Almost 25% Of LA Office Space Was Available For Lease In Q1 2021
Vaccination rates are on the rise and coronavirus pandemic restrictions on business operations have been rolled back to the less restrictive orange tier for the LA area, but the office market hasn’t gotten the message yet, according to a Q1 2021 report from Savills.
The report revealed 23.6% of the office space in Los Angeles was available for lease. That’s a high not seen since 2009, the authors wrote. Inventory has grown from 214M SF in Q1 2020 to 216.4M SF in Q1 2021.
Of the submarkets, Burbank had the lowest rate of space for lease at 7.8%.
“Burbank was the one submarket in all of LA that is coming out of this pandemic probably stronger than it was when it went into it,” Savills Southern California Region Research Director Michael Soto said.
The city’s momentum really picked up, thanks to Netflix’s large Burbank lease signed late last year as part of its plan to build out its animation studio. But Netflix joined a submarket that was already anchored by Disney, Warner Bros. and other major entertainment tenants, and the desire of smaller adjacent businesses to be near the big players has helped keep availability low in Burbank.
Santa Monica and the Fox Hills area saw 30.4% and 36.7% of their office space available for lease, respectively. Santa Monica has seen a significant amount of sublease space hit the market, Soto said, noting that last month, the Santa Monica building where entertainment producer Lionsgate is headquartered saw at least 187K SF of sublease space hit the market in February.
Sublease space is hitting new highs citywide, a factor that has contributed to the high overall availability. Sublease inventory has ballooned by 91% since the pandemic began and is now at more than 9M SF, Savills found.
Office leasing activity totaled 2M SF in Q1 2021 — a drop not only from Q4 2020, when leasing activity totaled 2.1M SF, but also a 42.4% drop from the five-year quarterly leasing average of 3.5M SF, the report found. For comparison, Q1 2020 saw 4M SF of leasing activity.
Despite all the available space and sluggish leasing, average asking rents actually increased 2.9% from the last quarter, up to $3.85 per SF. Those high asking rents are misleading, in part because they don’t accurately capture that landlords are aggressively trying to retain and attract tenants.
“Concessions such as parking abatement and contraction rights have become prevalent again and are not expected to go away anytime soon,” according to the report.
The concession trend seems to have figured into the quarter’s biggest transaction, Beyond Meat’s 12-year lease at Hackman Capital Partners’ 888 Douglas in El Segundo, which included a year of free rent.
Touring has increased, Savills said, and that is expected to ultimately turn into the inking of more leases. Last month, leasing and asset management platform VTS analyzed data tracking the number of in-person and digital tours of office space in Los Angeles and found that touring in late February was only down about 18% in LA versus the same time a year before. That was the highest touring demand of any U.S. city, VTS found.
Savills predicts an uneven recovery for the LA office market, but with so much space on the market, the report’s authors still predicted that the LA office market would be a tenant-favorable one for at least the next 18 to 24 months.
“There’s just so much space on the market that it’s going to take time for a lot of that space to get leased up again,” Soto said.