Los Angeles Commercial Office Market: Q4 2024 Conditions Report

Los Angeles office markets continued adjusting to post-pandemic utilization patterns in Q4 2024, with divergent performance across building classes and submarkets. This report analyzes vacancy rates, rental trends, construction activity, and emerging office-to-residential conversion opportunities based on market data and permit records.

Vacancy and Absorption Trends

Overall office vacancy in Los Angeles County reached 19.7% in Q4 2024, up 180 basis points from Q4 2023 and representing the highest vacancy rate since Q2 1995. However, this aggregate figure masks significant variation by class and submarket. Class A downtown office vacancy reached 24.8%, while West Los Angeles Class A space showed 14.2% vacancy. Class B and C properties experienced more severe distress, with countywide vacancy exceeding 23% for older office stock.

Net absorption remained negative for the seventh consecutive quarter, with 1.94 million square feet of space returned to the market in Q4 2024. This reflects both lease expirations without renewal and mid-lease terminations or subleases. The sublease market contained 4.2 million square feet of available space, representing 2.1% of total inventory and creating downward pressure on direct lease rates.

Rental Rate Analysis

Asking rental rates declined across most submarkets, though quoted rates increasingly diverge from actual transaction rates as landlords offer substantial concessions to attract tenants. Downtown Class A asking rates averaged $3.85/SF/month in Q4 2024 (down from $4.20 in Q4 2023), but effective rents accounting for free rent periods and tenant improvement allowances averaged $2.95/SF/month. West Los Angeles Class A asking rates held more stable at $5.20/SF/month (down from $5.40), with effective rates of $4.15/SF/month.

Tenant improvement allowances increased dramatically, now averaging $85-$125 per square foot for Class A space (up from $55-$75 in 2019), reflecting landlord competition for scarce tenants. Free rent periods extended to 6-9 months for five-year leases, compared to 3-4 months pre-pandemic. These concessions erode landlord economics substantially, particularly for properties with maturing debt requiring refinancing at current elevated interest rates.

Construction Activity

New office construction activity collapsed, with only 847,000 square feet under construction countywide as of December 2024—the lowest pipeline since 1998. This compares to 6.2 million square feet under construction in Q4 2019. Projects underway are exclusively build-to-suit developments with pre-lease commitments; no speculative office construction is active in Los Angeles County.

The development hiatus will eventually constrain Class A supply, but given current absorption trends and the large existing vacancy pool, meaningful supply constraints are unlikely to emerge before 2028-2030. Several planned projects totaling 2.4 million square feet have been formally cancelled or indefinitely postponed since early 2023.

Office-to-Residential Conversion Analysis

Office-to-residential conversion emerged as a significant trend, with 14 projects totaling approximately 2,100 residential units in various stages of planning or construction across Los Angeles County. Most conversion activity concentrates in downtown Los Angeles, where older Class B and C office buildings face structural obsolescence and difficulty competing for tenants.

However, conversion feasibility faces significant challenges. Analysis of candidate buildings reveals only 15-20% of downtown office inventory meets basic criteria for economically viable conversion: floor plates under 15,000 SF (allowing natural light penetration to units), ceiling heights exceeding 9 feet, and structural systems accommodating residential plumbing distribution. Buildings failing these criteria face conversion costs of $450-$650 per square foot—exceeding ground-up construction costs in many cases.

Recent state legislation (AB 2011, 2022) streamlined entitlements for qualifying conversions, and Los Angeles implemented expedited permit processing for conversion projects. Despite these incentives, conversion pencils financially only for buildings acquired at significant discounts to replacement cost. Several highly publicized conversion projects stalled during design or permitting when detailed cost analysis revealed unfavorable economics.

Submarket Performance Divergence

Downtown Los Angeles: Faces most severe challenges, with office utilization estimated at 55% of pre-pandemic levels based on transit ridership and parking data. Major employers including Salesforce, Blackrock, and entertainment companies reduced space significantly. The submarket benefits from conversion opportunities and improved pedestrian realm from recent public investments, but near-term outlook remains challenging. Several trophy properties marketed for sale found no buyers at offered prices, suggesting significant valuation reset underway.

West Los Angeles: Relative outperformance continues, driven by concentration of entertainment, technology, and professional services firms with stronger return-to-office adoption. Vacancy rates while elevated remain more manageable. New supply is constrained by limited development sites and community opposition to density. However, even West LA faces challenges, with Santa Monica and Westwood seeing increased sublease supply.

El Segundo/LAX Area: Aerospace and technology concentration provided relative stability. Vacancy increased modestly to 12.8%, but asking rents held steady at $3.95/SF/month. Development pipeline remains active with build-to-suit projects. Proximity to LAX and campus-style office parks proved resilient, though not immune to broader headwinds.

Pasadena/Glendale: Suburban markets benefited from some employer relocations from downtown and westside seeking lower occupancy costs. Vacancy rates remained elevated at 17.2% but showed stabilization. Rental rates declined modestly but without the dramatic concession packages seen in downtown.

Financing Market Conditions

Office property financing remained severely constrained, with most conventional lenders limiting or eliminating new office exposure. Properties approaching loan maturity face difficulty refinancing, with required equity injections of 25-40% to achieve refinancing common even for well-leased buildings. Several distressed sales occurred when owners elected to deed properties to lenders rather than inject additional equity for refinancing.

Cap rates for office transactions—when deals occur—widened to 7.5-9.5% for Class A properties and 9-12% for Class B/C assets, compared to 5-6.5% and 6.5-8% respectively in 2019. However, transaction volume collapsed to lowest levels since 2009, with only $1.8 billion in office sales countywide in 2024 compared to $8.4 billion in 2019. The lack of transaction volume makes valuation highly uncertain.

Tenant Utilization Patterns

Building access data suggests office utilization stabilized at approximately 65% of pre-pandemic levels countywide, though with high variation by industry. Financial services and legal averaged 75-80% of prior utilization, while technology and creative industries remain at 50-60%. Many tenants adopted permanent hybrid policies allowing 2-3 days remote work weekly, suggesting current utilization patterns may represent the new equilibrium rather than transition phase.

This structural shift in space demand per employee creates long-term challenges for office markets. Even if employment in office-using industries grows, space demand may not return to pre-pandemic levels. Some tenants reduced total square footage but invested in higher-quality remaining space, contributing to "flight to quality" benefiting Class A properties while pressuring older inventory.

Construction Cost Implications

Tenant improvement and renovation costs increased substantially, impacting landlord economics. Typical Class A office tenant improvements now range $125-$185 per square foot (up from $85-$120 in 2019), driven by labor costs, expectations for higher-end finishes, and incorporation of enhanced HVAC and air filtration systems demanded post-pandemic. Mechanical, electrical, and plumbing (MEP) costs increased disproportionately, up 35-45% over 2019 levels.

Base building renovations and capital improvements face similar cost pressures. Elevator modernization, HVAC system replacement, and building envelope upgrades all carry costs 30-40% above 2019 levels. These capital requirements stress property cash flows already challenged by rental rate softness and increased vacancy.

Regulatory and Policy Developments

Los Angeles implemented several office-related policy changes. The city's Adaptive Reuse Ordinance expanded to additional downtown zones, facilitating office conversions. Parking requirements reduced for office conversions, eliminating a significant cost and feasibility barrier. However, these supply-side interventions have not materially improved office market fundamentals given demand weakness.

Property tax appeals by office owners increased dramatically, with the Los Angeles County Assessor's Office reporting 340 office property assessment appeals filed in 2024—up from average of 85 annually in 2015-2019. Successful appeals will reduce property tax revenues for local jurisdictions, creating fiscal pressures.

Outlook

Office market recovery timing remains highly uncertain. Base case projections suggest vacancy rates peak in 2025-2026 at 21-23% before gradually declining as obsolete inventory exits through conversion or demolition, and as employment growth absorbs excess capacity. However, return to pre-pandemic vacancy levels (13-14%) unlikely before 2030-2032 even under optimistic scenarios.

The market continues bifurcating between newer Class A properties in desirable locations—which will likely recover earlier—and older Class B/C inventory facing potential functional obsolescence. Owners of marginal office properties face difficult decisions regarding capital investment, conversion feasibility, or disposition at values well below historical cost basis. The sector's challenges will persist, influencing construction activity, employment, and municipal finances throughout the latter 2020s.