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Subleasing’s Fading Star

As office-based businesses grappled with the repercussions of work-from-home operations in the pandemic, the longstanding practice of subleasing suddenly gained new relevance. But as the coronavirus panic fades, so is the subleasing trend at a point when there’s plenty of office space on the market.In the greater L.A. market, roughly 1.5 million square feet of subleasing space has been pulled off the market in the first half of the year by companies changing course, according to Savills, a real estate research firm in downtown Los Angeles.“When we went into lockdown last spring, we saw tons (of subleasing) on the market all over the region,” said Mike Soto, Southern California director of research for Savills. “Everyone was working from home. Cost-conscious occupiers got someone to share or companies realized ‘We might go remote from here on out and we may not need any space.’”But presently, the office market has shifted.“Businesses navigating a return to the office are approaching things differently,” Soto said. “Not every company is adhering to a one-size-fits-all return to the office.”Some businesses are shedding space as employees work from home while others are demanding a hybrid mix of employees working remotely and showing up at the office.“At Warner Center, subleases have been pulled off the market,” Soto said. Last year, the Savills researcher said a sublease was hitting the market every day.“Now it’s every two weeks,” he added.North Los Angeles office specialist Dan Sanchez at JLL’s Burbank office noted that the San Fernando Valley represents a middle-ground in the greater L.A. market. He believes that Valley subleasing peaked in the second quarter, citing pre-COVID sublease rates at about 1.6 percent and now sitting at 3.8 percent.“’Because it’s spread out, it tends to be fairly stable,” Sanchez said of the North L.A. market, with Burbank the high-achieving outlier. “Burbank has held very steady. Because of the entertainment industry, it continues to have high value.”Other parts of North L.A. are shouldering big vacancies of office space.“Santa Clarita and Conejo does have a higher share of sublease space on the market,” Sanchez said. “There are a few large blocks of space that are out there.”According to Savills, more companies are hunting for office space. In the second quarter, office leasing increased to 3.1 million square feet. This was a 55 percent increase over the 2 million square feet leasing activity reported in the previous quarter but still down 21 percent from the 4 million square feet from the first quarter 2020, as well as down 10 percent from the five-year quarterly average of 3.5 million square feet.“As the Los Angeles economy is now reopened,” the study said, “there is cautious optimism that leasing activity will continue to increase as occupiers return to the office. However, with the long-term effects of flexible and hybrid work policies on office space demand still unfolding, and the market facing record-high availability, it appears that recovery will be slow and uneven.”“There are two takeaways – one is people putting space on the market but also normal absorption isn’t working because of the COVID issue,” said Sanchez at JLL. “We haven’t seen it going down yet, (but) it should level off and head in the right direction.”Despite tenants pulling back on space, “it’s still all fairly early,” Sanchez said, to see where this will go post-pandemic.“The Delta variant has kind of slowed things down and (companies) continue to reevaluate).”Beyond the ValleyIn fact, the Valley was never the center of the subleasing trend. Soto said West Los Angeles “saw a third of all sublease activity” in the greater L.A. market.That speaks to the nature of the Valley’s companies, which, aside from the Burbank-based entertainment industrial complex, tends to skew older and more traditional.In Savills’ second-quarter sublease report, tech company hubs such as Santa Monica, Playa Vista and Culver City dominate the market. In contrast, subleasing opportunities in places such as Santa Clarita (60,000 square feet at 24305 Town Center Drive in Valencia, offered by Cunard Line; 51,500 square feet at 27200 Tourney Road in California Resources Corp.’s offices), Warner Center (31,533 square feet at 21600 Oxnard St., subleased by Center for Autism & Related Disorders) and Calabasas (27,285 square feet at Calabasas Commerce Center, offered by Western General Group) are relatively small spaces.“It’s been minimal in the Valley by comparison – the kind of companies that did put space on market for sublease were mostly fast-growing tech companies,” Soto said.With offices in Santa Clarita and Encino, Yair Haimoff of Spectrum Commercial Real Estate handled a pair of subleasing deals in Encino at 15531 Ventura Blvd., where DeVry University committed to 10,000 square feet of ground floor offices; and the second floor, another 10,000 square feet, went to Prager University.“Transactions are happening but with more availability now than before,” Haimoff said. “We see the change (over last year). We see more activity but some of the larger tenants don’t need more space.”Burbank’s strengthAccording to Colliers International data, Burbank had the lowest office vacancy rate in the Valley region during the second quarter at 8.7 percent, compared to 17.7 percent in the San Fernando Valley and 18 percent overall for L.A. County.“Burbank was the one submarket in all of Los Angeles that is coming out of this pandemic probably stronger than it was when it went into it,” Savills’ Soto said.With all the available space and sluggish leasing, overall asking rents by landlords fell to $3.82 per square foot per month from $3.90 a square foot in the previous quarter but were still above the $3.73 per square foot in the second quarter last year.

“Landlords are fatigued but they’re not stupid,” said Jim Markel, vice president and regional manager of Marcus & Millichap in Encino. “They’re not happy to fall on their sword and take a discounted price.”Looking forward, despite concern over the Delta strain, Sanchez believes the Valley office market is better off this year than it was last year.

“In general, people have now absorbed the pandemic,” he said. “They’ve lived through it, they understood it. Obviously, we need to see where things happen with the variants, but a lot of the shock has been absorbed and companies are planning and are trying to figure out the next step.”The office market appears on the mend for the next several quarters, and Sanchez remains a believer in the long-term viability of the work setting.“There’s collaboration, there’s culture,” he said. “For some people, being in the office is the way to be.”

Michael Aushenker
Michael Aushenker
A graduate of Cornell University, Michael covers commercial real estate for the San Fernando Valley Business Journal. Prior to the Business Journal, Michael covered the community and entertainment beats as a staff writer for various newspapers, including the Jewish Journal of Greater Los Angeles, The Palisadian-Post, The Argonaut and Acorn Newspapers. He has also freelanced for the Santa Barbara Independent, VC Reporter, Malibu Times and Los Feliz Ledger.
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