Downtown LA’s downturn: What’s behind the business exodus?

Downtown LA’s high vacancy rate is due in part to the prevalence of remote and hybrid work, which reduces the need for an office footprint, says Paul Habibi, senior continuing lecturer of finance and real estate at UCLA’s Anderson School of Management. Photo by Ted Soqui/Sipa USA via Reuters Connect.

Downtown LA’s real estate market onced boomed. Before the pandemic, new developments and cranes dotted the skylines. Today, many of those skyscrapers sit empty or are covered in graffiti, while conditions on the streets worsen. Meanwhile, businesses continue to leave the area. Wedbush Securities is the latest business in downtown LA to announce its leaving the city’s urban core. It says it will be moving to a smaller space in Pasadena next year. So what’s going on in the city’s urban core? 

About one-third of downtown LA’s office space sits empty, says Paul Habibi, senior continuing lecturer of finance and real estate at UCLA’s Anderson School of Management. He chalks up the high vacancy rate to remote and hybrid work, which reduces the need for an office footprint. Meanwhile, he points to crime and homelessness exacerbating the issue. 

He points out however that other cities in LA are not facing the same circumstances. “Century City, Santa Monica — these are also competitive office markets to downtown Los Angeles, and some tenants have decided to vote with their feet and relocate to places outside of downtown.” 

Habibi says the vacancy rate is not only higher than it was pre-pandemic, but even as far back as two decades ago. So what happens when these buildings don’t have rent flowing in? Habibi says many of these office owners put big loans on their properties, which at the time, were supported by existing cash flow. 

Now, they’re struggling to make payments: “That can cause them to default if the loans come due or mature. Oftentimes, those properties that are now worth less can't support as big of a loan, so the landlord has to get a smaller loan to take out the larger one they had, which oftentimes requires them to put more cash in the properties.”

He continues, “Landlords may or may not want to, or may not be able to, cover that cash deficit, in which case the property might change hands and go to a new owner.”

Habibi says the environment is good news for prospective owners. “They have a lower economic basis and they can actually make ends meet by having a higher vacancy rate and lower rents. And so the story starts over for those new landlords.” 

Credits

Guest:

  • Paul Habibi - senior continuing lecturer of finance and real estate at UCLA’s Anderson School of Management