Office Demand Weakens as Pandemic Worsens
Los Angeles County
LA County sublease vacancy doubled from one year ago and reached 1.6% of the total office inventory by Q4 2020, pushing the overall vacancy rate to 16.9%. This is an increase of 230 bps over the year and represents over 35 million square feet of vacant space. This amount has not been seen since 2011, and the level is expected to be surpassed in the first half of 2021. Office demand was strong leading into 2018, and it started to dwindle in 2019. In 2020, new leasing and renewals amounted to 8.2 million square feet with 40.9% of this activity recorded in first quarter. This yearly total is a decrease of 55.6% compared to the 18.5 million square feet of leasing in 2019. The largest new deals signed in fourth quarter were in the South Bay and West Los Angeles by automotive, cosmetic, tech and entertainment tenants.
Net absorption was negative for the third consecutive quarter, with an additional 2.2 million square feet of occupancy losses. Although a slight improvement from the previous quarter, this brought the year-to-date figure to a historic low of negative 5 million square feet. The hardest occupancy hit was in West Los Angeles with nearly 1.7 million square feet of negative net absorption, making up 33.3% of the LA County total.
While significant lease concessions have been offered, asking rental rates haven’t declined in LA County. Rent growth has faltered, but the fourth quarter overall average rate of $3.59 PSF/MO FSG was still 2.9% higher than the $3.49 PSF/MO FSG in Q4 2019. Much of the growth was hindered by the sharp drop in sublease asking rates caused by the influx of sublease availabilities.
There are currently 4.4 million square feet of new major office projects under construction, with 67.5% of this concentrated in West Los Angeles. Market conditions with this new incoming supply will be determined by the success of the mass COVID vaccine rollout, which is now within sights.