By Chandler A. Larsen, Principal, Avison Young
This year started off where 2019 finished for the Los Angeles office property sector – and that’s red hot! During the first two and a half months of the year, office space absorption was on pace to beat 2019. Rents were steadily increasing past $39.84 per square foot on an annual gross basis, record-high (psf) sales prices were recorded across product types and rising construction costs were complemented by a construction pipeline of more than 8 million square feet of office space.
Suddenly, by mid-March, COVID-19 had taken hold in the U.S. and abruptly halted all the momentum the Los Angeles office sector had built up. However, the emergency interest rate cuts proposed by central banks across the globe have flooded markets with liquidity, helping to avoid contagion throughout the financial sector. This, in conjunction with the $170 billion in commercial investor relief included in the current stimulus package, points to the potential for a short downturn. Nevertheless, the jury is still out on just how long and how deep this slowdown will be as previously unimaginable unemployment numbers continue to be reported and economic forecasts are trending in the wrong direction.
In addition to the macroeconomic uncertainty, there are a number of office sector-specific variables at play when you try to predict when the LA office market can begin to regain some of the momentum it experienced at the beginning of 2020. One commonly analyzed variable is how (and when) retail tenants that work in conjunction with the office sector will be able to reopen, and how landlords will support them with rent relief. Other variables include how companies will bring back employees with fewer workers per shift to comply with social distancing guidelines, and whether or not companies abandon open areas for closed private offices out of safety concerns. Although the sector hasn’t really shifted too much yet (rental rates have been surprisingly steady), real estate trends tend to lag compared to overall economic trends, so the coming quarter should provide much more clarity surrounding the overall impact of the slowdown.
Every day is a new day of uncharted territory for the Los Angeles office sector. Thankfully, as we’re starting to see the curve flatten across the U.S., we have initiated discussions to try to reopen offices in LA by mid-May. Just what that reopening looks like and how gradual it will be remains to be seen. Fortunately, LA has become a world-class city with major institutional and financially strong office landlords that should be able to weather the storm of this pandemic and bring the Los Angeles office sector back to its pre-coronavirus strength.