2023 Q1Round Up: Office and Industrial Market

The Los Angeles real estate market has experienced significant changes in both the office and industrial sectors. Let's delve into the insights, projections, and summary of these developments.

The office market in Los Angeles saw a notable increase in overall vacancy, with a quarter-over-quarter rise of 0.8% and a year-over-year increase of 2.4%. This surge can be attributed to the return of large blocks of direct and sublease spaces to the market. Many firms have responded to the rise of flexible work arrangements by reevaluating their space needs, resulting in a trend of "right-sizing" workspaces. This adaptation has led to a decrease in office space demand.

Sublease availability played a significant role, accounting for 16.3% of overall availability. In a remarkable quarter-over-quarter increase, sublease availability rose by over 1 million square feet, reaching an all-time high of 10.7 million square feet. This surplus of sublease space reflects the current challenges faced by the office market in Los Angeles.

The implementation of Measure ULA at the start of Q2 2023 had a notable impact on the market. As sellers aimed to evade the newly imposed transfer tax on real estate, several large deals were finalized at the close of the quarter. Union Bank Plaza in Downtown Los Angeles (445 S. Figueroa St.) was sold for $104 million, representing a 50% discount from its previous sale price in 2010. This transaction highlights the distress experienced within the current office market.

Despite these challenges, the office market did see an increase in asking rents. Since Q1 2020, asking rents rose from $3.60 to $3.85 in Greater Los Angeles. However, it's important to note that tenant improvement and rent concessions have also seen a relative increase compared to previous periods. This suggests that while rents may have increased, tenants are negotiating for more favorable terms.

Class A assets dominated leasing activity, accounting for 86% of the total. High-quality spaces with desirable amenities continue to attract attention in the market.

Looking ahead, the office market in Los Angeles may face ongoing challenges due to the return of significant amounts of sublease space, which is likely to impact vacancy rates. However, as the flexible work phenomenon continues to shape workplace dynamics, firms are expected to adapt their space needs accordingly.

The implementation of Measure ULA and the resulting rush of deals reflect the urgency felt by sellers to avoid the newly imposed transfer tax. These distress sales may continue in the short term, indicating potential investment opportunities for buyers.

While asking rents have experienced a gradual increase, the rise in tenant improvement and rent concessions suggests that tenants retain some leverage in negotiations. This trend highlights the importance of flexibility and adaptability for both landlords and tenants in the current market environment.

In contrast to the challenges faced by the office market, the industrial sector in Greater Los Angeles has been witnessing positive trends. The rise of e-commerce and the subsequent need for logistics and distribution centers play a significant role in driving demand for industrial properties. Additionally, the Greater Los Angeles region's position as a major transportation and logistics hub further enhances the appeal of industrial real estate. Industrial asking lease rates have steadily risen for eleven consecutive quarters, reaching a record high of $1.69 per square foot per month in Q1'23. With occupancy rates at an impressive 98.7%, demand for industrial space remains high, although slightly below the peaks observed in 2022.

In summary, the Los Angeles real estate market showcases a divergent picture between the office and industrial sectors. The office market is grappling with increased vacancy rates, driven by the return of large amounts of sublease space and the impact of flexible work arrangements. Conversely, the industrial sector is experiencing growth with rising lease rates and robust occupancy levels. Market participants will need to navigate these distinct dynamics while remaining adaptable to the evolving demands of the post-pandemic era.