In the wake of the pandemic, downtown Los Angeles is grappling with significant shifts in its office real estate landscape.
Los Angeles is experiencing changes, similar to what cities like Chicago and San Francisco have currently been experiencing.
This year, Chicago and San Francisco have been grappling with an inundation of tax appeals. Chicago has surged to becoming the second-most popular city for such challenges, there’s speculation on whether LA might be treading a parallel path.
In a notable instance, Brookfield DTLA Fund Office Trust Investor had anticipated the expiration of Orrick law firm’s lease in 2022 at their 777 Figueroa St. tower. While the landlord was able to persuade Orrick to occupy a different property they owned, the law firm downsized its office space due to hybrid working models, taking only one-third of the space they previously leased. This was a significant setback for Brookfield DTLA, especially since they had already stated in 2022 that over half a million square feet of leases across their portfolio would expire. The ramifications extended as Brookfield DTLA admitted last month to defaulting on loans related to the aforementioned tower and the nearby 52-story Gas Company Tower. This could spell further challenges for the expansive 69-million-square-foot downtown LA office market.
Post-pandemic dynamics have undeniably affected office demand. The average price per square foot for top-rated downtown LA offices plummeted to $242 in the recent quarter from $523 three years ago. While real estate experts anticipate a prolonged period of market adjustment, they recognize the potential of newer office properties and those offering sought-after amenities like gyms, outdoor meeting spaces, and air quality monitoring systems.
However, the challenges are evident. Newport Beach-based KBS, another prominent office owner in downtown LA, has struggled to sell its Union Bank Plaza office tower. Negotiations with potential buyer, New York’s Waterbridge Capital, have been drawn out and inconclusive. If the deal proceeds, the sale price could be significantly lower than what KBS initially paid, reflecting the broader market’s downturn.
Moreover, the slow pace of large office space sales and rising vacancy rates (currently at 18.7% in downtown LA) reveal a market in flux. This is more pronounced in comparison with cities like New York, Chicago, and San Francisco, which are all currently inundated with commercial property tax appeals.
Downtown LA’s woes predate the pandemic, and despite attractive amenities in some buildings, several remain unoccupied. For instance, the 777 Tower, boasting a luxurious marble lobby and other perks, is situated in the prime financial district but remains under occupied.
Adding to the uncertainty, owners such as Hudson Pacific Properties have refrained from selling their properties. They are likely awaiting a more favorable market.
Sean Fulp of Colliers points to a hesitancy among investors due to downtown LA’s historical performance. Several factors contribute to their reluctance, including rising office vacancies, increased interest rates, and urban challenges like perceived crime.
Efforts by landlords to attract tenants with incentives have yielded limited results. This might be exacerbated by distressed landlords’ potential inability to invest in office upgrades, possibly diverting their attention to resolving loan-related complications.
However, the future is not entirely bleak. While the fate of downtown LA’s office spaces remains uncertain, each property’s trajectory will be influenced by factors such as its location, condition, and owner’s financial standing. Some see parallels between the office market’s current state and the challenges that malls faced in previous years. A slow and considered approach might benefit stakeholders, allowing the market more recovery time.
Additionally, opportunities may arise from the current predicament. The availability of vacant spaces might attract companies looking to establish a significant urban presence. Alternatively, some of these offices might be repurposed into housing, educational institutions, or healthcare facilities.
Jessica Lall from CBRE echoes optimism for downtown LA’s trajectory. Prior to the pandemic, the area was transforming into a dynamic urban center, with growing residential populations and commercial establishments. With anticipated enhancements to transportation and the city’s role as a host for the World Cup in 2026 and the Olympics in 2028, downtown LA’s future might still be bright.
As downtown LA navigates these waters, the lessons from cities like Chicago could be invaluable. While the future is uncertain, Los Angeles has historically risen to meet challenges, turning them into opportunities for growth and transformation.
