Forecasts and Updates for Major Western Region Rental Markets | Allen Matkins
Los Angeles experienced the second-lowest occupancy rate in the country during the COVID-19 pandemic. The massive 235 million square foot market has seen rents rise in five of the past six quarters despite the city having been closed for the past 18 months and vacancy rates hitting 40%. The rent increases are driven by 12 million square feet of new space reclaimed by the tech industry.
There have been pockets of activity in Culver City, Burbank and Hollywood primarily related to the burgeoning tech entertainment industry in the region. The demand for entertainment has remained high, increasing the need for sound stages and the like.
In contrast, the downtown Los Angeles market is stagnant, as businesses that traditionally occupy these spaces have stayed at home. These finance, real estate and insurance companies continue to perform well, but some believe they will need less space after the pandemic is over.
Concessions in all Los Angeles area markets are at record levels. There is no indication that these concessions will go down or that rental rates will go down in some of the less popular areas. In the future, owners and tenants are looking for flexibility and efficiency. Flexibility is key, as tenants may not know exactly what they need until they get everyone back to the office and are able to see how they want to use their space.
San Francisco was significantly affected by the COVID-19 pandemic when the city closed. Occupancy rates and transit use were the lowest in the country. The vacancy rate is 20%. With a high density of office space in the city center, the city’s business activity seemed flat. Behind the scenes, business continued from home offices and living rooms. A huge amount of wealth creation has continued, unemployment rates have remained low, and businesses in the region have continued to hire employees.
The best subleases in the area are moving again, and many of the current subleases will expire over the next three years. The city’s priorities are getting people back to work in the office, which requires workers to feel safe and comfortable outside their homes. As tech companies start to return to work, the plentiful supply of sublet space should wear off.
Bay Area highlights include 5M, a mixed-use development in downtown San Francisco. The building will be 100% leased before the end of 2021, and visits have increased dramatically now that people have the opportunity to physically walk around the facility and see the attributes of health and wellness. Progress on Pier 70 continues and much of the infrastructure has been completed, allowing people to walk around the grounds.
The rental market in Seattle has seen an increase in demand for sublets and new tenants entering the market over the past two to three months. In particular, certain sublet spaces are exiting the market as owners anticipate businesses returning to work in the months to come. Major players in the field include technology companies, as well as growing life science companies.
Bellevue has been a bright spot during the pandemic due to Amazon’s expansion in the region. However, the company has been a disruptor in the space. Much of the current downtown construction is tied to Amazon projects, and the company has also been pushing tenants to move out before their leases end, with plans to take back those spaces.
In the South Lake Union area, projects originally built as offices have shifted towards life sciences. This includes Cascadian and Dexter Yard, which are now targeting tech and life science companies. This trend could continue and reduce the number of office spaces in the region.
The Puget Sound region is expected to experience a strong year-end. Leadership transitions at Amazon and the potential election of a business-savvy mayor are factors that could affect growth in the region.