The latest data on the Los Angeles office market just came out and two very noteworthy trends were revealed. The vacancy rate in downtown Los Angeles has climbed to 25%. That’s ridiculously high. In the next paragraph, the report stated that office asking rents continued to climb.  Climb?

How do you reconcile these contradictory trends? Existing and new office space clients of mine take the logical position that with the pandemic and all the news they hear about people and companies jettisoning the office for good, rental rates would be dropping like a rock across the board.  Naturally, I need to disavow my clients of their logic and explain what is going on.

Commercial real estate is not like the stock market that is driven purely by buyers and sellers. Imagine what it would be like if the companies whose shares are being traded had a say in the price? That is exactly what you are dealing with in the commercial real estate leasing market. Some landlords can make the decision to pass on bargain hunting tenants and are willing to weather high vacancy rates in order to hold the line on rents.  It varies according to the strength of the landlord and even the specific building. Large landlords can afford to play the long game. A smaller landlord who depends on cash flow to keep their head above water might do whatever is needed to get their buildings leased.

One rule of thumb every good tenant rep broker knows is that in a soft market an average 25% vacancy rate does not mean that every building is 25% vacant. An older, functionally obsolescent building or a building in a less desirable location might be 45% vacant and a well located, class A building might only have a 5% vacancy rate.  So the question for my clients boils down to this: are you willing to go down market to get the cheapest rent or does the quality of the building and the sophistication of the landlord (translate: the management of the property) matter to your business?  Once they take a hard look at both properties, the decision is easy.

If you lead a horse to water and it doesn’t drink, maybe it’s a camel.