— By Taylor Stokes, Market Intelligence Analyst, Avison Young —
The Los Angeles office market continues to struggle with a 24.7 percent vacancy rate at the end of the first quarter of 2024, according to Avison Young’s first-quarter Los Angeles office market report. Leasing activity picked up slightly in the first quarter of 2024 with 951 leases recorded. This equated to 3.5 million square feet, up 5.4 percent from the fourth quarter of 2023 when there were 902 leases signed.
To put the decline of occupancy in perspective, the first quarter of 2022 ended with a 15.4 percent office vacancy rate, which was up from 15 percent at the end of 2021. It was also up from the previous high of 13.1 percent that was recorded in 2010.
There were a couple lease transactions to highlight in the first quarter of 2024. Snap picked up 400,000 square feet in Santa Monica, while Bank of Tokyo Mitsubishi signed a nearly 62,000-square-foot lease in Downtown Los Angeles.
Downtown continues to struggle with the highest vacancy in the market at 28.6 percent. The anticipated return to office hasn’t happened, as many users see the hybrid work schedule continuing for the long-term. They, therefore, chose to shrink their office space or move to a 100 percent work-from-home model altogether. Some users are moving to areas that are more convenient to their employees’ residences to attract and retain talent.
The best-performing market continues to be West Los Angeles as it offers businesses and employees quality office space surrounded by diverse retail and dining amenities. For example, Westfield Century City mall recently underwent a renovation and features more than 200 shops and dining establishments.
Intuitively, it would make sense that average asking rental rates would be significantly reduced with such a high vacancy. Instead, they have remained relatively stable, increasing slightly to $45.37 per square foot in the first quarter. Many landlords have been offering generous concession packages in lieu of decreasing rental rates as they need to show lenders they are able to meet their financial obligations and demonstrate overall building value.
Speaking of finances, there is about $10 billion of CMBS debt maturing in the next 36 months. Time will tell which assets will be in distress, but the ones that are most vulnerable are the older, Class B and C assets with high vacancy rates. We will most definitely see increased investment activity throughout Los Angeles over the next couple of years as more loans approach maturity and owners make their decisions to either refinance or sell their assets.
The largest sales transaction in the first quarter of 2024 was the 62-story Aon Center in Downtown Los Angeles. Shorenstein Properties sold the asset to Carolwood LP for $133 per square foot, a nearly 45 percent discount from the building’s prior sale.
Ultimately, the Los Angeles office market has been struggling to recover. However, key industries are growing, including entertainment/media, finance, law and healthcare, to name a few. That said, we believe the market will adjust and create more user activity, especially if rental rates adjust as buildings are traded at lower valuations.