Consider the impact of the COVID-19-induced work-from-home movement on the owners of 325 million square feet of office space in Southern California. According to data compiled by the Cushman & Wakefield brokerage, by the end of 2019, there were 41 million square feet of vacant offices in the region, representing a 13% vacancy rate. However, as of June 2023, this number has risen to 68 million square feet, resulting in a 21% vacancy rate. This means that over the course of four-and-a-half years, there has been a significant increase of 27 million square feet of unoccupied office space in the area.
To put this into perspective, this 67% surge in vacant office space is equivalent to the total office space, both occupied and vacant, in cities like Memphis, New Orleans or Tucson.
This increase in vacancy is not exclusive to Southern California. Nationwide, office vacancies have grown by 50% during the pandemic, reaching a rate of 19.2% compared to the pre-pandemic rate of 13%.
Implications for Iconic Buildings
One notable example that highlights the impact of this trend is the U.S. Bank Tower in downtown Los Angeles. The 67% increase in empty offices in the region could potentially fill 11 floors of this prominent landmark, which spans 73 stories and 1.4 million square feet.
This shift away from traditional office spaces is not driven by a decrease in employment. In fact, the number of workers in the four-county region reached a record high of 8.04 million in May 2023, surpassing the figure from the end of 2019 by 48,000. The demand for office spaces has simply declined due to remote work arrangements, leading to significant economic challenges for landlords as they experience a decrease in tenants and cash flow.
According to McKinsey, the global office property values could potentially suffer an $800 billion loss due to the rise of remote work. This has already manifested in Southern California, where high-profile office properties such as Gas Company Tower and 777 Tower in Los Angeles have faced mortgage defaults. Additionally, two office towers in Orange County were sold at a significant loss, and two Santa Ana office buildings are being demolished to make way for warehouse space.
Despite discussions around the “return to office” movement, the reality on the ground suggests that this shift towards remote work is more than just talk.
Regional Variations in Vacancy Rates
When examining neighborhoods in the region, it becomes evident that certain areas have been more heavily impacted by vacant office spaces. The Westside of Los Angeles and the vicinity of John Wayne Airport in Orange County have the highest total vacant space. Additionally, downtown LA’s non-central business district and the Mid-Wilshire district are experiencing significant vacancy rates.
Here is a breakdown of the vacancy rates in 16 key markets:
LA West: 13.7 million square feet or 24% vacancy rate (4th highest rate among the 16 markets).
OC airport area: 8 million square feet or 20% vacancy rate (8th highest rate).
LA South: 7.5 million square feet or 24% vacancy rate (5th highest rate).
LA Downtown Central: 7.2 million square feet or 26% vacancy rate (3rd highest rate).
LA Tri-cities: 5.9 million square feet or 22% vacancy rate (6th highest rate).
LA North: 5.7 million square feet or 18% vacancy rate (10th highest rate).
LA Non-central business district: 4.2 million square feet or 32% vacancy rate (highest rate).
OC South: 3.9 million square feet or 18% vacancy rate (11th highest rate).
OC Central: 3.8 million square feet or 20% vacancy rate (7th highest rate).
LA Mid-Wilshire: 3.6 million square feet or 29% vacancy rate (2nd highest rate).
LA San Gabriel Valley: 1.2 million square feet or 10% vacancy rate (13th highest rate).
OC West: 873,743 square feet or 20% vacancy rate (9th highest rate).
OC North: 822,266 square feet or 15% vacancy rate (12th highest rate).
Inland Empire East: 790,713 square feet or 9% vacancy rate (15th highest rate).
Inland Empire West: 777,628 square feet or 10% vacancy rate (14th highest rate).
Inland Empire South: 332,161 square feet or 8% vacancy rate (16th highest rate).
Jonathan Lansner is the business columnist for the Southern California News Group. He can be reached at [email protected]
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