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With A Return To Office Up In The Air, Occupiers Weigh Pandemic Necessities Against Long-Term Plans

With nonessential offices closed since December, most office occupiers are once again facing uncertainty about their office space, waiting until California and LA County regulations allow for a broader return to the office and until pandemic conditions improve so workers and employers feel better about returning to a physical office. 

In the meantime, many tenants have their eyes set on the summer.

“I’m working on more than three dozen different leases right now, many of them for June and beyond,” Newmark Executive Managing Director Ryan Harding said.

Several of those are for additional space, he said, with employers anticipating that they will be putting some distance between workers when they eventually return to the office. 

Downtown Los Angeles

For now, however, the office market looks rough. Newmark’s Q4 office report found that vacancy increased to its highest point since 2013. Nearly 700K SF of office came online in the final quarter of 2020, 68% of which is leased, but tenants can’t occupy it yet. That accounts for part of the increase in vacancy in Q4, Newmark said, but not all of it. Current office utilization is averaging about 30% in Los Angeles, Newmark said, citing data from Kastle Systems.

Just as there isn’t clarity on when exactly workers will be able to return to the office, it is hard to know what guidelines employers will need to follow once they get the go-ahead to bring workers back. However, one recent suite of requirements put out by the California Division of Occupational Safety and Health Standards Board last year is expected to be extended into the safe-to-return period for office users, Fisher Phillips associate Hannah Sweiss said. 

Cal/OSHA’s emergency temporary standard, among other things, imposes some additional requirements on employers, including specifying what must be included in the employer’s written COVID-19 prevention program, social distancing and face-covering requirements. If there were any companies out there that didn’t already have a plan in place for tackling these issues, now they have to.

“People are wondering, ‘How do we have people set up? What is the actual physical work site like? Are people going to be able to be socially distant? How will we use shared facilities such as break rooms, the restrooms? What are going to be our rules around those?’” Sweiss said.

One of Harding’s clients, a tech company, has long-term leases in Los Angeles and Orange County. It is one of the few instances where Harding said he is seeing an occupier make a major investment in its space with an eye toward being prepared for workers to return. The changes include taking additional square footage, rejiggering the workspace layout, altering restrooms and adding design touches that allow for contactless use of doors. 

But for many office users, there is a balance to strike between how long these updates will be useful and the money invested in them.

“The issue is, how much money do we put in for what many really believe is a short period of time?” Harding said. 

A few companies Harding works with had leases that were expiring naturally late last year and allowed those leases to lapse, not because they were deciding to make all work remote but because they wanted to search for a different space or negotiate better terms either with their current landlord or with landlords at a new space. 

Newmark’s Q4 office report found that monthly asking rents, which were averaging just under $3.70 per SF citywide, are up over the previous quarter’s $3.50 per SF. Office rents aren’t softening because most landlords know “a recovery is on the horizon.” 

Short-term extensions of leases that were set to expire last year are also increasingly commonplace. If you can stay put for the short term, doing so is probably a good idea, Cresa senior adviser Brittney Lane said.

“With lease terms typically being five to 10 years, you don't want to make a long-term decision in an unstable market,” Lane said, adding that most landlords had been open to offering short-term extensions.

There are signs that a rebound for leasing is imminent. A Q4 JLL report found that leasing activity had increased more than 10% over the previous quarter, though even that was 50% below pre-COVID-19 leasing levels. And anecdotally, the number of tours were up in Q4, signaling that more leasing activity might be ahead, JLL said. 

Even in Q4, some companies decided to lock down their spaces, renewing leases all over the city. JPMorgan renewed its lease for 103K SF in Century City, and Brookfield reported a handful of larger lease renewals in two of its Downtown office towers, Newmark noted. 

“A lot of journalists were calling us last year, saying, ‘Tell us about all the downsizings you’re doing. Tell us about people giving up office space and going fully remote,’” Harding said. “I told them then I didn’t know one company of the 300 we work with that was doing that because of COVID, and I still don’t today.”