Office Market Struggles in Los Angeles Amid Uncertainty

The Los Angeles office rental market began the year with a turbulent first quarter, plagued by historically high vacancies despite robust return-to-office policies from managers. The greater Los Angeles area saw a notable exception, however, as Century City experienced tight occupancy and some of the highest rents in the West.

Overall, countywide office vacancy reached a new high of 24.2%, according to real estate brokerage CBRE. When considering "shadow" office space that is leased but not occupied, overall availability increased to more than 29% – about triple what is considered a healthy market balance between landlord and tenant interests.

Real estate experts had hoped for better at the end of 2024 as the leasing market showed signs of recovery following the COVID-19 pandemic. However, the devastating wildfires and economic uncertainty caused by President Trump's global tariffs introduced new elements of uncertainty. CBRE property broker John Zanetos stated that "we were more optimistic heading into 2025" but acknowledged the challenges facing the county office market.

Some good-sized tenants signed year-end leases in the quarter, including toy makers Mattel and Jazwares. However, real estate analysts are watching 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 leading to acquisitions of office space.

Michael Soto, vice president of research in the western region for Savills, observed that "anxiety is back in the market" and some tenants are slowing down their decision-making until there is more clarity in the macroeconomic environment. This sentiment was echoed by Zanetos, who noted that landlords face significant upfront costs when preparing office space for new tenants as part of lease agreements.

Downtown Los Angeles Office Market Struggles

The downtown Los Angeles office market continues to struggle with vacancy rates near 34% and overall availability at 37%, slightly up from a year earlier. CBRE reported that the area has struggled with vacancy for decades, but companies' cutbacks in their office space since the start of the pandemic have driven down the values of office buildings and pushed some landlords into financial stress.

Zanetos stated that there are very few buildings that can transact leases due to the lack of financial concessions that tenants require. However, some buildings are doing exceptionally well and are more than 90% leased. There are still potential tenants looking for large amounts of space to rent in Los Angeles County, including the Los Angeles Department of Water and Power.

Century City: An Outlier in the Office Market

One neighborhood thriving in the overall soft leasing market is Century City, where vacancies are few and rents are high due to strong demand. Real estate broker Gary Weiss of LA Realty Partners stated that "Century City is an outlier" and has been for years in terms of performance on rent and occupancy.

Weiss attributed the trend of law firms expanding in Century City instead of downtown to factors such as homelessness, increased vacancy, and safety concerns in downtown Los Angeles. Century City offers high-quality buildings with first-rate security, making it a safe and attractive option for tenants.

Investment in Office Buildings

Sales of office buildings have slowed due to large institutional investors being skeptical about property values appreciating enough to resell them at a profit after five years. However, 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.

Other private buyers are investing in fairly new buildings filled with tenants, which are considered low-risk investments. This month, Kingsbarn Realty Capital 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.

Conclusion

The Los Angeles office rental market began the year with high vacancies and uncertainty due to the devastating wildfires and economic uncertainty caused by President Trump's global tariffs. Century City stands out as an outlier in the market, experiencing tight occupancy and some of the highest rents in the West. As real estate analysts watch for new hesitation in decision-making among business leaders, it remains to be seen whether the office market will recover or continue to struggle with vacancy rates near 34% and overall availability at 37%.