LA Saw 10-Year Low for Office Sales; Sublease Space Jumped a Record-High 22 percent

Tenants are shedding excess space and trying to recoup occupancy costs through subleasing

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Hamstrung by continued shutdowns due to the spreading coronavirus, the office market in Los Angeles County nearly stalled in the second quarter this year, according to a new report by NAI Capital.

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The sector was marred by lower transaction volume, rising vacancy, and slowed rent growth due to shelter-in-place orders, as prospective buyers entered wait-and-see mode. With just 1 million square feet trading hands, total sales volume dropped 55 percent compared to the first quarter, and nearly 75 percent since the second quarter of 2019. It was the lowest quarter for sales in a decade.

Combined leasing and sales activity in the first half of 2020 was just 45 percent of the total of 2009, and on pace to be lower than that year, especially if the shutdowns continue, according to NAI Capital. Tenants have also been busy shedding excess space and trying to recoup occupancy costs through subleasing in the region. Available sublease space ballooned, with 1.1 million square feet flooding the market in one quarter. The 22 percent jump was the highest of any quarter on record.

The work-from-home phenomenon has lessened space requirements for tenants around the country as some premier companies like Facebook and Morgan Stanley permanently alter their office strategies. Earlier this week, Google announced it will keep employees home until at least next July, The Wall Street Journal reported. Last year, Google agreed to pre-lease all 584,000 square feet of the One Westwide development in West L.A., which is a conversion of the defunct Westside Pavilion by Hudson Pacific Properties and Macerich. It is set to open in 2022.

Vacancy in L.A. was at 10.8 percent, and rent was at about $3.36 per square foot. The vacancy rate could potentially suffer much more in the long term, considering that the total office space under construction remained at a historic high in the second quarter. It was up 47 percent from the 2008 peak of 5.2 million, to nearly 7.6 million square feet.

Office-occupier employment is expected to gradually come back as offices reopen, but a survey by NAI Capital also showed that 80 percent of office brokers believe office pricing will decline, vacancies will rise, and landlords will offer more concessions moving forward. Experts expect tougher challenges to emerge during the late summer and into the fall, with federal emergency funding gone and occupancy restrictions still in place.

On Monday, the L.A. County Public Health Department reported more than 2,000 new cases of coronavirus and 17 more deaths.