Has Los Angeles Hit Bottom?

For office tenants and investors eyeing the Los Angeles market, now may be the opportune moment to capitalize on favorable market dynamics and valuations. Recent transactions hint at a newfound price stability, prompting experts to suggest that the time to act might be upon us.

Kevin Shannon from Newmark, a leading investment sales broker, notes a surge in capital seeking investment opportunities, underlining the increased competition for deals. December witnessed significant sales activity across different segments of Greater L.A.'s landscape:

- Kennedy Wilson's sale of 400 and 450 North Brand Boulevard in Glendale for $60 million.

- Carolwood's acquisition of the AON Center in Downtown L.A. at approximately $134 per square foot.

- Harbor Associates' purchase of 1640 South Sepulveda Boulevard in Westwood for $271 per square foot.

What's striking about these transactions is the substantial discount they represent compared to previous sales, ranging between 50 and 60 percent. Some industry insiders speculate that these prices might constitute the bottom, with expectations of a sustained period at this level.

Adam Rubin of Carolwood sees their acquisition of the AON Center as setting a benchmark, providing clarity amidst uncertainty. This sentiment resonates amid a challenging year that witnessed a 51 percent decrease in office investments compared to 2022.

However, fewer transactions mean fewer comparable data points, posing a challenge for prospective buyers in gauging fair market value. Despite this, the recent sales serve as early indicators of potential market stabilization, albeit varied across submarkets.

Looking ahead, Brookfield Properties' listing of 777 Tower in Downtown L.A. offers insight into future market movements. Despite being 52 percent leased, the property attracted significant interest, suggesting investor confidence despite occupancy concerns.

For both tenants and investors, maximizing leverage in this market requires strategic action. Occupancy rates significantly impact property valuation, with every percentage increase in occupancy potentially adding substantial value. Therefore, for tenants seeking space, negotiating favorable lease terms amid the current market downturn could yield significant cost savings. Similarly, investors should leverage the current pricing environment to acquire assets with strong upside potential, focusing on properties with attractive occupancy rates and long-term value prospects.

Maturing Debts May Lead To Opportunistic Aquisitions In The Office Market

The COVID-19 pandemic reshaped the way we work, triggering a surge in remote work arrangements. As a result, the office sector of the US commercial property market has been under significant pressure. Landlords are grappling with a daunting wave of debt maturities, leading to a record amount of debt being extended or modified rather than refinanced. Goldman Sachs recently cautioned that office mortgages are "living on borrowed time."

With outstanding commercial mortgages set to mature by the year-end hitting a staggering $929 billion, savvy investors are eyeing the potential opportunities arising from defaults on commercial loans. Banks hold $114 billion of this total, while non-bank entities account for the remainder. The significant increase in maturing loans has been primarily driven by lenders and borrowers opting to modify and extend loan terms rather than pursuing refinancing or foreclosure. This trend has disproportionately benefited office loans, offering a window for investors to explore distressed asset acquisitions.

Despite these efforts to delay defaults, Goldman warns that funding costs are unlikely to revert to pre-pandemic levels, potentially posing financial challenges for office properties. Data from CMBS indicate that the percentage of office loans fully paid off at maturity has fallen below 60%, contrasting with other property types where maturity payoff rates remain near decade-high levels.

As office property values plummet, the costs of refinancing existing commercial mortgage loans have soared to two-decade highs. This trend, coupled with declining property values, paints a grim picture for many office buildings, with some experiencing rock-bottom occupancy rates. For investors seeking deals, this presents an opportunity to capitalize on distressed assets and negotiate favorable terms amid market uncertainty.

Goldman analysts anticipate a continued wave of loan modifications in the near term, driven by the economic challenges facing commercial real estate borrowers. However, they caution that the risks associated with this trend are on the rise, signaling a potential shift in the market landscape.

To find opportunistic deals on office buildings where loans are in default or nearing default, investors can employ several strategies:

1. Stay informed: Keep abreast of market trends, foreclosure notices, and distressed property listings to identify potential investment opportunities.

2. Network with lenders: Establish relationships with lenders who may be looking to offload distressed assets or negotiate loan modifications.

3. Conduct thorough due diligence: Assess the financial health and occupancy rates of target properties to gauge their investment viability.

4. Seek creative financing options: Explore alternative financing sources, such as private equity firms or distressed asset funds, to fund acquisitions.

5. Be patient and persistent: Navigating the distressed property market requires patience and persistence. Stay focused on long-term investment goals and be prepared to act swiftly when opportunities arise.

6. Consult with CRE professionals with market expertise that have knowledge of commercial office buildings where landlords are struggling to make new lease transactions.

Written by Jamal Brown

Creating Stability: The Power of Long-Term Office Leases in Today's Real Estate Landscape

In today's ever-evolving business world, where change is the only constant, making strategic decisions for your company's future is paramount. One such decision that holds tremendous potential benefits is signing a long-term office lease. In this blog post, we'll delve into why, in the current state of the office market vacancy rate and upcoming uncertainties in commercial real estate debt markets, committing to a long-term lease might just be the smartest move you can make for your business.

**The Office Market Landscape**

The commercial real estate market is in a state of flux. Office vacancy rates are fluctuating as businesses reassess their real estate needs in light of remote work trends and the ongoing COVID-19 impact. This unpredictability creates a unique opportunity for savvy business owners willing to embrace stability in uncertain times.

**Benefits of a Long-Term Lease**

1. **Cost-Effective Leasing Rates**: Locking in a long-term lease often comes with favorable rates and concessions. In a market where landlords are eager to secure stable tenants, you can negotiate attractive terms that significantly reduce your overhead costs.

2. **Stability Amid Uncertainty**: Long-term leases provide your business with a secure, stable home base. In an uncertain world, knowing where your office will be for years to come can be a powerful advantage, allowing you to focus on your business without the constant worry of lease negotiations.

3. **Customized Office Space**: With a long-term lease, you have the opportunity to tailor your office space to your exact needs. This flexibility fosters a more efficient and productive work environment, which can be a competitive advantage.

4. **Attract and Retain Talent**: Committing to a long-term lease signals your commitment to the future. This can be a strong selling point when recruiting top talent, as prospective employees value job stability and a consistent work environment.

5. **Asset Appreciation**: In the long run, your leased office space could appreciate in value. As the market rebounds, your real estate asset becomes more valuable, potentially offering an additional source of income or a valuable asset to leverage.

**Negotiation Techniques for a Favorable Deal**

1. **Research and Market Insight**: Arm yourself with knowledge about local market conditions, vacancy rates, and rental trends. This information is your best bargaining tool.

2. **Longer Term Commitment**: Be open to extending the lease duration. Landlords often reward longer commitments with better terms.

3. **Concessions and Build-Outs**: Negotiate for rent abatements, tenant improvement allowances, or other concessions. Landlords may be willing to invest in your space to secure a long-term tenant.

4. **Flexible Clauses**: Include flexibility clauses in your lease, such as expansion or contraction options. This ensures your space can adapt to your changing needs.

5. **Early Renewal Options**: Secure the right to renew the lease at a predetermined rate. This safeguards your favorable terms for years to come.

In conclusion, while the commercial real estate landscape is uncertain, committing to a long-term office lease can provide your business with stability, cost savings, and a competitive edge. By employing smart negotiation techniques, you can secure a deal that not only meets your current needs but also positions your business for long-term success. Embrace the opportunity to take control of your company's future by exploring the advantages of a long-term office lease today.

Our team can assist you in leasing or purchasing commercial real estate that supports your short and long term needs. Reach out to us today at info@theoceanco.com

Exploring San Diego: Unveiling its Rich History, Culinary Delights, and Outdoor Adventures

San Diego, known as "America's Finest City," offers a perfect blend of history, gastronomy, and outdoor activities. Its stunning beaches, iconic landmarks, and vibrant culture make it a dream destination for travelers. Join me as we explore the enchanting tourist destinations of this southern California gem, uncovering its intriguing history, mouthwatering culinary attractions, and exhilarating outdoor adventures.

Unveiling History:

A visit to San Diego wouldn't be complete without delving into its rich historical past. Begin your journey at the historic Old Town, often referred to as the "birthplace of California." Wander through the adobe buildings, visit the preserved homes and museums, and embrace the Spanish and Mexican influences that shaped this city's heritage.

Just a short drive away, you'll find Balboa Park, a true treasure trove of history. Take a stroll through its lush gardens, admire the breathtaking architecture, and explore its impressive array of museums, including the renowned San Diego Museum of Art and the Museum of Natural History.

Culinary Scene:

San Diego's diverse cuisine scene ensures that you'll never go hungry. Indulge in the delectable flavors of Baja California at one of the city's many Mexican eateries. From authentic street tacos to mouthwatering seafood, your taste buds will be in for a treat.

Don't miss the chance to explore the historic Gaslamp Quarter, where you can find a wide variety of culinary options. Explore the vibrant streets lined with restaurants, bars, and cafes offering diverse cuisines, from contemporary American fare to international flavors.

For those seeking a unique dining experience, head to Little Italy, where the aroma of freshly-made pasta fills the air. Savor classic Italian dishes in charming trattorias or sip on a glass of wine while enjoying the famous San Diego sunset.

Outdoor Adventures:

San Diego's year-round mild climate beckons outdoor enthusiasts to embrace its natural beauty. Start by basking in the sun on the pristine beaches, such as Coronado Beach and La Jolla Cove. Take a leisurely walk along the boardwalks, try your hand at surfing, or simply relax and enjoy the breathtaking coastal views.

Nature lovers will find solace in the Torrey Pines State Natural Reserve, where picturesque hiking trails guide you through stunning sandstone cliffs and rare Torrey Pine trees. Capture panoramic vistas of the coastline from the top and relish in the tranquility of this coastal paradise.

If you're seeking more thrills, head to Mission Bay and try your hand at watersports like kayaking, jet skiing, and paddleboarding. Embrace the refreshing ocean breeze and discover the vibrant marine life that San Diego is known for.

Final Thoughts:

So why should you be here right now? San Diego offers a world of wonders for every type of traveler. From its captivating history to its diverse culinary offerings and abundance of outdoor adventures, this city will never cease to amaze you. So, pack your bags, embark on a memorable journey, and let San Diego enchant you with its unique blend of culture, flavors, and natural beauty. You heard it here first.

📢 Commercial Office Properties: Understanding the Loss of Value 📉

Recent transactions indicate a significant loss of value observed in commercial office properties. This trend, influenced by several factors, has sparked widespread discussion and analysis within the real estate industry. Today, we'll explore some of the key reasons behind this phenomenon.

1️⃣ Remote Work Revolution: The advent of remote work has undoubtedly played a crucial role in altering the dynamics of office spaces. The widespread acceptance and success of remote work during the pandemic have prompted many companies to adopt hybrid or fully remote work models. As a result, the demand for traditional office spaces has decreased, leading to a decline in their value.

2️⃣ Changing Workplace Preferences: The pandemic forced individuals and businesses alike to reassess their workplace preferences. Companies aiming for flexibility and cost optimization, have shifted towards smaller offices, shared workspaces, or even fully remote operations. Similarly, many employees have discovered the benefits of working from home, creating a preference for remote setups. This shift has impacted the demand and attractiveness of conventional office properties.

3️⃣ Technological Advancements: Advancements in technology and communication tools have eliminated the need for physical presence in the office. Video conferencing, collaboration software, and cloud computing have facilitated seamless remote work experiences, eroding the traditional reliance on office spaces.

4️⃣ Economic Uncertainty: The global economic downturn resulting from the pandemic has also affected the commercial real estate market. Many businesses faced financial challenges, downsizing or even closing their doors. This disruption has created a surplus of vacant office spaces, further contributing to the decline in their value.

5️⃣ Repurposing and Adaptive Reuse: In response to the changing landscape, property owners and investors have been exploring alternative uses for office buildings. Repurposing commercial office properties into residential units, hotels, or mixed-use spaces has gained traction to maximize value. While this trend promotes revitalization, it can also result in a surplus of available office properties, adding pressure to the market.

It's important to note that despite the current decline in value, the long-term future of commercial office properties remains uncertain. As businesses adapt and strategies evolve, there may be opportunities for these properties to regain their value. The ability to foster collaboration, networking, and creativity remains an essential aspect of physical workspaces.

Real estate investors and property owners are actively seeking innovative solutions to adapt to the changing needs of businesses and individuals. Whether through renovations, amenity enhancements, or redesigning existing spaces, the goal is to create appealing environments that align with the evolving demands of the workforce.

While the current loss of value in commercial office properties may present challenges, it also offers a chance for innovation and reinvention within the real estate industry. By embracing change and identifying new opportunities, stakeholders can navigate these uncertain times and shape the future of office space.

San Diego Office Outlook - Lessons learned from Q1 2022

Accelerated demand for San Diego’s class A and B office inventory has had an effect on on vacancy rates coming into 2022. Expansion from local biotech firms absorbing vacant space with larger transactions requiring new construction are driving demand throughout Torrey Pines, Carmel Valley and Del Mar Heights.

Breakthrough Properties and Gemdale are building large lab campuses along the State Route 56 corridor that received pre-lease commitments totaling 850,000 square feet since the end of last year. BD Biosciences signed for 220,000 square feet at Torrey View and Neurocrine Biosciences leased roughly 630,000 square feet at Aperture Del Mar.

Alexandria Real Estate Equities pre-leased 430,000 square feet to Brisol Myers Squibb at the interchange of I-5 and I-805 at its Campus Point 4 building in Alexandria Point, where Amazon occupies more than 130,000 square feet.

Those large deals at upscale office properties have driven leasing during the first quarter in San Diego market to the highest quarterly total in more than 15 years, with over 2.5 million square feet of new leasing activity.

In turn, there has been a noticeable shift in where that activity is falling. 

Historically, leasing in urban locations in San Diego have led volume. However, since 2019, demand has shifted to suburban areas of San Diego, where many firms are choosing to locate near where their workers live. The pandemic work-from-home and subsequent ‘hub and spoke’ model adopted by larger businesses to accommodate suburban employee bases continues to keep vacancy low in suburban submarkets north of Hwy-52.

Companies forecasting their office space needs for the next 12 - 24 months should expect rates to increase in suburban markets, and inventory to remain low. However, there are hidden opportunities to reduce occupancy cost in the urban markets, specifically downtown San Diego, where the sublease inventory is still high and large blocks of space sit vacant for longer.

California stay-at-home order hurts Restaurant industry

To our hospitality friends:

WE ARE WITH YOU

Urging everyone in California to support all your local restaurants as they struggle through California’s new stay-at-home orders.

THINGS YOU CAN DO

1. Support your favorite restaurants that continue to operate outdoor service according to safe, CDC guidelines.

2. Buy GIFT CARDS from locally owned restaurants and give them out as holiday gifts.

3. When you order delivery, try and place your orders directly with the restaurant. Third-party apps take up to 30% of the value of the order. Let’s do what we can to give 100% of our support to the people creating our meals.

4. Share these tips with your friends and support the locally owned restaurants in your area.

This holiday season, let’s truly practice the act of giving.

#wereinthistogether #saverestaurants #ilovemycity

If you have any commercial leasing or purchasing questions call us ☎️ 858.356.2990 and Jamal will assist you. 

The Future of Customer Loyalty

Customer Loyalty. Its a term that gets thrown around often, but this year with online shopping and take-out orders dominating the landscape, repeat customers are essential to survival. Assuming you have a CRM (and you should) here's what should you do to stand out:

1. Personalized Touches:

-Adding hand written cards (like the one I recently received from my online order with Boochcraft) that thank your customer for their purchase

-Suggesting specifically curated additional items for your customer based on their buying history (you should have this data for returning customers)

-Asking how they enjoyed their last purchase of (insert item) from you

2. Convenient user interface: how quickly and comfortably your customer completes orders from you makes a difference. Make sure to thank them in a meaningful way

3. Flexibility:

-In store pick-up greetings feel like the traditional shopping experience

-Make curbside pick-up quick, easy and on-time (especially restaurants)

-Native delivery service (rather than 3rd party) rewards points

San Diego Retail: Minor Pain or Disability

Costar is dancing around the issue in this article. The pandemic is accelerating a trend that existed back when Corona was just a beer.

Yes the SD inventory is temporarily down due to the Parallel Capital's acquisition and repurposing of Horton Plaza, but that entire mall was long dead and 1/2 vacant pre-pandemic due to the loss of Nordstroms. As of now Parallel still plans on building/leasing 300k sf of retail on that site, whether they should is another question. So the current vacancy rates aren't really telling the story at all. Longstanding anchors have been upended due to a little thing called the internet, and people's preference to avoid salespeople while having their goods delivered. The subplot is...there's no one to meaningfully backfill them. Before you angrily spout stats about discount stores or Amazon distribution centers think this through; the discount crowd isn’t shopping at the remaining inline stores, and no one is coming to a center for an Amazon distribution center.

Locally, the recent loss of large occupiers (RIP Souplantation & Pier 1) from centers doesn't bode well for the smaller stores that depended on the foot traffic, but this was foreshadowed by the closure of well known national big box retailers over the last few years.

Look I want everyone to win, but they have to adapt to survive. Hopefully small/regional operators focus on their online presence and develop a community to generate sales; however the long term result of this points to smaller footprints/less inventory on-hand in stores across the board in my opinion. And that's just the burbs, CBD retailers are facing a potential population shift (on top of everything else) that may hurt sales for the foreseeable future. When do they start asking “why am I paying $84/sf to be surrounded by boarded up shops”?

However you cut it, our addiction to online shopping is the root of retail leasing woes, Covid-19 is just an accelerant.

Jamal Brown is the CEO of The Ocean Company, an exclusive tenant representation firm with offices in San Diego, Orange County and Los Angeles focusing on the leasing and acquisition of commercial real estate.

Main: 858.356.2990 | E-mail: jbrown@theoceanco.com | social: @theoceancompany

Office Occupiers Eye a Return To The Workplace

Recent interview w/the CEO of an international commercial real estate firm provides some insight while raising some interesting questions.

1. If the return to the office is a collaboration/new hire on-boarding/company culture play; how do we consistently promote company values/build team dynamics when the space is utilized fractionally?
2. It appears we will be moving towards greater square footage per employee, thereby increasing the overall office footprint. Does this mean we should expect to see a flight from quality due to rents? Larger footprints = increased overhead = reduced profit margins. What does this do to the class A office market?

3. Current uncertainty & its effect on leasing decisions should prompt landlords to offer robust concessions packages to tenants that will make long term commitments, however, we aren’t seeing that yet. When do landlords accept that we’re in a Tenant’s market?

Unfortunately, no one has all the answers. I am interested to hear your thoughts.

Jamal has negotiated thousands of leases on behalf of tenants since 2003 and continues to advise companies on their on-going real estate strategies.

How Parking Effects Your Business

Lets talk about: PARKING

We all hate parking far from the entrance to the restaurant, store, gym or workplace. Sometimes lack of parking stops us from even visiting these establishments...ok not work but you know it’s still annoying. Here is a breakdown by sector on how parking effects your patronage.

Retail: While this might be intuitive for suburban retailers who often enjoy 5.0/1,000 sf leased parking ratios, there are certain operators, like gyms, who need customers to be able to park and be a 30 second walk to the front door. In my experience w/@lafitness the time it takes to get from car to club is a huge factor in whether or not people visit your location. Urban retailers don’t always have the luxury of on-site parking and should locate in either a “destination” zone (most frequently traveled blocks) or nearest to public parking as possible.

Hospitality: similar in discussion to retailers, however, suburban sites should have “express” or “to-go” stalls adjacent the ADA stalls at the facility. Covid makes taking over your parking lot a necessity right now, but your to-go delivery speed is a still a factor...besides, who wants to pay Grub Hub, Uber Eats or Postmates 30% of your sale?! Urban food & beverage operators primarily want to locate where the people are and where their concept isn’t over saturated. Let’s face it, city living forces you to walk and we will gladly do so to get to our favorite places.

Office: for office tenants, parking can be a financial component that effects their bottom line. Most suburban office parking comes free of charge, except for you Santa Monica. Urban office parking can run $100-$300/stall/month and subsidizing your employee parking charges will substantially increase your monthly overhead.

Whatever sector you fit into, parking is an aspect of the real estate selection you need to pay attention to in order to ensure overall success.

Signs we've entered a tenant's market

Significant write down and sale of the U.S. Bank Tower, an iconic DTLA office property leads me to believe a few things.

🏢 Sluggish leasing activity as a result of the recession and the pandemic is cause for concern to landlords whose rent rolls aren’t showing long term stability.

❓Shadow vacancy, again as a result of the pandemic and recession, could result in a tsunami of new-to-market subleases further hampering velocity in leasing activity.

💰 Overwhelming signs that we’re at the end of the “landlord’s market” cycle mean future lease economics will be more tenant friendly including robust concessions packages.

Although we aren’t currently seeing a direct effect of economic stagnation reflected in leasing rates throughout Southern CA, I am sure 2021 will mark the beginning of a fresh cycle in the office market.