LA Office Sublease Trends: Benefits and Challenges

 Sublease space is on the rise in Los Angeles' office market.

Sublease space is on the rise in Los Angeles' office market.

  • 5M SF of office space available for sublease, up 13.5% over the past two years

  • The average asking rent for sublease space remains 6.2% below direct space

  • LA West contains 38% of the total available sublease space in Los Angeles County

  • Tenants see value in sublease space on the Westside

Over the past two years, the Los Angeles office market witnessed a steady rise in available sublease space. At of the end of 2Q 2018, more than 5M SF of office space was available for sublease. This represented a 2.7% uptick over the prior quarter and 2.0% from 2Q 2017. The average asking rent for available sublease space rose to $2.91/SF, up 5.1% from 1Q 2018 and 4.3% year over year. 

The LA West submarket posted the largest amount of available sublease space at nearly 2M SF, a 15.8% increase above to the previous quarter. While the average asking rent for direct space in the LA West submarket was $4.13/SF, the average sublease rate of $3.99/SF offered a 3.5% discount. Tenants are cashing in on this rent reduction to expand their footprints in the Silicon Beach office market and brought LA West’s subleasing volume to 306,688 SF this quarter, the highest level of activity seen since 4Q 2003. Tech and media companies accounted for a significant portion of 2Q 2018 subleasing activity. The Tennis Channel occupied 69,002 SF of sublease office space from Beachbody Holdings LLC at the Lantana Entertainment Media Campus in Santa Monica for $4.95/SF. Playboy leased 40,214 SF of sublease office space at 10960 Wilshire Blvd in Westwood at an asking rate of $3.85/SF.

Why is office sublease space increasing in Los Angeles County?

Los Angeles County is seeing greater amounts of high-priced space, particularly in LA West, being placed on the market for sublease. In LA West, 260,025 SF of sublease space was added to the market in 2Q 2018 compared to 46,249 SF in 1Q 2018. This brought the total available sublease space in the LA West submarket up 22% from its 2Q 2017 total. The Downtown Los Angeles, LA North, South Bay, and Tri-Cities submarkets also experienced upticks in sublease availability relative to 2Q 2017. 

Several larger sublease spaces above 20,000 SF are having trouble securing tenants, and the accumulation of this space sitting on the market impacted availability. For example, DirectTV’s combined 101,770 SF of sublease space divided across three floors at Grand Ave. Corporate Center in El Segundo, each sized over 20,000 SF, had been on the market for over 24 months at the quarter’s end. Automotive information company Edmunds’ 62,556 SF of sublease space at Colorado Center in Santa Monica sat on the market for more than 7 months by the close of the quarter. Fox Interactive Media’s 48,351 SF sublease space at The Bluffs at Playa Vista was on the market for more than 108 months at the end of 2Q 2018 as well. Collectively, these large spaces represented nearly half of all available sublease space in Los Angeles County mid-year.

Growing sublease availability is also driven by companies consolidating, outgrowing their existing spaces, downsizing, or maximizing space efficiency due to technological changes. Software firm NationBuilder placed its 55,000 SF space at 520 S. Grand Avenue in Downtown Los Angeles on the market for sublease this quarter at a $3.00/SF asking rate with plans to move into a smaller space. Snap Inc. fell into the consolidation category when it put 163,000 SF of space across 14 Venice locations on the sublease market in 1Q 2018 and moved employees into its corporate headquarters at Santa Monica Business Park. 

Sublease rental rates offer sizable discounts

The average asking rent for sublease space in the Los Angeles office market ($2.91/SF) remained 6.2% below the average rental rate for direct space of $3.09/SF. Sublease space offered the best bargain in the Tri-Cities submarket where the average asking rent for direct space was $3.04 vs. $2.24 for sublease space, a 35.7% discount. 

Although sublease rents are going up overall due to more high-priced creative office space being put on the market, many existing sublease spaces have seen asking rents decline from their 1Q 2018 rates to remain competitive. For instance, at The Water Garden in Santa Monica, asking rents for 8,591 SF of sublease office space were cut from $3.25/SF to $2.50/SF. In another example, a 9,638 SF creative office sublease space at The Taft Building in Hollywood cut its asking rent from $4.10/SF to $3.82/SF. Both spaces remained vacant at the end of 2Q 2018.

Still, not all sublease spaces offer discounts below Los Angeles County’s direct asking rents. Oath, formally AOL, is asking $4.95/SF for 30,466 SF of space at 331 N Maple Dr in Beverly Hills and Saban Brands’ 24,402 SF of space at 10100 Santa Monica Blvd in Century City is asking $4.45/SF. These asking rents were 60.2% and 44.0% above Los Angeles County’s average asking rent for direct space, respectively. 

Outlook for the remainder of 2018

In 2Q 2018, vacant sublease space has increased to more than 2.3 million SF, up 63% over the year. As vacant sublease space rises to over half of the total available sublease space, expect pressure on sublessors to reduce asking rents. As sublease rents drop, occupancy will trend upward for the rest of 2018.