Extended Pause for Leasing and Coworking

The havoc created in commercial real estate by the coronavirus cannot be understated as North L.A.’s office sector scrambles to stay afloat in the new conditions after a promising first quarter. With economic uncertainty continuing due to the ongoing global pandemic, expect availability to increase and rents to plateau as tenants retrench and the city remains in shelter-in-place with all non-essential businesses closed. According to Colliers International first quarter data, the San Fernando Valley had office vacancy in the first quarter of 11.6 percent, compared to 11.1 percent quarter-over-quarter and 10.3 percent year-over-year. East San Fernando Valley was tightest, at 9.7 percent over 9.9 percent in 2019’s fourth quarter. In the Tri-Cities, where Burbank and Glendale represent a combined 13 million square feet of office space, the cities showed vacancies of 9.1 and 15.1 percent, respectively. In Santa Clarita, where there was just over 2 million square feet of inventory open; vacancy came in at 11.7 percent compared to just over 14 percent year-to-year. “The first two months of the year were actually pretty solid,” said Michael Soto, research director for Southern California at Savills US, the London-based real estate firm with offices in downtown Los Angeles and West Los Angeles. “The leasing was slower but only because the unemployment rate was so low. Companies were having trouble trying to find employees.” Leasing volume fell dramatically in March. “The next quarter will see a huge drop off in leasing activity,” Soto said. “Also, we’re tracking to see if there’s a sharp rise in availability.” Sudden pivot At NAI Capital’s Encino office, Executive Managing Director Chris Jackson and Vice President of Research & Marketing at NAI Capital J.C. Casillas discussed what seemed like another stable quarter in a strong economy until the bottom fell out by mid-March. “By all accounts, the office and industrial markets were doing well, especially the industrial markets,” Casillas said. “All of the markets were doing fairly well with very little vacancy and industrial in the San Fernando Valley as well as the same for office space,” Jackson added. “There was definitely activity in both leasing and sales.” Santa Clarita, which has had some sluggish office vacancy for quite some time, continued more or less status quo. “Santa Clarita was doing very well in industrial as well but had seen a little bit of a slowdown in spaces over 100,000 feet over the last year,” said Jackson, whose agency nevertheless managed to squeeze in a massive leasing of a 103,916 square-foot distribution and manufacturing facility in Valencia, at 28545 Livingston Ave. West before the coronavirus hit. Looking forward NAI Capital conducted a survey on the Southern California office market, and, for the near future, confidence appears rattled. According to the data, when it came to asking rents, 68 percent of those polled expect rents to decline as market conditions will not sustain pre-pandemic rates; existing tenants are requesting rent relief from landlords while vacant space will be priced lower. 65 percent of those polled believe sales prices will see steady declines as vacancies pile up and panic selling from overleveraged owners depresses the office market. Some 88 percent believe landlords will offer more concessions to keep tenants. “Office landlords will offer more concessions to keep tenants,” Casillas said. “Many landlords are proactively re-negotiating leases, offering rent abatement or deferring rent with repayment on a certain date and/or restructuring with blend-and-extend leases.” Casillas added that observers should expect vacancy to increase, downsizing to occur and businesses to shutter while tenants will default on leases and “sublease space will increase.” Plus, there is the prospect of coworking brands forfeiting square-footage in the region. Given the short-term nature of flex memberships, it’s an open question how coworking providers will fare. “There could be a lot of space coming back,” Soto said. “Coworking and flexible won’t go away but the venture capital, supercharged growth of coworking, that might be over.” In this area, NAI aligns with Savills. “Coworking offices are looking like ghost towns as people have been forced to work from home,” the NAI report said.