LA office market struggles, but tenants and investors see opportunity
By Jerry Holdner, Southern California Regional Manager, Avison Young
The Greater Los Angeles office sector is experiencing a fragmented and slow recovery from the pandemic as the fallout is handled in various ways by office tenants, investors and landlords. The first quarter of 2022 ended with an office vacancy rate of 15.4%, compared to 15% at the end of 2021. It is also up from the previous record of 13.1% recorded in 2010. We started to see several companies requiring their employees to return to work at least to some extent during the first quarter, which typically included a hybrid schedule. With soaring gas prices and an extremely competitive labor market, hybrid situations have been important bargaining chips for employers to attract and retain employees.
That said, we don’t see rental demand returning to pre-COVID levels for at least 12-24 months or more. Office occupants have evaluated and will continue to evaluate their short and long term occupancy strategies. With all the indicators pointing to hybrid working remaining indefinitely, desktop users are looking to reduce their footprint.
This usually involves a flight to quality as office rents are low and concessions are constantly on the table for new leases and renewals. Our first quarter office report indicated that asking rents had increased by 1.2% since the start of 2021 and that tenant improvement allowances for Class A spaces averaged around $100 per foot. square. As we enter the second quarter, we see no significant changes in rental and IT allocations.
We have seen a favorable unemployment rate of around 7% in the Los Angeles metro area and believe this number will continue to decline through the end of 2022. This is a huge improvement from the peak of the pandemic by 17.9% in May 2021. While unemployment is low, Avison Young’s proprietary Vitality Index, which leverages mobility data to track foot traffic at specific locations, shows that overall volume metropolitan-wide visitor numbers remain 23% below pre-pandemic levels. Office visitor volumes, meanwhile, will remain 64.5% below pre-pandemic levels (as of the end of March).
In confidence that the Los Angeles market will recover in the not-too-distant future, capital sought out core and core-plus properties. Investors are looking to focus on discounted asset prices. They are particularly bullish on creative office assets occupied by the entertainment and media industries, as they have performed extremely well. Inventory remains tight as owners are reluctant to list an asset with so few trading options. Prices for traditional office properties are expected to continue to decline, however, and the wide gap between investment yields, benchmark rates and falling prices could attract new sources of capital, particularly for cash flow properties. .
Los Angeles’ office market has been slow to recover, but it remains one of the country’s top regions for entertainment, technology, media, advertising, finance, tourism, healthcare and the research. As we transition from pandemic to endemic, the market should strengthen. Now is an ideal window of opportunity for tenants to negotiate favorable leases and investors to acquire assets that will appreciate and stabilize as the market improves.