Los Angeles Ended Q1 on a Slow Note

Image by RoschetzkyIstockPhoto/iStockphoto.com

Los Angeles’ office market still struggled to overcome its post-pandemic woes, in line with most major U.S. metros. Hybridization of work and the ongoing interest rate hikes have provided a combination of challenges for office providers to surpass.

The office construction pipeline is shrinking in Los Angeles, following national trends, while deal volume is also significantly down from a year ago. In the first quarter, several large leases proved that demand is still positive, albeit skewed toward the metro’s massive creative office segment.

Read on for key insights into Los Angeles’ office market performance during the first quarter, based on CommercialEdge data.

Supply favors creative office segment

As of March, Los Angeles had 2.6 million square feet of office space under construction. This represented 0.9 percent of total stock, only half of the 1.8 percent national rate. Development of new office space has slowed down post-pandemic, as traditional office users nationwide have slowed or halted expansion plans. No construction starts were recorded during the first quarter.

Compared to other gateway markets, Los Angeles’ office pipeline stood among the bottom half. San Francisco’s office space underway represented a 5.1 percent expansion of its current stock, followed by Miami (3.3 percent), Manhattan (2.0 percent) and Chicago (1.2 percent). Among all major metros tracked by CommercialEdge, Austin had by far the largest expansion of its stock underway, at 7.0 percent (6.2 million square feet).

Second Century. Rendering by Sora, courtesy of Gehry Partners

The largest properties underway in the first quarter were a pair of office buildings comprising the Second Century Project in Burbank—measuring 355,000 and 445,000 square feet. Worthe Real Estate developed the property for Warner Brothers. The project was completed this month and is set to house 4,500 employees.

Another significant project is underway in North Hollywood—NBCUniversal is constructing a new campus, set to include 315,000 square feet of office space. The development broke ground in 2021 and is expected to come online later this year.

During the first quarter, three office properties came online in the market, totaling 214,849 square feet. Year-over-year, completions were down significantly from 2022’s first quarter, when nearly 2 million square feet of space was brought online.

The largest property completed in the first quarter was The Wrapper Tower in Culver City, developed by Samitaur Constructs. Eric Owen Moss Architects designed the 180,000-square-foot, 17-story tower, which is also being marketed as offering creative office space.

Office vacancy still a concern

Office vacancy in Los Angeles stood at 14.7 percent as of March, up 10 basis points month-over-month, and 200 basis points below the national average. Year-over-year, vacancy increased by 110 basis points.

5750 Wilshire Blvd. Image courtesy of Cushman & Wakefield

Several large office leases were completed in the first quarter, highlighting the strength of Los Angeles’ creative office segment. In February, Sony Pictures Entertainment agreed to a long-term lease at Onni Group’s 5750 Wilshire Blvd. The company will occupy 225,239 square feet across multiple floors of the Class A office building.

Another large lease was Ares Management’s 206,000-square-foot agreement in Century City. The company signed a 12-year lease at 1800 and 1900 Avenue of the Stars, which is currently undergoing a $100 million renovation. Ares expects to move in after the upgrades are completed, in 2024.

Los Angeles’ full-service equivalent listing rate stood at $42.4 as of March, 10.9 percent higher than the national average, and up 0.8 percent year-over-year.

Office investments slow down

Nationwide office sales for the first quarter diminished from the previous year’s performance. At $6.5 billion, sales volume was only a third of the amount recorded in 2022’s first quarter. Los Angeles followed this pattern as well, with $343 million in office sales during the first three months—down 65.6 percent year-over-year.

The average price per square foot for these sales stood at $196 as of March, down 49.4 percent from 2022, and on the same level with the national average.

Union Bank Plaza. Image courtesy of KBS

Waterbridge Capital closed on the largest sale of the quarter, the $104 million transaction of Union Bank Plaza in downtown Los Angeles. The Class A building was the last asset in the portfolio of KBS Real Estate Investment Trust II. The new owner financed the purchase with a $75 million loan, provided by BH Properties.

Coworking solutions expand

As of March, Los Angeles’ coworking segment accounted for 2.2 percent of its total office inventory.

When compared to other metros, Los Angeles sits in the top half for how much shared space it has to offer. Manhattan is one of the largest from this perspective, with 2.8 percent of office space as coworking space (13.5 million square feet allocated).

Los Angeles is on track to retain its spot as one of the top metros for coworking companies. Last year, WeWork launched a global return-to-work initiative, teaming up with 11 cities and organizations, including Los Angeles. The program aims to incentivize local businesses to develop hybrid solutions, while the company will provide data and key insights into the needs of workers.