Weekly Office Leasing Figures for Los Angeles Remain Well Below Average
Office Vacancies Are All but Certain to Rise
Before the coronavirus outbreak, 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, as the impacts on the coronavirus set in, there has been a clear deceleration in gross leasing activity. The market has experienced minimal levels since the middle of March, and now May has seen some of the lowest levels of activity on a weekly basis since CoStar’s dataset began in 1996.
Given the weekly leasing numbers, vacancies are likely to drift upward. To what extent is debatable, given that the economic impacts from the pandemic have little semblance to anything the U.S. economy has faced since the Spanish Flu of 1918.
Using Oxford Economics and CoStar’s own property market forecasts shows possible baseline, moderate downside and severe downside economic scenarios and how they could impact office vacancy rates in the market — any of which could play out given the uncertainty surrounding the pandemic and when business could return to some semblance of normal.
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 sustained pace. This scenario fits the profile of what many consider a “V” shaped recovery, with a quick bounce back this summer. This scenario is 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, employment gains would turn positive in the second half of the year as well, but the economy would enter a second recession in 2021, with a severity on par with the Global Financial Crisis of 2008. This economic forecast would result in vacancies seeing modest improvements in 2021, but vacancies could resume rising from 2022 to 2024.
The severe downside is quite bearish and translates into an economic downturn akin to another Great Depression. In this scenario, vacancies would see a steep ascent for two years, not peaking until the beginning of 2023.
With even the optimistic baseline scenario implying vacancies could reach levels previously seen in the past recession, market participants should brace for possibly poor conditions in the office market for at least the next year.
By Ryan Patap - CoStar Analytics - June 8, 2020 | 08:23 AM
