OFFICE MARKET ASSESSMENT
The Los Angeles office market is experiencing a slow recovery with 429k SF of direct net absorption in Q2, offsetting the losses incurred early in 2022. The quarterly gain comes after showing early signs of a recovery late in 2021 with positive absorption recorded for the first time since the pandemic emerged two years ago.
The office market has shown signs of stabilization as the rate of occupancy losses has significantly decelerated to only 109k SF of red ink over the prior 12-months. As a result of the quarterly leasing gains, the market-wide direct vacancy level remained unchanged in Q2 but has risen 70 bps Y-O-Y to a record high of 18.2%.
The Class A sector recorded 219k SF of direct net absorption in Q2, improving the trailing 12-months total to 486k SF of red ink. Class B properties registered its third straight quarter of leasing gains with 210k SF of direct space absorbed in Q2, bringing the 12-month total to 377k SF of occupancy gains.
Sublease availability rose by 91k SF to reach an all-time high of 9.4 MSF in Q2. The sublease space additions during the quarter included DirectTV (101k SF), Optum (81k SF) and Edgecast (79k SF).
Leasing activity has accelerated to 13.7 MSF over the trailing 12 months, up 54.8% since hitting its pandemic low early in 2021 but remains 27.9% below the pre-pandemic average. Leasing volume totaled 3.2 MSF in Q2, which is only 14.9% below its five-year quarterly average.
The largest lease signed in Q2 involved Amazon’s 208k SF deal at the Water Garden in Santa Monica. The other top leases inked included Forever 21 taking 162k SF in Downtown, First Republic Bank’s 156k SF renewal and expansion in Century City, and law firm Quinn Emanuel’s 139k SF renewal in Downtown.
Touring activity has picked up at a slow but steady pace as occupiers evaluate their future space needs and are more willing to execute on long-term leasing decisions. Technology and entertainment/media companies will continue to lead in the market’s recovery, but economic headwinds have prompted some tech companies to place a temporary hold on expansion plans as they assess market conditions.
Asking rents have risen by 1.4% year-over-year to surpass their prior peak. However, concessions such as rental abatement and tenant improvement allowances remain high as landlords have chosen to remain aggressive in chasing occupancy while keeping the face rates high.
The construction pipeline contains 3.4 MSF underway currently 47.3% pre-leased, which has fallen from its 6.6 MSF peak in Q3 2020. Developers delivered approximately 366k SF in Q2, with an additional 2.3 MSF of new product scheduled to deliver by year-end 2022.
The office market is expected to remain tenant-favorable in the near term as space availability options are plentiful, but pent-up activity should help improve leasing fundamentals and generate more occupancy as employees return to the office and more companies make long-term real estate decisions.