OFFICE MARKET ASSESSMENT

The Los Angeles office market experienced 396k SF of occupancy losses in Q1 after showing initial signs of a recovery late in 2021 with positive absorption recorded for the first time since the pandemic emerged two years ago. Despite the negative absorption, the rate of occupancy losses has dramatically decelerated to 1.9M SF of red ink over the trailing 12-months. As a result, the market-wide direct vacancy rate has risen 190 bps from a year ago to 18.3%, reaching its highest level on record.

The Class A sector accounted for the bulk of the occupancy losses with 477k SF of direct space becoming vacant in Q1, pushing the trailing 12-months total to nearly 1.7 MSF of red ink. However, Class B properties registered its second straight quarter of leasing gains with 81k SF of direct space absorbed in Q1, bringing the 12-month total to 229k SF of occupancy losses.

Sublease availability increased by 717k SF to reach an all-time high of 9.3 MSF in Q1, reversing a trend of three consecutive quarterly declines. The quarterly hike was largely attributed to space additions by Farmers Insurance (580k) and Yahoo! (132k).

Leasing activity has accelerated to 14.0 MSF over the trailing 12 months, up 58.5% since hitting its pandemic low a year ago but remains 27.8% below 2017-19 pre-pandemic levels. Leasing volume totaled 3.4 MSF in Q1, up 38.0% compared to a year ago.

The largest lease signed in Q1 involved Creative Artist Agency’s 400k SF deal following its landmark merger with ICM. The other top leases inked included Lionsgate Entertainment’s extension on its 193k SF headquarters, Nike’s 93k SF expansion in Playa Vista, and law firm Buchalter’s 87k SF renewal in Downtown L.A.

Touring activity has noticeably picked up as occupiers continue to re-evaluate their future space needs and are more willing to execute on long-term leasing decisions. Technology and entertainment/media companies are expected to continue to lead in the market’s recovery, while studio leasing and development show no signs of slowing down.

Demand for newer creative projects built in recent years has been particularly strong and will likely continue to draw attention of leading creative users seeking to attract top talent and provide ample indoor and outdoor collaborative space.

Asking rents have risen over the past 3 quarters to surpass their prior peak. However, concessions such as rental abatement and tenant improvement allowances have increased as landlords have chosen to remain aggressive in chasing occupancy while keeping the face rates high.

The construction pipeline contains 3.7 MSF underway currently 44.6% pre-leased, which has fallen by 44% since its peak in Q3 2020. Developers delivered approximately 849k SF in Q1, with an additional 2.5 MSF of new product scheduled to deliver by year-end 2022.

Los Angeles’ office market is expected to remain tenant-favorable for 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 long-term real estate decisions are made in the year ahead.

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