It Might Seem Bleak, But There’s Reason for Optimism in Los Angeles’ CRE Market

Los Angeles grapples with a film industry in its worst downturn in decades, a drag on the region so strong that Mayor Karen Bass has assembled a task force. Housing affordability and homelessness continue to metastasize. In a year in which the mayor’s aggressive Inside Safe program spent $250 million, the city decreased its record-high number of unhoused by just about 1,000 people.  

And for commercial real estate, signs of strain and stress aren’t hard to find, underscored by a bearish, less-than-optimistic sentiment that coursed through last December’s Matkins/UCLA survey of commercial real estate professionals. A string of high-profile corruption scandals and convicted City Council members have reflected poorly on the state of play, and constant gripes about restrictive regulations and initiatives — rent control and property transfer tax Measure ULA remain popular boogeymen for real estate — suggest this high barrier to entry environment remains difficult to do business in.

An affiliate of Brookfield (BN) has defaulted on $2.2 billion in mortgages since last year. L.A.’s downtown, adorned by the graffiti’d shell of the Oceanwide Plaza, has struggled, with nearly one in three square feet of office space vacant. But so have many submarkets of the city. In supposedly hot West L.A., 25 percent of the office space sits empty. 

It’s the kind of opening scene that suggests an unhappy ending. But look closer, especially at a handful of pockets of new development and demand, and the true, multi-polar nature of the city’s commercial real estate becomes clear. (It’s not as though some of us haven’t seen this picture before. Back in the 1980s and `90s the city was essentially being written off as unfixable.) 

L.A. is easy to hate, but capital can’t help but love it. A recent JLL analysis found the city brought in $96 billion in property deals since 2021, the highest figure of any metro globally.

“We’re at a crossroads,” said David Fan, JLL (JLL)’s senior director of research for Southern California, who sees tailwinds and signs the market may have reached a bottom. “Commercial real estate has been in a deep recession and hasn’t seen a sharp rebound. There are lots of short-term challenges, but zooming out I feel cautiously optimistic.” 

L.A. continues to diversify its tenant base. A new wave of aerospace growth comes after years of tech office expansion, with employment at a 20-year high and $17 billion in Department of Defense contracts awarded to California firms in the first half of the year.  

When one industry struggles, said Matt Moran, a project director at Project Management Advisors, others pick up the slack. L.A.’s office market has seen a surge in what Fan calls more boring sectors, such as law firms, financial companies, professional services firms and asset managers. The diversity in L.A. represents a “hidden plus” for the market, he said, and a magnet. JLL found that Los Angeles attracted the second-most college graduates of any city in the nation, after New York. 

And, right now, the current cycle is stuck on financial challenges and tightened wallets. 

“The struggle right now is: Where is the funding going to come from?” said Moran. “A lot of assets are maturing, which has our clients worried, especially maturing assets with 50 percent occupancy rates. That’s where the real struggle is right now.”

The recent plateau in interest rates, and the latest rate cut, with more expected, has started to change that dynamic, he said.  

Competition remains fierce, especially in the office market, where Class A and trophy assets — which make up just 3 percent of inventory — have landed the bulk of recent leasing activity and even seen a slight uptick in rental rates. Moran points to SoCalGas’s recent move downtown, signing a lease at 350 South Grand in Bunker Hill, with plans to vacate its namesake Gas Company Tower on Fifth Street, as one of the biggest and best examples of tenants trading up, leaving older assets that haven’t updated. Big names aren’t abandoning the city — during this lull, they’re playing hopscotch. 

The vacancy and supply situation does show signs of correcting itself in the next few years. Fan said the city typically delivers about 1 percent more inventory every year, or about 2 million square feet. But, in the next five years, the market will only deliver about 2 million square feet of office, 60 percent of which is already committed. And he’s seeing a revival of activity: There’s about 4 million square feet of activity in West L.A., and 3 million downtown, a fairly decent amount. Add to that the expected boost in office-to-
residential conversion activity, which will both lower vacancy rates and remove untenable office space, and the numbers start looking even better. 

Century City especially has been exploding, with rents up nearly 60 percent since 2018. The divide between this growing market and downtown is “the most dramatic in the country,” David Steinbach, global chief investment officer for owner Hines, told Bloomberg. And a number of mixed-use projects show momentum taking shape. Habitat LA, a Westside project by Lendlease adjacent to the city’s Expo light rail line, just secured $316 million in construction funding. And massive expansions by both UCLA — which acquired the Marymount California University campus in Rancho Palos Verdes, the Westside Pavilion mall on the Westside and the Trust Building downtown — and USC, which got a big health center approved, should provide additional retail and residential catalysts.

The $1 billion Television City project in Fairfax represents another huge swing that’s soon coming to fruition. It’s a mixed-use, live-work project with a public park, just the kind of diverse development Moran said will play well amid a secular shift in office demand. More mixed-use projects combining commercial and residential, especially with the Westfields and Brookfields of the world, have a substantial draw. The city just made headlines for the groundbreaking of the nation’s first Costco-anchored residential project.

“We’re all really kind of bullish on SoCal, we wouldn’t be here otherwise, and capital still wants to be here,” said Alex Valente, principal with Trammell Crow’s Los Angeles office. “We’ve got a billion dollars of commercial office under construction right now in L.A.” 

He points especially to the firm’s Vivo on Harbor development in San Pedro, near the city’s ports, as a symbol of the spread of development activity taking place across the region. The hybrid work era has brought a little more geographical flexibility to where people live and work, allowing developers in the sprawling region to, say, take a big bet on a new waterfront arts district. He said the “borough-ization” of Los Angeles will be a big driver going forward. 

The concern about film, TV and content is real, but there’s also real money being spent on expansion. Moran said Sony is always upgrading its facilities, and the $1.5 billion Fox Studio Lot redevelopment in Century City aims to add nine soundstages in the next decade. A post-strike hangover has slowed projects, but Moran predicts the industry will bounce back. 

Industrial, a behemoth built off the city’s crucial Pacific ports, is also showing signs of cautious optimism after a softening of the market. JLL’s Fan says there’s renewed concern around the potential for significant tariffs under the next U.S. administration, but vacancy has been on the decline, and activity has been on the rebound. Ports had a busy July, and JLL predicts year-over-year leasing growth in 2024.

“The evergreen engines of Los Angeles — the universities, the ports, these institutions that are just the fabric of L.A. — we like seeing where they’re going and how they chart their course,” said Valente. 

Moran remains optimistic the coming 2026 World Cup and 2028 Olympics (the latter of which has a number of expansive transit projects tied to its opening) will act as a catalyst for Los Angeles. The city’s ability to fully act on the promises of a car-free Olympic Games, a concept that is already being walked back, as well as making significant dents in the housing affordability challenge and homelessness, remain unclear at best. In Moran’s sunnier visions of the city, the larger shift toward more walkable and mixed-use projects get bolstered by the larger commitment to increased public transit and transit-oriented development. 

It’s a more connected, less car-centric Los Angeles. That’s a fantasy that this global entertainment capital may just be able to sell.