Los Angeles Office Real Estate Property Market Update | Q4 2024
Los Angeles office real estate market update in Q4 2024
Office vacancies, and the headwinds that are impacting them for the Los Angeles submarket will look to continue into the first quarter of 2025, with fundamentals at their worst position in decades. Overall vacancy continues to rise from 2020 (10%), to the current 16.2% vacancy rate, with availability rates even higher at 18.5%. Recent leasing is still restrained, at around a quarter less than the average activity seen during the five years preceding the pandemic.
Overall, most office markets around the country have fallen; however, Los Angeles has endured more significant and longer lasting vacancies than most metros. Additionally, the area's overall elevated unemployment rate and recent job losses in the entertainment and tech sectors, key office tenancies, and tenants’ downsizing have curtailed tenant demand.
Softer leasing levels have been insufficient to offset the numerous tenants vacating or downsizing their footprints, whether upon lease expiration or by putting space on the sublease market. The amount of sublease space, 2.6% of the market's space, is around its highest level recorded. *
Unsurprisingly developers have in turn exercised caution when commencing office developments, which has resulted in a decline in the overall space under construction by more than 65% from the most recent high in 2020 of 8.9 million SF, to now just 3.2 million SF currently under construction. This is showing that demand, more than oversupply issues, has a more significant impact in the market dynamics.
Slower tenant activity has resulted in minimal rent movements since early 2020. Given record market vacancy, one would expect that landlords would have lowered rents significantly. However, rents can only fall to certain levels before the deals fail to make financial sense for the landlord. According to some local market experts, even 10-year leases may have to offer packages worth five to six years of the total rent collected during the lease to attract tenants.
The outlook for Los Angeles' office market is sobering. With vacancy anticipated to rise even further during the next several years, the forecast calls for rents to see soft momentum for at least the next several years. Developers and investors will likely continue to show restraint in today's environment, with most opportunities for redevelopment primarily in the acquisition/rehab space, updating smaller to mid-sized and some older buildings to today’s standards.
* Source: CoStar