Los Angeles Office Development Petering Out, No New Starts In Q2

The greater Los Angeles office market had just 1.7M SF of office space under construction as of the second quarter, and there were no new starts in the same period, according to data from CBRE. 

Greater Los Angeles is expected to see just 516K SF of office completions this year, a low the region hasn’t reached since the period just after the Global Financial Crisis, from 2011 to 2014. Construction completions fell to about 244K SF in 2011. 

“It doesn't make any sense to build a building, because you can buy buildings at a discount to replacement cost,” CBRE Vice Chair Stephen Somer said. 

Following the GFC, office tenant demand fell, influencing the decline in office construction at the time. Similarly, Los Angeles has now been slower to return to prepandemic office usage levels. 

This time, that decline is combining with higher costs of capital and construction, creating conditions that result in fundamentals that generally skew away from building new office space, Somer said.  

Instead, offices sold in Q2. In Downtown, Uncommon Developers bought 601 S. Figueroa from Brookfield for about $200 per SF. In Playa Vista, Barings bought an office building from Clarion Partners for $151M, or about $500 per SF.

There are some exceptions. CBRE’s data doesn't include medical offices or owner-occupied offices. And some submarkets are seeing new construction.  

In Century City, JMB Realty is building a 37-story office building in the city’s busiest and arguably most expensive submarket. Talent agency CAA agreed to become an anchor tenant in the tower in 2022. 

“You're likely only building if there's a tenant that commits to it,” Somer said. “Then you can get financing, and they can get that built.”

The property — greater LA’s largest under construction now — is 89% leased and scheduled for completion in 2026, according to CBRE’s second-quarter report. 

Apple is self-developing a campus in Culver City, where the tech and media company bought land near the city’s E Line light rail station. 

Even in those cases, Somer said tech and media companies, once major drivers of the office market, still aren't back in expansion mode. Across the board, consolidations have been flagged as a factor in LA’s sagging occupancy figures. 

But speculative office construction is likely to become increasingly rare. Somer estimated that in LA and most markets, it is easy to imagine there being very low office construction for the next five years, given the high cost compared to the returns. Some markets might see an even longer dry spell. 

Greater LA’s overall vacancy rate in the second quarter was 24.1%, with negative net absorption of more than 596K SF, according to CBRE.  

There are no scheduled office deliveries in the greater LA market from 2027 onward. What is under construction now is scheduled to be delivered in 2025 and 2026. 

If those conditions persist, that would put a cap on office inventory, but absorption and vacancy will not necessarily improve just because the inventory faucet has been turned off, Somer said. 

“If you see tenant demand start to rebound, then you have fixed inventory with tenant demand increasing, and that will help the market,” Somer said. 

But that assumes that tenant demand does, in fact, robustly rebound. So far, Somer said, there’s still a way to go on that front. 

“We're starting to see it,” Somer said. “It's slow going, but it's starting to.”