L.A.’s Office Availability Hits Another All-Time High as Values Continue to Fall

Office leasing activity in Greater Los Angeles increased to start 2024, but there’s little reason for optimism. 

Renewals from tech and media firms drove the uptick in tenant deals, and the market remains soft with another record high in availability — and the reset in valuations is “only starting,” according to a first-quarter report released Monday from Savills.

L.A. saw 3.2 million square feet of office leasing in the first three months of 2024. That’s 45 percent more space leased than the previous quarter, and 13 percent more than the first quarter of 2023. 

But the major tech and media companies that in the past bolstered L.A.’s office market are instead rapidly reducing their office spending and shrinking their overall footprints nationwide. Indeed, last week, it was revealed Amazon (AMZN) is planning to save $1.3 billion by reducing its office footprint and ending leases early.

Thus, Savills’ report said leasing activity in L.A. from the first quarter was mostly driven by lease expirations. Indeed, five of the top 10 leases signed were renewals, two were relocation deals, and two were for new locations. (William Morris Endeavor signed the one lease in the top 10 that was an extension a few years ahead of expiration. That lease was for 247,768 square feet with landlord Douglas Emmet in Beverly Hills.)

Greater L.A.’s availability rate ended the quarter at 27.6 percent, which was 90 basis points higher than the fourth quarter. That means there is more than 60 million square feet of office space that is either vacant, available for sublease or under contract that is soon to expire. Available sublease space all increased in the first quarter to 10.8 million square feet.

“This (availability rate) is another historical high as office space demand has remained below pre-pandemic levels due to hybrid workplace strategies, as well as office-using employment growth that turned negative over the last year,” Savills’ report read.

The overall average asking rent for office space in L.A. ticked up to $3.94 per square foot per month from last quarter, and was up 2.9 percent from a year ago. Savills said landlord concessions were also still at historic highs, but the report anticipates more owners will drop their asking rents this year as they get more aggressive at “chasing occupancy.”

At the same time, L.A. is facing eye-popping declines in office property values and subsequent sales at significant losses to the seller. In late March, a Brookfield (BN)-run fund shed a big part of what used to be an expansive Downtown L.A. portfolio for just $145 million, or about half of the remaining debt on the property. And another prominent tower that was part of that same portfolio is headed to a foreclosure sale.

“The long-awaited reset in office building valuations in the Los Angeles office market is only starting as recent distressed sales at low valuations have become increasingly common,” Savills’ report read. “For those office properties in a weaker financial position or in a less-desired location, expect fundamentals to continue to deteriorate. … As a result, 2024 will be the year that more owners decide to sell their properties at a loss or realize that they need to convert or redevelop their properties to non-office use.”

Snap’s 466,733-square-foot renewal with Boston Properties in Santa Monica was the largest lease of the first quarter. William Morris Endeavor’s extension was second largest.

Lionsgate signed a 153,210-square-foot renewal at 2600-2800 Colorado Avenue in Santa Monica for the third-largest lease, followed by Riot Games’ 78,000-square-foot renewal with Kilroy Realty at 12312 West Olympic Boulevard.

Fab Factory signed the largest new lease of the quarter for L.A. when it inked a 66,000-square-foot deal with Georgetown Company at 1350 North Western Avenue in Hollywood. The second-largest new location lease was AXS Group’s 41,534-square-foot lease at 110 East Ninth Street in Downtown L.A. 

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