Hudson Pacific Properties’ Office Occupancy Contracts

REIT also says investment sales activity is down due to debt turbulence

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Los Angeles-based REIT Hudson Pacific Properties (HPP) posted a drop in office occupancy on Thursday in the wake of waning demand from tech tenants.

The landlord and developer, which primarily serves the tech and media industries, said that its in-service office portfolio — which generated about 82 percent of its quarterly revenue — was 89.3 percent leased at the end of the quarter. That’s down from 92.3 percent the previous quarter, and from 94.8 percent in the first quarter of 2020 before the pandemic.

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Victor Coleman, Hudson Pacific Properties
Victor Coleman, Hudson Pacific Properties

“There is no question that tenants are being more methodical in their decision process, given a slower than anticipated return-to-office and the rapidly changing economic climate, marked by high inflation and rising interest rates,” CEO Victor Coleman said in the REIT’s earnings call.

The slight decline in occupancy comes at a time of unprecedented uncertainty for the office sector due to the rise in remote work, with many tech and media companies pulling back from office commitments. For example, Amazon announced Thursday that it’s pausing corporate hiring, and Facebook’s parent company Meta is spending $2.9 billion before 2024 just to shrink its office footprint.

“The confluence of monetary policy, potential recession, tight labor markets and hybrid work continues to impact supply and demand fundamentals in all of our markets,” Coleman said. “This is a time of pause, slowness, and maybe even reversing paths and giving back space and laying off people. And so we’re seeing that.”

Coleman said one positive offset is that HPP was “finally” seeing more companies bringing employees back to the office two to four days per week.

“Simply, though, it’s just taking longer to get leases over the finish line as tenants attempt to make mid- to long-term real estate decisions in the face of considerable uncertainty,” he said.

Coleman said company leaders are confident HPP is well positioned and won’t see a serious impact from the tech slowdown until potentially the end of 2023.

“We’re not seeing any lowering of rents or increase in (tenant improvement allowances) on the deals that we’re making or the conversations we’re having, on a material basis,” he said.

HPP reported 380,000 square feet in leasing activity in the third quarter, and said it currently has 2 million square feet in various stages of leasing to give the firm 57 percent coverage on remaining 2022 expirations. The firm’s year-to-date leasing activity of 1.6 million square feet is up 18 percent over last year.

“This activity was largely driven by small to midsize tenants averaging 6,000 square feet across a range of industries, including tech, health care and government,” Colman said.

HPP President Mark Lammas said its Los Angeles in-service portfolio is 98.9 percent leased, and its main focus in L.A. is backfilling the soon-to-be vacated NFL lease at 10900-10950 Washington in Culver City, following their move to Inglewood adjacent to SoFi Stadium.

“We have two tenants interested in backfilling the entirety of NFL space,” Lammas said. 

Coleman also said investment sales flow has dropped due to the debt markets because no one has an appetite to “sell into an increasing cap rate marketplace.” Among the top recent sales, HPP sold the 12-story Trailer Park office in Hollywood for $96 million. But the firm had acquired the building 11 years ago for $92.5 million.

“Pricing was a bit softer than our initial expectations heading into the first quarter of this year,” Lammas said.

Coleman said there are very few transactions closing at where the initial underwriting was 90 to 120 days ago. 

“A lot of these transactions are asking for seller financing,” Coleman said. “A little bit of a weakness on 6922 Trailer Park is that we had some solid interest — four or five real buyers there — but a few of them wanted seller financing, and we weren’t prepared to do it at the terms that they wanted. And so we went with the all-cash buyer with the sure deal.”

HPP’s studio portfolio made up 13 percent of its net operating income and 18 percent of its revenue in the third quarter. The same-store studio portfolio was 84.4 percent leased over the trailing 12 months. For comparison, after the first quarter of 2020, trailing 12-month occupancy for the three same-store studio properties was 92.4 percent.

HPP also made a landmark acquisition supporting its studio platform when it bought Quixote Studios, which provides soundstages and production services for the entertainment industry, for $360 million.

“With its combination of stage lease rights, production gear and vehicles, Quixote further enhances our ability to capitalize on robust productions spin on and off our own Sunset Studio lot,” Coleman said.

Additionally, Coleman said the under-construction Sunset Glenoaks project, which calls for seven new soundstages, is set to be completed in the third quarter of 2023.

Gregory Cornfield can be reached at gcornfield@commercialobserver.com.