Q3 2022 Office Market Outlook – Los Angeles
Los Angeles County’s office market remains on a slow path to recovery, as more and more companies try to bring their people back to the office after the pandemic shutdown. Elevated vacancy, undefined demand, and added construction haven’t led to a wholesale cut in asking rent to accelerate occupancy. While completed construction added close 3.3 million square feet, mostly vacant, to the inventory since Q3 2021, the market is grappling with more sublease office space coming online. Increasing each quarter since the shutdown, vacancy is up 50 bps from last year to 14.6 percent.
While work from home and space utilization strategies continue to play out, vacant office space on the market is piling up, albeit at a lower rate. Since the third quarter of last year close to 2.6 million square feet of available space was added to the market, pushing the total this quarter to an all-time high of 70.8 million square feet. Available sublease space jumped 17.8 percent from Q3 2021 to 10.7 million square feet – much higher than the Great Recession. While available sublease space continued at a record high, the rent dipped 1-cent from the previous quarter, up 1.5 percent from last year to $3.48 per square foot full service gross. The average rent hasn’t seen significant movement, helped by higher year to date leasing volume, up 3.8 percent compared to last year at this time.
TRENDS TO WATCH
Tenants seeking value will look to lease where available space has increased, creating opportunity. Companies as an example, like Beautycounter, which signed a lease for office space in 2018 through 2024, have placed their excess space on the market for sublease. Lululemon stepped in to sublease that space from Beautycounter, representing 36,659 square feet in Santa Monica, fully furnished -at well below published direct rents. The LA West submarket, which holds more than 21.9 million square feet of available office space, 18.5 percent of which is sublease space, the most in the region, witnessed a mere 1-cent year over year decrease in the published average asking rent. While LA West captured the most leasing volume year to date in the third quarter of 2022, lease volume amounted to an 18 percent drop from the prior quarter. More than 4 million square feet of sublease space sits available in the LA West office market.
Months of free rent, tenant improvement allowances, and easing rent will remain valuable concessions for landlords looking to lure tenants into their projects, especially in markets where available sublease space, vacancy, and construction has risen.