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4/12/24
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This report provided by real estate services firm NAI Capital Commercial
MARKET OVERVIEW
Despite the continuous rise in vacant space and ongoing construction projects, weak demand is hindering the LA County office market's slow journey to recovery. Landlords, wary of adjusting asking rent despite elevated vacancy rates, face a challenge to spur occupancy. In Q1, completed office construction added to the inventory since 2020 remains mostly vacant, at 31.3%. Additionally, the market grapples with a significant influx of sublease office spaces.
The evolving landscape of remote work and space utilization strategies drives a constant accumulation of vacant office space. This quarter's increasing vacancy rates propelled the overall vacancy rate up by 150 bps compared to the previous year, reaching 16.8%. Since January 2023, the market has added more than 1.9 msf of vacant space, culminating in a record high this quarter, approaching 66.3 msf. Remarkably, vacancy has consecutively increased each quarter since 2020 at the start of the pandemic. The amount of vacant space on the market now registers 32% above the peak reached during the Great Recession.
Substantially, vacant sublease space has accumulated, experiencing a 10.7% increase from 2023, reaching 7.1 msf– surpassing levels not seen since the Dot-Com Bust. Despite the incoming level of record sublease space onto the market year over year, asking rent remains stubbornly elevated, remaining flat from last year at $3.46/sf on a full-service gross basis. This quarter's lower leasing volume, down 22.4% compared to the end of last year, has exerted some downward pressure on landlord concessions, such as offering free rent depending on tenant credit and lease term commitment.
TRENDS TO WATCH
The abundance of office space concerns landlords while granting tenants leverage in negotiating favorable deals. However, the surge in available office space is driven by the evolving landscape of remote work, space utilization strategies, and employment trends.
Companies actively reducing excess office space have led to a significant increase in available sublease space quarter over quarter, up by 5.8% since the end of 2023 and 2.7% higher than Q1 2023, totaling approximately 11.5 msf — a new all-time high. In the South Bay, available sublease space now exceeds three times that of Q1 2009 during the Great Recession. Traditionally, the South Bay office market served as an outlet for overflow demand from LA West. With office space availability in LA West at an all-time high of 23.4%, twice the amount available in Q1 2009 during the Great Recession, the market is saturated with available office space.
Furthermore, unemployment in LA County is now at its highest level in nearly two years, with office-occupying sectors depicting lagging performance, according to the latest figures from the State of California Employment Development Department. The key sectors of employment that drive office space demand have seen negative growth year over year. Information experienced the largest year-over-year reduction, down by 36,000 jobs, followed by the motion picture and sound recording industries, which saw a decrease of 33,500 jobs, accounting for 93% of the employment decrease. Other subsectors reporting declines include telecommunications (down by 1,100 jobs), broadcasting and content providers (down by 1,000 jobs), publishing industries (down by 500 jobs), and computing infrastructure providers, data processing, web hosting, and related services (down by 200 jobs). Losses in other industries include professional and business services (down by 16,000 jobs) and financial activities (down by 2,500 jobs).
Currently, in this market, tenants pursuing office space hold the advantage, while landlords actively strive to uphold property value. These factors will drive the dynamics in the office market into the busier spring and summer season.
This report was prepared by J.C. Casillas, Managing Director, Research, NAI Capital Commercial
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