Looking for Bargains on Office Space? Prepare for Sticker Shock. Rents Are Higher Than Before COVID
Nearly a year into the worst pandemic in a century, Los Angeles companies expecting to snap up office space on the cheap may be disappointed.
L.A. office rents have held steady or even gotten pricier since COVID, even as more space has become available as most employees continue to work from home.
"I honestly thought rents would have dropped by now," said Michael Soto, research director at the brokerage Savills Inc. "For a lot of tenants, they are still seeing a bit of sticker shock that prices haven't dropped yet."
Despite a 22% vacancy rate, the average asking L.A. office rent at the end of 2020 creeped up to $44.88 a square foot from $42.12 at the end of 2019, according to Savills. In West L.A., where most tech companies are located, rent inched up to $62.96 from $59.58 even as vacancy also increased to 21% from 14%.
"It's counterintuitive," said Soto. "Usually when availability goes up, rent goes down. But rents have been sticky."
Soto credits the steadiness in prices to landlords holding firm on pricing, anticipating that workers will return to the office in the second half of the year.
"We are in a wait-and-see approach to see who blinks first," Soto said.
Even though overall demand for office space in L.A. has fallen, it is still doing much better relative to other major cities, according to the VTS Office Demand Index (VODI), a real time tracker of private commercial real estate data. It found demand in L.A. was down only 15% in January compared to the same month in 2020. By comparison, demand plummeted 52% in San Francisco and 68% in New York.
One reason why is the Netflix effect. Through the pandemic, streaming services continued to aggressively expand their L.A. footprint, which helped drive up rent for the market as a whole.
"These are companies that are flush with capital," Soto said. "They have taken advantage of drop off in leasing activity to expand to get favorable terms."
Some large tech companies – such as Salesforce, Zillow, Twitter and Dropbox – have said remote work will be permanent. But they are still in the minority as most companies plan to return to the office, even if they will not require all their workers to be present all the time.
Just one in 10 companies expect all employees to return to their pre-pandemic work arrangements, according to a recent survey conducted by the National Association for Business Economics. A dot.LA survey of top L.A. VCs conducted in December found 28% do not expect employees to ever go back, but 44% expect employees to return during the second half of this year.
Jamie Montgomery, co-founder and managing partner of March Capital, said he never considered giving up his venture firm's Santa Monica office and that he's hopeful his staff can return in a few months.
"We have a relatively young team and they like the social interaction," Montgomery said. "I think we're in what I would call a creative industry where you kick around ideas and you come up with the best ideas. I mean, I'm not going to sit here at my desk and be a brilliant investor."
Montgomery says he was able to buck the trend of higher rents when he signed a new lease in December, lowering his rent to where it was five years ago. He was eager to get the deal done before prices increased.
"I thought if we waited too long we probably would miss that window," he said.
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