The detrimental effects of the COVID-19 pandemic permanently changed the world in many aspects. From the massive movement to remote work to the skyrocketing inflation rates, the pandemic affected all sectors of the economy. One area that experienced a significant shift was the commercial office space market.
Before the pandemic, companies were boasting about their full-access gym, the in-office chef, and countless amenities. Now, employers face difficulty convincing employees to return to the office even with these lavish facilities.
What happened to the commercial office space sector in Los Angeles? Can businesses hold up in this ever-changing market? In this blog post, we'll uncover the effects of the pandemic on commercial office spaces in Los Angeles and explore what lies ahead for the sector.
An Overview of the Commercial Office Marketplace in Los Angeles
The 1999 Avenue of the Stars, formerly known as SunAmerica Center, is the leading commercial space in the city.
According to a commercial real estate data sheet published by CommercialEdge in February 2023, this establishment's average listing rate last January 23 was $42.65 per square foot, with an estimated 0.8% increase from the past 12 months.
Moreover, the total vacancy rate of the commercial building was 14.7%, slightly lower than the nation's 16.6% average.
With this fact, let's look at the overall condition of the city's commercial real estate marketplace:
Supply
Despite the increased vacancy in Los Angeles's commercial real estate units, around 2.56 million square feet of commercial rental spaces are estimated to be constructed in the city. This signifies more incoming rental units in the city, propelling a spike in supply despite the projected decrease in demand, which could be an indicator of lower rental prices in the near future.
Transactions
With the staggering economy during the pandemic, many commercial rental establishments couldn't keep up with the changing trends and ended up selling their properties. Around $86 million worth of commercial properties was estimated to be sold in Los Angeles last January 2023.
Factors Affecting the Changing Landscape of Commercial Office Spaces
For many, the pandemic seems like a climatic event from a distant past, but its effects still linger with us these days. The COVID-19 pandemic significantly changed commercial property management in the city. Here are some of the factors that had the most significant effect:
Transition to Remote Work
One of the most evident changes after the pandemic surge is the massive transition to remote work.
Due to health and safety concerns, many businesses shifted from an in-office setup to a hybrid or entirely virtual office. This caused a significant decrease in demand for commercial office spaces, leading many companies to downsize or vacate their offices altogether.
The service industry, such as professional management, health and research, and trade and finance services, takes up a large portion of the city's workforce.
Since most of the day-to-day operations for these sectors can be done remotely, many businesses opted for a hybrid or full-remote setup to accommodate the nation's health and safety protocols.
Lay-offs
The economy, directly and indirectly, affects the status of commercial real estate. With the significant decrease in business operations, many companies have resorted to cost-cutting measures, such as downsizing or lay-offs.
This reduced employee count led to a diminishing demand for commercial office spaces and an overall decrease in the city's workforce. This resulted in an increase in vacant offices across the city. Moreover, most of these laid-off employees sought jobs that allowed them to work remotely, further stretching the gap between the supply and demand of commercial office spaces.
Increasing Interest Rate
With the rising inflation, many commercial landlords struggle to keep up with their mortgage payments. This caused an increase in interest rates, further burdening those needing to take out new loans or finance existing ones. Those who can't keep up with the rising cost of maintaining their office spaces find it challenging to keep their doors open and are forced to sell their property or default on their loans.
Those who found a way to maintain their properties increase their rental prices to accommodate the increasing overhead costs, which strains business owners who want to keep their operations in an office setup.
Inconvenient Location
The competition in the commercial real estate market is tight, and one of the many factors business owners consider when looking for office spaces is location.
Due to the pandemic and the projected economic trends, many businesses choose to downsize or vacate their properties in more expensive areas in the city.
Instead, they choose a cheaper area with lower overhead costs where they can maintain their operations without compromising the quality and safety of service.
Lack of Amenities
Even before the pandemic, employers leverage in-office or surrounding amenities to sweeten the deal for their employees.
However, with the current pandemic protocols in place and safety concerns, many of those amenities are either unavailable or not maximized, effectively making them useless.
Now, many employers are looking to trade their enormous offices for smaller spaces with ample amenities to keep their hybrid or remote employees looking forward to going to the office.
Current and Projected Trends in Commercial Real Estate
Despite these changes, it doesn't mean the city's commercial real estate landscape will fade. Landlords must learn to adapt and find ways to make their properties more appealing while keeping up with the current health and safety protocols.
Here are some of the observed trends in Los Angeles property management:
Smaller Spaces
Many career experts and data scientists predict that remote work is here to stay. As more and more companies devise a way to transition their workforce to a hybrid or remote setup, the demand for smaller office spaces increases. Gone are the days when a business needs to occupy an entire building or business park.
Quality Over Quantity
Business owners are carefully weighing their options when it comes to their properties as the demand for commercial real estate declines. Other than choosing a conveniently located office space, they also seek out properties that offer ample amenities and services to keep their employees safe and entertained.
Furthermore, amenities that accommodate the health and safety protocol of the state and city are also a top priority. This includes temperature checks, compartmentalization, and contactless access to the building.
Coworking and Flexible Working Spaces
Coworking and flexible spaces are hailed as the future of the commercial real estate market. Coworking spaces are neutral zones for businesses of all sizes, perfect for those who want to enjoy a productive work environment without committing to long-term contracts or hefty overhead costs.
According to Zippia, over 6,200 coworking spaces were built in the U.S. in 2022. Furthermore, over 1.08 million American employees and freelancers regularly work in these flexible spaces.
Coworking spaces are a win-win for both the tenant and operators alike. Tenants can enjoy a productive office setup without paying for long-term lease costs and other expenses to maintain an office. On the other hand, landlords or operators may enjoy the short-term and flexible contracts they can offer with these spaces.
Storage and Retail Facilities Could Survive
Although the sudden and massive transition towards remote work threatened the future of commercial spaces offering office spaces, storage, and retail facilities could survive the change.
According to Voit, warehouses in America are running out of room. By the end of the third quarter of 2021, the warehousing industry hit a historic low of a 3.6% vacancy rate. This is attributed to the increase in demand for e-commerce during the height of the pandemic.
Warehouses play a significant role in the supply chain of many companies, and the demand for them is still projected to increase in the next few years. This could mean good news for landlords leasing their properties as storage or retail spaces.
Key Takeaways
The work culture is changing due to the pandemic, with more companies transitioning their workforce to a more sustainable setup. This has triggered significant changes in the commercial real estate industry, with landlords and property owners struggling to adapt.
Smaller offices and coworking spaces are now the leading trends as businesses prefer flexibility, practicality, and shorter contract deals with their properties. Despite the recession the service industry faces, storage and retail facilities have survived the increase in demand from an e-commerce market.
Many years before, commercial real estate experts were projecting a different outcome for the sector. However, the pandemic has forced us to rethink our approach and explore other possibilities for businesses to thrive in this new normal.
There's no telling what the future holds for this sector, but understanding the changing trends of commercial property in Los Angeles is critical for property owners and landlords who want to ensure the success of their investments. If you’d like to learn more, contact us at Bell Properties. We’d love to be your property management resource in LA County.
