Like many other markets in California, the LA office space market showed negative absorption this quarter and an increase in vacancy rates. Remote and hybrid work schedules have lowered demand, resulting in higher subleasing rates and falling average rental asking rates.
Despite the relatively lackluster performance, activity in LA office space markets shows some signs of recovery after the pandemic. LA added a decent chunk to its office inventory this quarter, and employees are slowly but surely returning to the office.
Los Angeles is the largest city in California and has a population of approximately 3.9 million as of 2022.
The average age is 35.9, and the median household income is $65,290. Los Angeles has long been a cultural and economic center of the US, known for its diverse culture and entertainment industry. The city is also a major player in technology, petroleum, and trade, with the single busiest container port in the country.
Los Angeles features a mid-Mediterranean climate, with hot, dry summers and short, mild winters. Temperatures throughout the year hover between 60 and 90 degrees F. The city receives relatively little rainfall, meaning droughts are a common occurrence.
Los Angeles features over 400 distinct neighborhoods, each with its own history and culture. Despite the city’s large size, population density is low due to the urban sprawl that characterizes most districts.
In Q3 2022, Los Angeles posted negative absorption at 320,000 square feet, reflecting generally low demand for office space. Although overall absorption was negative, some submarkets, such as Downtown and San Fernando Valley, showed positive absorption.
Vacancy rates continued their steady increase, rising to 20.7% at the end of Q3 2022. Vacancy rates were the highest in the Hollywood submarket at 23.9% and lowest in the San Gabriel Valley at 7.1%.
Despite a year-over-year increase, leasing activity fell this quarter by 2.7 million square feet, while availability rates hit record levels of 25.7%. High subleasing rates and high vacancy rates cause average rents to fall, while construction dipped below last quarter’s activity.
Average asking rates for full services gross leases for all categories of office space showed a slight decrease from $3.70 per square foot in Q2 2022 to $3.67 per square foot in Q3 2022. Average Class A office space rents fell from $3.95 per square foot in Q2 2022 to $3.92 in Q3 2022.
LA submarkets with the highest average asking rates in Q3 2022 were West LA, Tri-Cities, Downtown, and South Bay at $4.96, $3.58, $3.33, and $3.23 per square foot, respectively.
Leasing activity fell to 2.74 million square feet in Q3 2022 from 3.34 million square feet in Q2 2022. However, Los Angeles tipped over 10.5 million square feet of leasing activity by the end of Q3 2022, showing a 7% increase from the same time last year.
Law firms, healthcare providers, and tech companies made up a significant portion of leasing activity. Five submarkets managed to show more leasing activity than the last 8-quarter average.
Subleasing rates also increased for the third quarter in a row. Subleasing activity was up 30 basis points to 4.5% in Q3 2022, representing 9.9 million square feet of subleasing space. Like most other large cities, LA’s high subleasing activity is due to lower demand from hybrid scheduling and remote work.
LA saw a handful of significant leases and sales in Q3 2022, including:
Overall, the West LA, San Fernando Valley, and Downtown LA submarkets saw the highest leasing activity this quarter.
Construction for new office space in Los Angeles fell slightly after the city completed several new constructions last quarter. As of Q3 2022, the city has 2.7 million square feet of new development in the pipeline—down from 3.4 million in Q2 2022. LA added over 726,000 square feet of office space this quarter.
Many developers focus on converting old buildings for new tenant use rather than building new constructions. The West Los Angeles and Tri-Cities submarkets saw the largest addition of new construction.
Leasing and purchasing activity was higher at the end of 2022 than in 2021, despite the quarterly decrease in Q3 2022. However, vacancies are expected to continue rising and remain above pre-pandemic levels for the foreseeable future. Economic troubles make many tenants unwilling to sign long-term leases.
Significant leasing and purchase agreements indicate a positive direction for market fundamentals. As Los Angeles employers continue to get workers back into the office, leasing momentum could increase as we enter into 2023
The outlook for commercial investors in Los Angeles is a mixed bag. Despite the quarterly decrease, leasing activity is up 7% from last year. Average rental rates have fallen, but the market absorbed a significant amount of new construction last quarter.
High vacancy rates and falling rental prices mean investors should focus on leasing high-quality Class A office space that can attract long-term tenants. Additionally, subleasing can be a way to reduce losses from potential vacancies. Investors should remain cautious, but there is room for optimism.
Stay vigilant, do your research, and happy investing!
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