Weekly Leasing Figures Imply Office Vacancy Could Increase Considerably in Los Angeles
CoStar Insight: Even Optimistic View Suggests Vacancies Could Reach Previous Recession Levels
Prior to the coronavirus pandemic, the Los Angeles office market was in a favorable position with vacancies near a decade low. Gross leasing levels during 2019 were in line with the past several years.
However, since the impacts of the coronavirus have continued setting in, there has been a clear deceleration in gross leasing activity. The market has experienced minimal leasing levels since the middle of March, and April saw one of the lowest levels of office leasing activity during a single month since CoStar’s dataset began in 1996.
Given the weekly leasing numbers, it looks like vacancies are set to drift upward. To what extent is debatable, given we are likely in the early stages of a recession that has little semblance to anything that the U.S. economy has faced since the Spanish Flu of 1918.
CoStar utilizes Oxford Economics for its economic forecasts that subsequently feed into property market forecasts. The outlook for the Los Angeles office market varies widely when looking at baseline, moderate downside and severe downside economic scenarios.
With the baseline scenario, vacancies are poised to notably increase during the second half of this year and reach levels seen in the last recession by the middle of 2021. From then on, occupancies would improve at a healthy pace. This scenario may be too optimistic and assumes we quickly get a handle on the pandemic and robust job gains resurface in the second half of the year.
In the moderate downside scenario, however, employment gains would turn positive in the second half of the year as well, but the pace of hiring going forward would be anemic. Vacancies across the office sector would rise further and could stay stuck for several years.
The severe downside is quite bearish and translates into a downturn almost akin to another Great Depression. Job losses would persist until 2022 and push office vacancies north of 15%.
With even the baseline scenario implying vacancies could reach levels previously seen in the past recession, market participants should brace for a considerable downturn in the L.A. office sector, regardless of optimism or pessimism with respect to the economic outlook ahead.
By Ryan Patap
CoStar Analytics
May 4, 2020 | 02:38 P.M.
