The Real Estate Quarterly – Difficulty Leasing

The Real Estate Quarterly – Difficulty Leasing
The Row DTLA has seen some leasing activity this year.

The office market continued to be choppy in Los Angeles during the first quarter as employers wrestled with getting employees back to the office and grappled with how to make the best use of their space.

During the first quarter, the office vacancy rate was 24.1%, up from 14.4% the first quarter of 2019, before pandemic-related lockdowns shutdown many offices, according to data from Jones Lang LaSalle Inc.

“The narrative of office as an asset class remains in flux,” said Jaclyn Ward of JLL. “There’s no doubt about that.”

Ward said parts of West Los Angeles have been problematic. Take Culver City, for example. The city, which counts Inc. and Apple among its tenants, saw a vacancy rate of 34.6%, up from 33.8% the previous quarter and dramatically up year-over-year from 22.5%, according to JLL data.

The West Los Angeles/Olympic Corridor vacancy rate shot up to 36.7% from 20.1% last year, JLL found.

Despite some of these big jumps in vacancy, other parts of the Westside, including Beverly Hills, Santa Monica and Westwood, have remained largely flat hovering just above 20% vacancy as they did last year.

“There are pockets of West L.A. where there are older quality buildings,” Ward said. “They haven’t been renovated. There’s not an interesting story relative to what they’re building or to what the landlord can offer and those are struggling.”

Ward does observe a bright spot on the Westside.

“There are pockets of L.A. like Century City that have very tight vacancies,” Ward said. “There are spaces that have tons of competition on them because there have been more traditional companies like law firms and professional service firms that have flocked to the high quality assets in Century City.”

While “Century City absolutely is the shining star relative to the broader market,” according to Ward, Culver City is not doing as well.

“A lot of the absorption and growth that we saw previously in Culver City was based on that prop up from tech growth and expansion. Culver City is still a very central market with high quality campuses and buildings but when the tech sell-off started and the spigot turned off relative to that big tech-tenant growth, Culver City has slowed.”

Ward added that there were pockets of Santa Monica and Playa Vista that have also slowed for the same reason.

Ward identified a four-pronged “perfect storm” phenomenon occurring concurrently contributing to the escalating vacancies: The broader economy is approaching a recession; rising interest rates as the Feds moves to curb inflation; the right-sizing of the tech market; and post-pandemic hybrid workplaces.

“If you have people not making decisions, you’re not going to see high absorption,” Ward said.

Until recently, she said, the tech industry was a reliable driver.

“L.A.’s tech growth and L.A.’s tech expansion that has happened in the past has really propped up a lot of the L.A. submarkets for years,” Ward said. “Even during the pandemic, prior to the tech sell-off, these large companies were still land-banking big blocks of space for growth.”

That expansion has stalled, contributing to the rise in available space.

Other markets

Other markets are seeing difficulties as well.

Wilshire Corridor has seen vacancies hit 33.2%. Pasadena is hovering at 25.1% while Glendale hit 25.7%, according to JLL data. Downtown has also notched upward since last year.

The downtown market has seen other difficulties as well: a number of defaults on towers.

Earlier this year Brookfield Corp. defaulted on $784 million worth of loans on two towers. SEC filings indicate that Brookfield, one of the largest office owners in downtown, failed to pay a $465 million loan package for the Gas Company Tower at 555 W. 5th St. and $319 million in loans for 777 S. Figueroa St.

Also this year, Oaktree foreclosed on Coretrust Capital Partners’ 914,000-square-foot tower 444 S. Flower St.

Last year, Broadway Trade Center at 801 S. Broadway was foreclosed on. An affiliate of Starwood Capital, a lender on the property, acquired the building.

Union Bank Plaza also hit a speedbump. The 675,945-square-foot property sold for $104 million this year, a far discount from the $250 million the property was once expected to fetch.

However, even in a submarket like downtown Los Angeles, where vacancy is at a high 23.9%, Ward said there are some bright spots.

Ward and her team did 300,000 square feet of leasing at Row DTLA last year plus an additional 90,000 square feet at the mixed-use site since the start of this year. Row DTLA a mixed-use project with restaurants, retail and office space. Four different tenants seized the available square-footage: a 50,000-square-foot fashion tech company, a 25,000-square-foot media company, a 5,000-square-foot law firm and a 15,000-square-foot consumer brand company.

“There are high-quality, well-activated, well-amenitized buildings that have really healthy activity right now,” Ward said.

At Row DTLA, owner Atlas Capital Group built out more than 100,000 square feet of spec suite space prior to Covid.

“We’ve had tremendous activity in that because Row answers the call relative to high quality, well-activated, amenitized, lots of parking,” Ward said.

Ward also points to Silverstein Properties, owner of the U.S. Bank tower, as another example of something going right in downtown Los Angeles.

“They just spent $60 million amenitizing and upgrading that office tower,” Ward said.

Feeling the changes

Matt Moran of Project Management Advisors partakes in the management and execution of office projects.

“Some of our clients are landlords and some of our clients are tenants so we have the unique insight into both worlds,” Moran said.

From his vantage point, Moran has felt a change in the office market.

“We’re seeing a slowdown in the commercial work,” Moran said. “What we feel is contributing to that is a two-fold: you had the whole pandemic which resulted in a big hybrid work atmosphere. As we transition back to the office, we’re seeing some economic challenges. We’re hearing it’s harder to borrow money for office.”

Moran offers reasons why downtown Los Angeles vacancy is hovering on the high end. Moran, who works downtown and cites safety concerns, said “being downtown is not very desirable.” The homeless crisis has worsened and so has crime.

“After the pandemic and the whole return to office, the tower typology is suffering a bit,” Moran said. “We’re seeing the move go to low-rise, outdoors-adjacency, amenities — that can be a challenge downtown.”

According to Ward, however, tenants are renewing space.

“Renewals remain an attractive option for tenants who have a workplace strategy that’s in flux but it very much depends on the type of business and industry that those tenants fall within,” Ward said.

Ward identified high-caliber law firms, media and entertainment companies among those renewing.

“Of course, there are tenants electing not to renew and downsizing as their workspace strategy shifts,” Ward said.

He added that there’s also still a vast market for sublease space.

The amount of sublease space in Los Angeles has increased substantially. There was 10.4 million square feet of sublease space available in the first quarter of the year, up 14% year over year from 9.1 million square feet, according to Savills data. That is also up from the third quarter of 2021, in the midst of the pandemic, when available sublease space stood at 8.2 million square feet.

“Space is sitting on the market longer,” said Savills Director of Research Mike Soto of the reason for the uptick.

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