Like other California cities, Los Angeles office space owners and landlords are coping with various challenges. Perhaps the biggest is the steady stream of companies moving out of Los Angeles and surrounding counties.
Reasons for the continued exodus can be simplified by one word: expensive. California has one of the nation’s highest costs of living: 41% higher than the national average. Housing is 96% higher, and utility bills are 27% more expensive.
Business taxes in California are the third highest in the nation. Only New York and New Jersey taxes are higher (although they don’t offer California’s Mediterranean climate as compensation).
Unemployment rates in Los Angeles are rising and came in at 6.4% during the third quarter of 2022. However, these numbers have dropped. As of November 2022, California is at 4.1% unemployment (seasonally adjusted), slightly higher than the national average of 3.7%.
Overall, new leasing activity for Los Angeles office space rose to 10.5 million square feet (SF), surpassing the year-over-year numbers by 7%. However, net absorption was negative, reaching 320,793.
Los Angeles is the largest city in California, covering around 469 square miles, and the second-largest city in the nation, topped only by New York City.
As of 2020, Los Angeles’ population was around 3.9 million.
The median income for a four-person household has risen sharply during the past 12 months, with the 2021 $80,000 figure rising to $91,000 in 2022.
Although the continued exodus of businesses from Los Angeles and the surrounding areas, combined with the year’s inflationary trend, is taking its toll, the news is not all negative.
The 1 million SF of negative absorption in 2022 is a vast improvement when compared to the 5 million SF of occupancy losses during Q3 2021.
These areas of Los Angeles have recently welcomed new and renewing tenants:
Time will tell whether this growth continues into 2023 with rising inflation and other factors of short-term economic uncertainty.
High vacancy rates and competition between owners of office properties continue to have a negative effect on prices. Landlords and investors continued to lower their asking rates during Q3 in an effort to minimize vacant space despite slight increases in Q2 2022.
The average asking rate for Class A office space was $3.92 per square foot (PSF).
Average asking rates for all classes of office space fell to $3.67 PSF.
Although the West Los Angeles submarket did not have the lowest vacancy rates, it had the highest average asking rate of all submarkets, at $4.96 PSF.
Conversely, the San Gabriel Valley’s average asking rate was the lowest, at $2.45 PSF, although this was a 2.6% increase from Q3 2021.
Although there were more lease renewal agreements finalized than new leases, there were several signed for six-figure areas of square footage.
Quest Diagnostics renewed a lease for almost 200,000 SF within Corporate Pointe at West Hills, a 10-storey complex in the West San Fernando Valley.
Raytheon Technologies renewed a lease for just over 150,000 SF at 2222 East Imperial Highway in El Segundo, adjacent to the Los Angeles International Airport.
A two-story, Class B building at 30601 Agoura Road, Agoura Hills, was purchased by a joint venture for $19,275,000. This equaled $162.00 PSF. The building is being renovated, with completion scheduled for early 2023.
Property investment specialists The Swig Company purchased 3130 Wilshire Boulevard in Santa Monica for $33,679,000 ($351 PSF). The 6-story building is LEED Silver Certified and includes a five-story parking garage.
As could be expected with a city with rising negative absorption figures, the number of office buildings under construction continued to decrease in Q3 2022, falling to 2,702,488.
It is yet to be seen if this trend will shift in 2023 as more employers continue to draw staff back into offices.
With vacancy rates rising and asking lease rates forecast to remain flat, many investors will be discouraged by the bearish outlook currently affecting Los Angeles.
However, some bargains may be available. These may be renovated into a different type of commercial real estate or upgraded to a Class A property.
Investors who are willing to take a long-term view of the Los Angeles market may come out ahead, although it is only recommended for those comfortable with higher-risk items.
While the number of companies leaving Los Angeles and California can’t be ignored, many businesses are staying in California and succeeding. Investors may want to take a closer look at these when considering investing in Los Angeles office space.
Many renewable energy businesses and providers are enjoying some serious success in California, with market capitalization increasing by 731% in the past three years.
Technology hardware, media, and software providers based in California have seen sales rise steadily over the past three years - from 63% in 2020 to 115% in 2022.
Do your research, stay diligent, and happy investing.
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