Los Angeles Office Market Fundamentals Continue to Weaken



By Ryan Patap | CoStar Analytics | September 3, 2020 | 3:08 P.M. Full article and related video here 


Midway into the third quarter, the Los Angeles office market continues to see conditions deteriorate.

Through July and August, vacancies have already increased by 80 basis points since the end of June, to 11.1%, and rental rates continue their trek south. Overcast conditions are likely to persist for some time, but the depth and severity of the current downturn remains a question mark, with the answer dependent on the trajectory of the ongoing coronavirus pandemic.

One growing concern for the market is the amount of available sublease space, which has spiked since the onset of the pandemic and recently reached an all-time high for the L.A. office market. Sublease space hitting the market could imply some office users are already reconsidering their space requirements as a result of the pandemic. Whether it is from weak firms contracting or healthy firms realizing they need less space if more workers continue to work remotely, the recent rise does not bode well for near-term demand.

There is 8 million square feet of office space under construction in the Los Angeles metropolitan region, the most underway at one time since CoStar’s dataset began in 1996. Culver City, the Olympic Corridor and West Los Angeles submarkets have the most square footage under development.

The pandemic has undeniably impacted office transaction volumes in Los Angeles. Based on the first seven months of this year, office sales are down 40% compared to levels seen during the first seven months of 2019. March through June saw especially muted activity across the region. However, July did see a bounce back in sales levels, driven by one large portfolio sale.

One tower in Downtown Los Angeles under contract suggests that price cuts for many future sales could be on the horizon. In what will be one of the largest transactions since the onset of the pandemic, New York-based Silverstein Properties has agreed to acquire the U.S. Bank Tower in downtown Los Angeles from a unit of Singapore-based real estate investor and developer OUE Limited.

Silverstein is expected to purchase the 1.4 million-square-foot building for $430 million, or just $307 per square foot. This figure represents a 34% decline from OUE’s fair market value estimate of $650 million, or more than $464 per square foot, at the end of last year.

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