Did Remote Work Collapse the Southern California Commercial Office Space Market?

For over two years, headlines have reported the end of the Southern California commercial office space market due to the rise of remote work culture during the COVID-19 pandemic. People said “office is dead” and that the office space sector would disappear. However, those same headlines and rumors can’t be further from the truth.

While it’s still really early to predict the post-pandemic direction of the commercial office space industry, it’s clear that the office space market in Southern California is recovering at a slow but healthy pace, and companies are still trying to figure out the best strategy for themselves and their employees.

Over 2 and a half years after companies were forced to adapt their employees to remote work, the office space market is, in fact, not dead and thriving mainly due to the major presence of tech companies in Southern California.

Before the pandemic, in 2019, about 4% of employed people in the U.S. worked exclusively from home; by May 2020, that figure rose to 43% of workers.

During the Coronavirus Recession of 2020, we saw a slight dip in office rental prices (price per square foot) in Southern California cities such as Santa Monica, Culver City, Downtown Los Angeles, Torrance, Irvine, and even Long Beach. We also experienced a slight increase in overall office space vacancies, but never the significant amount that many expected. For example, Long Beach only experienced a 5% increase in office space vacancies during the pandemic.

How Companies are Adapting to the Post-Pandemic Work Environment

Despite more than half of office workers in the United States desiring to work remotely, 50% of companies want workers back in the office full-time, while 85% of companies say that they want employees to spend at least half of their work week in the office.

However, there’s still a small yet significant amount of office workers that want to be in the office. Some have experienced issues such as mental isolation and zoom burnout, which makes workers miss being around colleagues and collaborating in the office.

To help sustain the productivity and happiness of their employees, some companies have embraced a hybrid model for employees, which sees them come in two or three times a week. This hybrid model essentially requires less office space per employee, which has caused some companies to downsize their office spaces to match their demand. The national trend right now is that most employees are able to work remotely at home a day and a half out of the week.

Regardless of the push and pull between employees and employers on the balance between working from home and the office, it’s clear that this hybrid work environment is here to stay permanently.

Just because most companies are allowing their employees to work from home for part of the week, it doesn’t mean that they need to downsize their office space significantly. Even if employers require their employees to work in the office for at least once a week, they’ll still need a workspace for their workers. Therefore, there will still always be demand for commercial office space.

How is the Commercial Office Space Market in Southern California?

In order to truly determine how the Southern California market is doing, we need to look into the current numbers and compare them with pre-pandemic and pandemic numbers. In the context of this article, we will be looking at the average vacancy rates, rent prices, sales volume, sales price, and capitalization rate for 2022.

Average Vacancy Rates

  • Los Angeles County – 25% vacancy rate
  • Downtown Los Angeles – 18% vacancy rate
  • Downtown Long Beach – 26% vacancy rate
  • Suburban Long Beach – 34% vacancy rate

Despite the influx of office space construction that occurred in Downtown Los Angeles before the pandemic and the vacancy rate increasing to 14.5% during the first quarter of 2020, the area’s vacancy rate in 2022 remains at 18%, a decrease from 25% in 2021. This is a good indicator that the office space market in Los Angeles is experiencing a slow yet healthy recovery.

Although the average vacancy rate in Long Beach is slightly higher than the average for LA County and Downtown LA, it’s still not as significant as the 40%+ vacancy rates that many analysts forecasted during the middle of 2020.

Average Office Rent Prices

  • Downtown Los Angeles – $3.15/sq ft
  • Long Beach – $2.51/sq ft

Along with the rise of vacancy rates, analysts also expected asking rents to fall. Although a 2020 forecast from CBRE predicted that the average office rent would sink to a low of $2.97/sq ft, the Downtown Los Angeles office market has experienced a 2.3% rent growth since 2020.

Downtown Long Beach experienced a slight decrease in rent prices from $2.48/sq ft in 2019 to $2.39/sq ft in 2020 but has also managed to experience rent growth up to $2.51/sq ft in 2022.

This growth has to do with constant demand from big companies such as SpaceX and Virgin Orbit that have chosen Long Beach due to it being the last affordable oceanfront city.

Sales Volume

  • Los Angeles County – $6.2 billion in office sales (12-month average)
  • Long Beach – $196 million in office sales (last 12 months)

The annual average sales volume in Los Angeles County dipped just a little less than $1 billion compared to the pre-pandemic average sales volume of $7.2 billion. This indicates that office spaces are still selling, and the market is still healthy due to the demand for office buildings.

What’s more impressive is the increase in office sales volume for Long Beach, which experienced a rise up to $196 million in the last 12 months from the 5-year annual average of $105 million.

Average Office Space Price

  • Los Angeles County – $469/sq ft
  • Downtown Long Beach – $246/sq ft

Average Capitalization Rate

A lot of commercial real estate investors buy properties based on the Capitalization Rate (or cap rate for short). It is defined as the ratio of an asset’s net operating income (NOI) to its valued price.

  • Los Angeles County – 5.4%
  • Long Beach – 5.6%

Many analysts consider a “good” cap rate to be around 5% to 10%, and since the average for LA County and Long Beach sits at 5.4% and 5.6%, it tells us that the office space market is indeed not dead.

Conclusion: Is the office sector dead?

Simply put, no. The office sector in Southern California is not dead for three reasons:

  1. There’s still demand for office buildings. As shown by rent growth and sales volume returning to pre-pandemic levels, we’re confident that investors are still willing to make bets on the commercial office market.
  2. Vacancy rates are not as high as predicted and still slowly recovering. Although many employees are spending most of their work weeks at home, employers still need a space for them when they return to the office at least once a week.
  3. The hybrid work model is here to stay. It’s difficult to tell where the trends will go during the next 12 to 24 months, but one thing that’s guaranteed is that companies will have to keep the hybrid work model for their employees. This will keep an ongoing demand for office spaces as companies downsize their needs.

The office sector in Southern California and the nation as a whole is slowly recovering and essentially evolving as companies continue to navigate the post-pandemic work environment to find a balance for their employees.

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