The Los Angeles office market began 2024 with a surge in leasing activity, a glimmer of hope after what had been a prolonged downturn, according to a recent first quarter of 2024 Los Angeles office market report by Savills. This increase, totaling 3.2 million square feet, marked a significant upswing compared to the previous quarter and year-over-year figures. However, much of this activity was attributed to lease renewals rather than fresh demand.
High-profile renewals by Snap (466,733 square feet), Lionsgate (153,210 square feet), and Riot Games (78,000 square feet), among others, were certainly bright spots. Another encouraging sign was William Morris Endeavor’s decision to extend their nearly 250,000-square-foot Beverly Hills lease several years in advance. Nonetheless, the ongoing slowdown in the tech and entertainment/media sectors continues to dampen overall demand for new office space.
Vacancies Persist, Sublease Space Grows as Asking Rates Rise
Despite the boost in leasing activity, the availability rate in Los Angeles climbed to a historic high of 27.6 percent in Q1 2024, which is 140 basis points higher from the a year ago when it stood at 26.2 percent. This continues to paint a picture of a market struggling with excess supply. Hybrid work strategies are keeping a sizable chunk of workforce remote, and office-using employment growth has turned negative in the past year.
Interestingly, the average asking rental rate saw a slight increase compared to the previous quarter, currently at $3.94 per square foot per month, compared to $3.83 a year ago. This hints at landlords focusing on higher-priced, premium spaces even in the softer market conditions. Adding to tenant availability options, sublease space rose to 10.8 million square feet in Q1 2024 from 10.4 million twelve months before, as companies continue to offload space.
Office Building Valuations Begin to Reset
In a trend many analysts predicted, office building valuations are finally experiencing a reset. Distressed sales at surprisingly low valuations have surfaced, a testament to the strained financial situation faced by owners of certain properties. While quality buildings in prime locations may still fare well, struggling buildings in less desirable areas face a tough road. 2024 could prove to be the year when owners finally accept the new reality of the market, opting either to sell at significant losses or attempt expensive conversions to other uses.
Outlook: Cautious Optimism Mixed with Continued Challenges
While Q1 2024 offered some positive signs, the Los Angeles office market will remain a tenant’s market for the foreseeable future. Expect a significant portion of leasing activity to remain driven by lease expirations. With few industries in robust expansion mode, growth in net new demand will likely stay muted.
Landlords are facing tough choices – while historic levels of concessions remain the norm, we might also begin to see aggressive drops in asking rents for some as a bid to secure occupancy. Meanwhile, the ongoing reset of building valuations will likely alter the economics of the entire leasing market in the years to come.
