Despite several large office leases signed in Q2 2022—including the largest lease in the market this year, a deal for more than 200K SF signed by Amazon—office leasing activity in Los Angeles dropped by 20% during Q2, according to the latest report from Savills Research.
According to Savills, leasing activity totaled 2.8M SF in Q2 in the LA market, dropping from 3.6M SF in Q1.
"With several anecdotal examples of deals falling out of contract by the end of the quarter (mostly from the technology sector) and other active requirements now on hold, the Los Angeles office market enters the second half of 2022 with more questions, none of which involve COVID-19," Savills' Q2 2022 report of leasing activity in LA stated.
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The office leasing activity report said the trend of office occupiers embracing hybrid work patterns will continue to blunt a more robust office recovery in Los Angeles.
"Many occupiers are utilizing a hybrid workplace model which will continue to act as a headwind for a more robust office market recovery," Savills said.
The Savills report noted that office availability actually decreased a tick during Q2, to 25.1% from the Q1 level of 25.3%, a dip of 20 bps that is the first time since Q4 2019 that availability levels dipped market-wide. Average asking rents remained steady at $3.87 per SF, only a penny less than the Q1 average.
The report said the overall trend of a tenant flight to quality has seen some high-end "trophy space" being taken off the market, resulting in less-expensive commodity Class A and B space making up a higher proportion of available space.
The slight dip in availability is likely to be short-lived as an economic cooldown takes hold, the report said.
Noting that a "fully reopened" Los Angeles regional economy with strong underlying fundamentals normally would result in higher office leasing activity and decreasing availability, Savills said uncertainty over the US economy combined with a paradigm shift in office work will push the pendulum in the other direction.
"The continued widespread adoption of hybrid workplace strategies and the return of uncertainty in the overall economy will keep the Los Angeles office market tenant-favorable for the foreseeable future," Savills said.
"Concessions will remain high as landlords continue to be aggressive chasing occupancy with over one-quarter of the Los Angeles market available for lease," the leasing activity report projected.
Savills said the largest office deal of the year so far has been Amazon's agreement to lease 207K SF at the Water Garden in Santa Monica. Other large leases included Forever 21, which inked a deal for 163K SF at California Market Center in Downtown LA; First Republic Bank, which expanded and extended its footprint at Century Park East in Century City to 156K SF.
Savills noted that deal volume in LA's office market "was top-heavy" in Q2. The firm's report said some small- and mid-sized tenants are still active but are taking longer to make their real estate decisions.
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