Q2 2024 Office Market Outlook – Los Angeles
Market Overview
The L.A. County office market’s recovery is hindered by weak demand, unoccupied new construction a, and continuous rise in vacant space. Landlords, wary of adjusting asking rents despite elevated vacancy rates, face challenges in spurring occupancy. In Q2, 30.2% of completed office construction added to the inventory since 2020 remains vacant. Additionally, the market grapples with a significant influx of sublease office spaces.
The evolving landscape of remote work and space utilization strategies drives a constant accumulation of vacant office space. This quarter the overall vacancy rate was up by 150 bps compared to the previous year, reaching 16.9%. Since January 2024, the market has added close to 2.4M square feet of vacant space, with 30% of that being offered for sublease. Remarkably, vacancy has consecutively increased each quarter since Q2 2020 at the start of the pandemic, rising 62%. The amount of vacant space on the market remains well above the peak reached during the Great Recession. Vacant sublease space has accumulated, experiencing the addition of approximately 300,000 square feet on average each quarter over the past two years, reaching 7.6M square feet this quarter—surpassing levels not seen since the Dot-Com Bust.
Trends to Watch
While the surge in available office space is driven by the evolving landscape of remote work and space utilization strategies, office demand will require lower rents to drive occupancy. Tenants continue to have leverage in negotiating favorable deals. The abundance of office space will compel landlords and sublessors to meet tenant demands. With available sublease space at an all-time high, sublessors are beginning to drop rents. The average asking rent for sublease spaces has started a noticeable descent, with the average rent in Q2 dropping by 5.8% from the previous year to $2.95/SF full-service gross, down 2.6% from Q1 2024. The rate at which sublease space has come on the market, increasing by 5.6% quarter-over-quarter, has outpaced direct space, which only increased by 0.5% over the prior quarter.
