The Los Angeles office market has seen another stagnant quarter, with moderate leasing activity and vacancies continuing to climb. According to a Los Angeles third quarter report from Kidder Mathews, the office market has remained slow overall. However, the market continues to see interest in high-amenity spaces, especially from tech and entertainment users.
“Leasing activity has been slow for a variety of reasons. Chief among them is the fact that many office users are continuing to find the right balance between in-office, remote work and hybrid options – which will have a notable impact on future space planning,” Gary Bargona, head of research for Kidder Mathews, said. “Many tenants pressed pause in 2021 so they can find the right space for their company considering the new guidelines with social distancing, etc. There is currently an abundance of Class A sublease space throughout the market and vacancies remain elevated, especially in downtown Los Angeles.”
The third quarter of the year marked the sixth consecutive quarter of negative net absorption in Los Angeles’ office market, with a loss of 497,818 square feet. Vacancy rates in Los Angeles’ office market also stayed relatively high at 13.2 percent, an 11 percent increase from the year prior.
Leasing rates also remained stagnant at $3.45 per square foot on average, roughly four percent higher than the third quarter of 2020. In an effort to garner more interest, the report showed many landlords are offering discounted rents and competitive concessions. Sublet space is also on average $0.40 less than direct asking rates as a way to incentivize potential tenants.
“Sublease space remains at an all-time high – growing compared to last year. However, many market indicators suggest recovery is just around the corner as lease rates have stabilized and overall demand is slowly trending upward,” Bargona said.
While vacancies increased, Kidder Mathews still reported more than four million square feet of office space leased in the third quarter of year. The largest lease of the quarter was signed by Fabletics. The activewear retailer signed a lease for 137,000 square feet at 2150 Park Place in El Segundo. Activision also occupied 87,526 square feet at 5454 Beethoven Street in Marina Del Rey.
“Major leases are coming from tech companies and the entertainment industry. As a result, creative office space for employees is still hot. Silicon Beach continues to see large leases as it is home to major companies, such as Activision, Netflix, Facebook, Apple, Hulu and Snap Inc.,” Bargona said.
New leasing is instilling hope in many investors, with large-scale transactions continuing to take place. However, with many employees switching to remote or hybrid work schedules, investors are showing more interest in high-quality amenity spaces as well as necessary facilities, like medical offices. Spaces leased to large tech or media companies also continue to be of value to investors.
For instance, Prospect Ridge Advisors purchased the luxury Burbank Empire Center office campus for $106 million, or $455 per square foot. Divco West Services also acquired another luxury office complex, Lankershim Plaza, in North Hollywood for $92 million, or $511 per square foot, and Magan Medical Clinic in the Eastern San Gabriel Valley was purchased by Sierra Health & Life Insurance Co. for $49 million, or $783 per square foot.
These trends were also observed in the construction taking place over the course of the third quarter. For instance, Hudson Pacific Properties is in the process of developing its 584,000 square foot office complex, located at 10800-10900 W. Pico Boulevard. Two large-scale office buildings totaling 445,000 and 355,000 square feet are also expected to be completed by Worthe Real Estate Group in 2023.
Despite ongoing construction and recent activity from investors, leasing will likely remain slow as employers reconsider their office space needs. However, leasing activity from large companies is anticipated to continue, which is likely to hold rental rates steady in the immediate future.
“Leasing activity should remain relatively flat in the near term – until tenants begin to finalize their new work atmosphere and space requirements. Tech and entertainment will continue to lead the way with regard to demand and leasing. User sales should pick up as tenants try to save on rental costs and take advantage of the low interest rate environment,” Bargona said.