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Thursday, Jun 13, 2024

Real Estate Quarterly: Sluggish Quarter

Across the Greater Los Angeles market in the fourth quarter the office sector saw both vacancies and the shedding of space climb.

“We continue to see negative absorption in our submarkets,” said Kevin Bender, executive vice president at Jones Lang LaSalle.

While some areas like Culver City, Playa Vista and the South Bay remained relatively neutral, net absorption largely trended downward.

“There’s been a significant trend of negative net absorption in downtown Los Angeles and San Fernando Valley,” Bender said.

With zero construction, Downtown L.A. saw 22.7% vacancy and – 55,092 square  feet of negative net absorption for the quarter. The Valley, which also has no construction in the works, averaged 21% vacancy and – 444,889 square feet in negative net absorption.

For downtown L.A., there’s been a challenge in getting people back into the office.

“Professional service firms, law firms, financial institutions are leaving,” Bender said. “Century City has been the beneficiary.”

The Valley, meanwhile, is seeing some contraction due to slowdowns in the entertainment business.

“That’s still a process to what’s going to evolve,” Bender said. “We’ve seen positive growth and demand in Century City, Culver City and the South Bay. You’re starting to see some positive results over the past six quarters but still working through what that means in 2023.”

Westside is building up

The Westside submarkets of Century City, Culver City and Playa Vista all thrived. Century City came out of the fourth quarter with a 13.8% vacancy and an asking rent of $6.20. Culver City saw 30% vacancy and $4.21 asking rent. Playa Vista had a 23% vacancy and $6.36 asking rent. This is compared to the Westside’s average of 22.1% vacancy and $5.48 asking rent. The Los Angeles County totals averaged 22.5% with asking rents of $4.14 for the quarter.

“Your rental rates are still the highest of all of the market on the Westside,” Bender said. “It is definitely the strongest submarket in terms of rents and existing opportunities. Playa Vista has seen some softening, but it is still holding strong comparatively to others.”

On the Westside, there was 1.7 million square feet under construction in the fourth quarter.

“Most of that construction is not preleased so there is an effort to fill those new projects,” Bender said.

Trusted Media Brands renewed a lease in Culver City.

Other markets

Averaging a high vacancy of 32.7% — well above L.A. County’s average of 22.5% — the Wilshire Corridor is seeing an asking rent of $2.57 per square foot and a whopping 612,017 in negative net absorption.

“The biggest challenge in the Wilshire Corridor is the lack of velocity,” Bender said. “That’s going to be the biggest challenge in 2023. Most companies have continued to be patient with waiting to resolve or execute workplace strategies finally that they’re comfortable with.”

Another submarket that is seeing some softness is Hollywood.

“Hollywood has seen a slowdown with the major content drivers,” Bender said. “There’s going to be efforts to see some redevelopment of projects. It’s been coming off strong demand in the last five to seven years.”

In the Tri-Cities, Burbank once again had the lowest vacancy when compared to Pasadena (25%) and Glendale (24.6%). However, at 15.2%, Burbank’s vacancy tripled year over year from when it was in the single digits.

Attracting tenants

Companies will need to find ways to lure more employees into the office, and likewise, building owners will also have to become creative, experts agree.

“Landlords will need to create some amenities at the office building that will make people want to go into the office,” David Solomon, senior executive vice president at Colliers, said. “If they have to take some of their rental area away from their tenant and make it a common space, they will.”

Class A buildings in coveted submarkets, experts agree, have become a magnet for businesses.

“Some of the better assets I have in Calabasas,” Solomon said. “A year before the pandemic there was a building that was bought by Cruzon and rebranded as the Commons Office. Rents increased and occupancy went up. It’s attributable to what I call flight to quality. We’ll pay a little more to go to the best office space.”

Solomon makes a car analogy: A person may scoff at paying three times the price for a Toyota but will gladly pay the same amount for a Porsche because of the prestige, experience and qualities that come with the sports car.

Both Bender and Solomon said that the market will continue to produce mixed results as companies try to figure out how to go forward in terms of workforce and workplace footprint.

“There’s still going to be attrition and contraction,” Bender said. “High-quality tenants are going to contract to allow more mobility for employees. Many tenants will remain the status quo.”

Landlords will need to create some
amenities at the office building that will make people want to go into the office.
David Solomon

Landlords and tenants have become creative. One JLL deal in Q4 saw Trusted Media Brands elect to renew its lease at the same location at 5762 W. Jefferson Blvd. near Culver City but downsize from 30,000 to 23,000 square feet with upgrades to the site. The landlord will perform the construction to ensure a smooth transition to the soon-to-be renovated space.

Bender describes the current atmosphere as a tenant’s market.

“It will create some challenges for landlords and there will be rental concessions,” Bender said. “I don’t think we’re going to see a big demand in office space because companies will enact solutions that will allow more flexibility and less space.”

Solomon believes the lull in the fourth quarter is cyclical.

“We’re going to see demand pick up again,” Solomon said. “I don’t think it will go crazy anytime soon, but you will see more people go back to the office.”

Looking forward

Some expect to see softness in the market continue.

“The fourth quarter is indicative of what we expect to see in 2023,” Bender said. “Most markets will remain neutral or continue with negative net absorption,” Solomon said.

“The biggest thing that’s impacting the office market is the return to work and what that means,” Solomon added. “On the one hand, you have companies like (Walt Disney Co.) that said they’re going to require four days at the office. On the other hand, you can probably have hybrid schedules and get things done, but I think they’ll be efforts to engage with their employees.”

Solomon noted that there’s confusion amid companies in the office market as to whether to renew leases, downsize or expand.

In mid-December, one of his clients, which had several locations in the Conejo Valley, was going to expand between 10,000 to 20,000 square feet.

“Ultimately, the tenant shelved the expansion and just did a renewal,” Solomon said. “They were unsure how much space they needed.”

Moving forward into the new year, Bender said, “We’re going to see more activity from tenants, but they’re going to be executing their strategies and that will include giving back space. That will create an overall neutral to flat negative absorption across the board.”

Solomon shared an overall optimism about the region in the long term.

“L.A. and California is still an in-demand market,” Solomon said. “There’s an intellectual capital that’s always been here. There’s innovation. The companies grow too big and move out and other companies take its space.”

Solomon has a bright outlook for the new year, despite the current data.

“I don’t think it’s overly concerning,” Solomon said. “Office space is not dead. You’re not going to see office buildings mothballed with chains or some massive adaptive reuse. It will sort itself out. The smart owners will figure out how to make their buildings more desirable. There’s such diversity in our economy, it’s not just technology or entertainment or financial services. It always figures itself out.”

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Michael Aushenker Author