Why the SoCal Office Market Is Poised for a Swift Recovery

The Southern California office market is well positioned for a swift recovery. The market has continued to see strong demand from investors looking to gain entry into the market, and while activity declined last year, the market outperformed the nation and other major metros.

“We do have some headwinds, including housing costs, high taxes and long commute times; however, Southern California has a resilient economy with a diversity of industries to counter balance those that are in recession,” Michael P. Zietsman, principal at ZPG, tells GlobeSt.com. “Social media, gaming and technology companies continue to expand their office space in L.A. and will help this economy recover faster than other major markets.”

Last year, the local office market was significantly impacted by the pandemic. Leasing activity and investment activity declined, and revenue was significantly reduced. “Many of the buyers of office building were relatively unknown or new to the market.  Institutional and value-add investors were replaced with foreign investors or family offices that bought properties that they believe have long-term cash flow stability,” says Zietsman. In addition, there was a widening bid-ask spread between buyers and sellers that hampered investment activity. “The one bright spot for investors in all of this was that financing costs dropped for well-qualified borrowers and high-quality assets with secure tenancies,” adds Zietsman.

Although activity slowed, the market outperformed the national market. Los Angeles and Orange County had only a 28% decreased in large office transactions compared to a 45% decrease nationally. Zietsman says that this exemplifies the ongoing demand for opportunities. “Investors have been targeting the L.A. market for the last several years because of its diversified economy and relative constraints on new supply. Also, this market is where the convergence of technology, media and entertainment is happening and its leading to exciting growth and office demand,” he says.

Opportunistic investors saw the pandemic as a way to enter a typically competitive market. “It is key to note that the demand for high-quality office investments was not satisfied pre-pandemic, as a result, some investors seized the opportunity buy into the L.A. market with less competition,” says Zietsman.

The market is well positioned for a strong recovery, but Zietsman doesn’t expect it to happen all at once. “I expect there to be a short to medium term pullback in demand as certain tenants embrace the work-from-home model partially or completely,” says Zietsman. “However, I believe that people enjoy the interaction with colleagues at work and benefit from proximity to the leaders of their companies.”

Activity this year will depend on leasing activity. “The dust hasn’t yet settled on rental rates, occupancy and leasing concessions,” says Zietsman. “So far, landlords appear to be holding firm on leasing terms.  If this attitude prevails, I think we will see investors flood back into the market.  If leasing conditions deteriorate then I expect we will see the bid/ask spread remain wide and fewer transactions will occur until one side capitulates.”