Some LA Office Building Owners Offer Large Cash Incentives To Lure Tenants to Buildings
The catch: The lease must be for a minimum 100,000-square-foot tenant on a 10-year term at the nearly vacant 340,000-square-foot Trust Building at 433 S. Spring St., and the deal must be completed before March 31, 2022. Meanwhile, any deal under 40,000 square feet may be eligible for a $3 per-square-foot bonus to the broker.
The million-dollar bonus is the latest in a string of cash incentives for brokers to land office deals for some properties in greater Los Angeles, which has seen vacancies and sublease space rise during the pandemic as companies rethink their physical real estate needs. The offers appear to be specific to certain buildings and are not common across L.A.’s office market, the nation’s fourth-biggest by inventory, said Rick Buckley, principal of L.A. Realty Partners, a Los Angeles-based real estate brokerage firm.
“Fundamentals in the market remain strong,” Buckley said. “We’ve seen concessions creeping up to get deals done, but, market-wide, deals are getting done.”
That said, the office vacancy rate in Los Angeles has remained persistently high and return-to-work rates remain low. The average office occupancy level in the Los Angeles area was 31.7% as of Nov. 29, according to data company Kastle Systems. That’s below the nation average of 32.5%. The region’s office vacancy rate is 13.7%, and downtown, where the Trust Building is located, it is 17.1%.
While broker bonuses aren’t isolated to Los Angeles office space, they aren’t widespread across the U.S., said Blaine Strickland, CEO of Winter Garden, Florida-based real estate consulting firm HBS Resources Inc. Plus, office building sales aren’t suffering uniformly nationwide, showing that landlords have long-term confidence in the market.
If these types of incentives were more common, U.S. office buyers would be getting steep discounts on buildings, Strickland said.
“There’s always somebody who wants to solve their problem instantly,” Strickland said of broker incentives. “But I don’t feel like it’s a national trend or that every landlord is asking if they should give away a Tesla or Lamborghini.”
The Right Incentive
It is also not clear that such bonuses work.
Steve Solomon, senior executive vice president of Colliers in Los Angeles, said he worked on a pre-pandemic deal with a $10 per-square-foot broker bonus that failed to lure a tenant. Solomon mostly works in the West Los Angeles office market where these types of bonuses are uncommon.
In terms of office leasing, a majority of office tenants are staying put when their lease expires, said Solomon of the deals he’s worked on. “Office demand is slower, but you still don’t see any super discounted deals or big bonuses.”
Broker bonuses may be an option for other landlords in the months to come, but it’s unlikely that L.A. landlords will more broadly embrace these incentives, L.A. Realty Partners’ Buckley said.
“If a landlord is aligned with the market, they will lease their building,” he said.
The bonuses are more common in harder-hit office submarkets such as downtown, where it is more common to see building owners offer brokers from $2 to $4 per square foot to push deals across the finish line. A $3 broker bonus, for instance, is offered for office sublease space at the Bank of America Plaza at 333 S. Hope St. in the downtown Bunker Hill neighborhood, according to marketing materials.
And then there is the Trust Building, where landlord Rising Realty Partners has pulled out all the stops to fill the space. Representatives of Los Angeles-based Rising, which purchased the building in June 2016 for $80.6 million, according to CoStar data, didn’t respond to a message seeking a comment.
Rents Hold Steady
At the same time the incentives are being offered, there has not been a noticeable retreat on annual asking rents, which have flattened in Los Angeles at about $41.23 per square foot, according to CoStar data. That indicates landlords are still bullish on landing deals, and cognizant that a pull-back on asking rents may trigger a race to the bottom.
One area where there has been a price reduction is in sublease space, which hit record highs for availability in Los Angeles during the pandemic as companies sent workers home to work remotely. Parsons Corp., which left its 100 W. Walnut St. headquarters in Pasadena for Virginia in 2019, is offering to sublease its space at a rate 38% below the initial sublease rate for deals completed before Dec. 31, according to marketing materials. In all, Parsons is offering roughly 242,000 square feet of space for sublease with a term ending in June 2026.
The real million-dollar question is where the Los Angeles and global office market is headed. Of course, it’s anybody’s guess. However, 45% of full-time U.S. employees were working partly or fully remote in September, with nine in 10 wanting to maintain remote work to some degree, according a Gallup poll published in October.
“After nearly two years working remote, it’s clear the Los Angeles office market won’t snap its fingers and go back to normal,” said Kristen Bowman, first vice president of Colliers.