The North Los Angeles office market continued to see high vacancy rates in the second quarter, and experts agree a big challenge in the market is the increased desire on the occupier side for greater flexibility.
The San Fernando Valley had an office vacancy rate of 19.8%, up from 19.3% during the first quarter. In the Tri Cities market, office vacancies reached 20.4%, up from 19.8% the previous quarter, according to data from Colliers.
“There’s a general feeling across the country, and maybe the world, that office buildings aren’t in the same demand area that they might’ve been prior to the pandemic,” said David Solomon, a senior executive vice president at Colliers. He added that the surge of remote work has played a big role in explaining these high vacancy rates as the world continues to navigate post-pandemic working environments.
The San Fernando Valley and Tri Cities markets still have lower vacancy rates than L.A. at large, which averaged 22.4% during the quarter.
“I think there’s been some resilience; part of that is based on the industries –whether that be aerospace, motion picture production and post-production,” said Chase Gordon, a vice president at Avison Young. “We’re seeing growth in life sciences, construction, web development, software engineering. These (industries) are all popular (in the San Fernando Valley) and have been a little more robust than some others found in other pockets throughout L.A.”
Gordon noted that, while vacancy rates are much higher than they were pre-pandemic, asking rates have remained relatively stable, and in some cases have shown slight growth, which he attributed to the “flight to quality” behavior many investors demonstrated during Covid-19. That flight to quality has created a bit of tension in the marketplace, Gordon added.
“There’s been a conflict between the demand for shorter, more flexible leases with spaces that met this higher bar of quality,” Gordon said. “Quality space requires significant capital investment on the owner/developer side, and inherently, shorter leases become more expensive for the occupier, because it’s not as easy to amortize that capital over a shorter period of time.”
Solomon echoed that sentiment. “It seems like the better buildings – the ones that charge higher rents – are generally doing better than the more mid-tier type of buildings,” he said.
According to Solomon, companies in class-A buildings that tend to offer amenities such as a fitness center and shared conference rooms usually have a higher retention rate of employees coming into the office, which is, in return, better for the market.
Industrial trends
On the other hand, the North Los Angeles industrial market is seeing very little vacancies, with the overall rate of San Fernando Valley and Ventura at just 1%, according to Colliers’ data.
“It’s still a very good market,” said David Harding, executive vice president at Colliers.
While the vacancy rate has increased since the first quarter, Harding said the numbers are “historically still very low.”
By the end of the second quarter, the San Fernando Valley and Ventura had a 2.3% availability rate and sublease space increased from the previous quarter by 460,000 square feet, a sign that a bit of softness had been added to the market.
According to Harding, this softness is largely attributed to labor strikes in the entertainment industry, which began on May 2 with the Writers Guild of America and then followed with SAG-AFTRA joining on July 14.
“That sector is a very active part of our market,” Harding said. “And remember, we’re not necessarily talking about the soundstages. I mean that’s part of it. But it’s all the other entities that are important to production.”
Harding noted that businesses and services related to the entertainment industry, such as costumes, props, cameras and catering, constitute a large part of production.
“There’s an enormous trickle effect in the entertainment industry … and with most of production not working, (those companies’) business is down tremendously,” he said.
Despite the halt in production, leasing in the North Los Angeles industrial market has remained relatively steady, though sales of industrial properties have been slow.
“Since passing Measure ULA, I would say (industrial) sales have hit an absolute halt,” said George Stavaris, managing director of industrial at Jones Lang LaSalle Inc.
Measure ULA, which went into effect on April 1, is a one-time transfer tax on residential and commercial real estate properties that sell for $5 million or more. Many potential sellers in the market are choosing to hold on to their properties as a result.
While low vacancy rates can be seen as a positive, the extreme lack of industrial inventory comes with its own set of challenges.
“We are still a hyper-tight market,” Stavaris said. “We still don’t have a significant amount of options for businesses looking to relocate, move, expand in the San Fernando Valley.”
He noted that a low vacant market is extremely difficult to transact in.
Asking rates have either remained flat or been reduced, and Harding noted absorption numbers were “on par with last quarter.”
What’s next?
“We will probably see much of the same,” Stavaris said of next quarter’s industrial market.
He also noted that an increasing vacancy rate could come with some positives. “I would say that having the vacancy rate climb might be a good thing for users in the market. It might provide them with more options to find more functional space … so if we do see a climb, it’s welcome.”
Harding, too, admittedly expects next quarter to illustrate relatively similar numbers as this quarter, though he did state the importance of ending the writers and actors strike is vital to getting business back to usual.
And for the office side of things, Gordon said he anticipates improvement.
“I think next quarter, as interest rates stabilize, we’ll begin to see a little bit of a rebound in the economy and a push in leasing,” he said. “There’s going to be more transaction volume, higher velocity and more people getting deals done.”
“I’ve seen an increasing level of pushback from employers,” he added, noting that he is very optimistic when it comes to the future of the office market, particularly as it pertains to quality, noting that in-person work provides a level of “collaboration and workplace culture which is much more difficult to instill in a remote workplace.”