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Big Leases Mask LA Office’s Long Road To Recovery

Los Angeles

News of big leases from the likes of Hulu and Snap in the second quarter garnered attention for their size, but LA’s office market has a long way to go as it is still on its path toward recovery, a Q2 2021 report from Savills shows. 

Overall leasing activity rose from 1.9M SF in Q2 2020 to 3.1M SF in Q2 2021, but that was in large part thanks to the handful of big-name leases, according to the report. Leasing activity was still down 21% compared to conditions right before the coronavirus pandemic — 4M SF of activity in Q1 2020 — and trailed the five-year quarterly average of 3.5M SF, Savills found. 

Many of the deals that came through in Q2, including some of the largest ones, were deals that were already in motion, said Michael Soto, Savills’ research director for the Southern California region.

“Companies that we knew were already out in the market or that had leases expiring in the next six to 12 months, they have to do deals. That’s the activity we’ve been seeing,” Soto said. 

That there has been major activity at all is a change from last year and an indicator that tenants are feeling more confident than they were in 2020, said Suzanne Lee, executive director in Cushman & Wakefield’s LA office. 

“The good news is that we are not seeing the paralysis that we were seeing in 2020,” Lee said. 

“Last year, virtually any company faced with an imminent leasing decision typically kicked the can down the road, doing a short-term 12-to-18-month extension," Lee said. "Now, our clients and people in general are confident that when they wake up tomorrow morning, the world is still going to be there.”

That is leading to more office tenants feeling emboldened to make longer-term leasing commitments, Lee said.

Availability and rental rates across the city

Companies that are looking to lease space certainly have a lot to choose from. In Los Angeles, 24.1% of office space was available for lease, according to Savills — a number the brokerage referred to as record high. It is slightly higher than Q1’s 23.6% availability. Availability refers to space marketed as available for lease, including sublease space as well as directly available space. 

Burbank was the only market with single-digit availability, with 8.8%. Hollywood, El Segundo, and the North Hollywood-Studio City-Universal City and Fox Hills-Marina submarkets all had availability over 30%. In the three years prior to the pandemic, average availability in the second quarter hovered around the high teens.  

Soto held up Burbank as well as other markets like Culver City and Santa Monica, the latter of which saw four of the top 10 largest leases in Q2, as areas that would likely recover faster because of those areas’ popularity with tech and entertainment tenants. Lee said markets that appeal to fast-growing clients would likely lead the recovery while others might lag. 

“The Westside has typically been more of a draw for tech and media clients, which are some of the fastest-growing and most robust sectors in our local economy. So while we saw a significant amount of vacancy and availability in that market during the pandemic, what we’re seeing so far is that that market will probably recover faster than, say, Downtown,” which has been typically more of a draw for traditional industries like finance, law and insurance, Lee said. 

Asking rents citywide averaged $3.84 per SF monthly, down a penny from $3.85 per SF in Q1 and a 5.7% increase year-over-year, though the report noted that “concessions such as rental abatement and tenant improvement allowances remain high as landlords aggressively compete for occupancy.”

Taken together, the quarter’s fundamentals and the top leases indicate that while a recovery may be picking up steam, it is hardly here yet. 

“The office market is moving in the right direction, but it’s going to take time,” Soto said.