L.A.'s office market takes a hit amid trade wars, fires and economic uncertainty

Yahoo

25-04-2025

Tenants hunting for office space in the Los Angeles area are in the driver's seat as vacancies plague many landlords trying to fill their buildings with people.
The greater Los Angeles office rental market started the year with a turbulent first quarter and historically high vacancies as tenant demand was persistently soft in spite of more robust return-to-office policies coming from managers.
A notable exception was Century City, which is experiencing tight occupancy and some of the highest rents in the West.
Countywide, though, overall office vacancy reached a new high of 24.2%, real estate brokerage CBRE said. When "shadow" office space that is leased but not occupied is considered, overall availability is more than 29% — about triple what is considered a healthy market balance between landlord and tenant interests.
Real estate experts hoped for better at the end of 2024 as the leasing market that had been lagging since the COVID-19 pandemic began showed signs of recovery, including more companies calling for workers to return to their desks. Then came the devastating wildfires and economic uncertainty caused by President Trump's global tariffs.
"We were more optimistic heading into 2025," CBRE property broker John Zanetos said, as the county office market saw year-end leases signed by some good-sized tenants including toy makers Mattel and Jazwares.
Read more: Mattel is revamping its work spaces as employees return to the office
The January wildfires that knocked the city back on its heels put many business decisions on pause.
Later in the quarter, confusion about tariffs and potential trade wars introduced another element of uncertainty, said Michael Soto, vice president of research in the western region for real state brokerage Savills.
Real estate analysts are watching "very closely" to see whether there is new hesitation in decision-making among business leaders that could slow down initial public offerings of stocks, mergers and other ventures that would typically lead to acquisitions of office space, Soto said.
"Anxiety is back in the market," he said. Some tenants "are probably slowing down their decision-making until there is a little more clarity in the macroeconomic environment."
The downtown Los Angeles office market, one of the region's largest, continued to struggle in the first quarter, with vacancy hitting nearly 34% and overall availability at 37%, slightly up from a year earlier, CBRE reported.
Downtown has struggled with vacancy for decades, but companies' cutbacks in their office space since the start of the pandemic have helped drive down the values of office buildings and pushed some landlords into such financial stress that they're having a hard time coming up with the money to attract tenants, Zanetos said.
Among the upfront costs for landlords is paying for office space to be prepared for new tenants as part of their lease agreements. Landlords also are expected to maintain their properties at a level that tenants will find acceptable, which becomes a challenge when landlords are in a shaky financial position.
"There are very few buildings that can actually transact" leases, he said, because they can give tenants the financial concessions they need to move in.
Those buildings "are doing extremely well," he said, and some are more than 90% leased.
There are still some potential tenants looking for large amounts of space to rent in Los Angeles County, Zanetos said, including the Los Angeles Department of Water and Power. The DWP is planning to renovate its historic landmark headquarters on Bunker Hill and needs about 300,000 square feet to move into while the work gets done, he said.
"That would be a huge shot of positive absorption" in the office market, he said. He declined to identify other large potential tenants in the market because their searches are confidential, he said.
The DWP's mid-century-style John Ferraro Building on Hope Street was completed in 1965 and houses about 3,300 employees. Renovations and an accompanying temporary move of employees are still in planning stages, DWP representative Joe Ramallo said.
The DWP also may consider buying a building, Ramallo said. Last year, the County of Los Angeles bought the 55-story Gas Company tower for $200 million, far less than its appraised value of $632 million in 2020.
One neighborhood that is actually thriving in the overall soft leasing market is Century City, where vacancies are few and rents are high because demand is strong, especially among attorneys and entertainment firms including Creative Artists Agency.
"Century City is an outlier, and has been for years in terms of performance on rent and occupancy," real estate broker Gary Weiss of LA Realty Partners said.
The neighborhood created in the 1960s on land west of Beverly Hills that was formerly the backlot of 20th Century Studios (now Fox Studio Lot) has long been a favorite of law firms, a trend that has accelerated since the pandemic began, Weiss said.
Some of them are choosing to expand in Century City instead of downtown, where they have had presences for years, he said. Among them are Latham & Watkins and Sidley Austin.
"Much of this is a reflection on what's happening downtown with the homelessness, with the increased vacancy, with the safety factor," Weiss said. "And so a lot of these firms are uprooting from downtown."
The neighborhood "has high-quality buildings with first-rate security," he said. "It's safe, it's clean."
Century City also has a rarity in L.A.'s office market — a flashy new high-rise under construction. The 37-story Century City Center is being built by Chicago landlord JMB Realty, one of Century City's largest property owners.
Creative Artists Agency, one of Hollywood's biggest talent agencies, has agreed to be the anchor tenant in the building on Avenue of the Stars. Other signed tenants include Sidley Austin and investment firm Clearlake Capital, real estate data provider CoStar said.
Read more: Creative Artists Agency signs lease for new Century City headquarters
Century City Center is nearly fully leased even though it isn't slated to open until early next year, Weiss said.
Overall vacancy in Century City is 13%, according to CBRE. Landlords are asking for nearly $7 per square foot per month, compared with the county average of $4.29 per foot for good-quality office space.
Sales of office buildings have slowed, in part because large institutional investors are skeptical that property values will appreciate enough to resell them at a profit after five years, as is common practice.
Private buyers or public entities such as Los Angeles County have picked up some downtown office towers at "huge discounts" compared with what it would cost to erect similar new buildings, Zanetos said.
Other private buyers are investing in fairly new buildings filled with tenants, which are considered low-risk investments. This month, Kingsbarn Realty Capital, a Las Vegas firm that caters to private investors, paid $105 million for Vine Street Tower in Hollywood that is fully leased by Skims Body Inc., a shapewear and clothing brand co-founded by Kim Kardashian.
The building was completed in 2017 and extensively renovated last year, real estate brokerage Newmark said.
Times staff writer Matt Hamilton contributed to this report.Sign up for our Wide Shot newsletter to get the latest entertainment business news, analysis and insights.
This story originally appeared in Los Angeles Times.