be able to offer more attractive rental rates, potentially creating new opportunities for tenants and altering the dynamics between landlords and occupiers.
In conclusion, the LA office market is at a crossroads. While the recent surge in leasing activity provides a glimmer of hope, the underlying challenges of high availability rates, declining office-using employment, and the ongoing valuation reset cannot be ignored. The market is evolving rapidly, and both tenants and landlords will need to adapt to this shifting landscape to thrive in the years ahead.
