Recent office sales activity in Greater Los Angeles remains restrained. The fourth quarter witnessed $802 million worth of office properties transact, well under the $1.7 billion worth of office sales that traded quarterly, on average, during the past decade in the metro.

Acute market weakness in most segments of the local office market, combined with long-term questions around the future trajectory for space use, have dented investor interest in office properties in the metro. Several recent sales have garnered lower pricing than previous transaction prices.

In November, Montana Avenue Capital Partners purchased 1700 E Walnut from CBRE Investment Management for $31.17 million ($260/SF). The sale included a six-story, 400-parking-space garage. The property was around 60% leased at the time of purchase. CBRE Investment management is selling the asset for a 35% loss, having purchased the property in June 2017 for $48.5 million ($405/SF). It bought the property from JV partners Montana Avenue Capital Partners and The Roxborough Group. Montana is purchasing the asset for less than it acquired the property for in October 2015, having paid $33.5 million ($280/SF).

In December, a private family office purchased 400 and 450 Brand Blvd. from Kennedy Wilson for $58 million ($130/SF). The two buildings comprised 440,700 SF, with 364,700 SF of office space and 76,700 SF of retail space. The buildings were 61% leased, and the property was marketed as a value-add opportunity. Existing tenants had a weighted average remaining lease term of 5.5 years. Significant tenants include 24-Hour Fitness, Cigna, and Regus. No loan was recorded at the time of sale, making it likely the buyer paid all cash.

The transaction represents a 60% loss for Kennedy Wilson, having acquired the buildings in May 2017 for $144 million ($325/SF). It also sold well below its previous sale price in January 2004 for $117 million ($265/SF). The sale indicates a trend in L.A. and nationally of private, opportunistic buyers becoming increasingly active in acquiring office properties, while larger, more institutional investors are divesting of office assets.

Substantiating the trend, during 2023, private buyers were behind 60% of all transaction activity on a dollar basis. From 2015 to 2019, the five years preceding the pandemic, private buyers represented, on average, around 45% of buyer activity. In contrast, institutional buyers were behind 10% of dollar volumes in 2023. From 2015 to 2019, they were behind around a quarter of activity.

The most prominent news around market distress centers on Downtown Los Angeles. In 2023, Brookfield Properties, the largest landlord in Downtown Los Angeles, defaulted on 777 Tower, Ernst & Young Plaza, and Gas Company Tower. Ernst & Young Plaza went into receivership in May, and Gas Company Tower went into receivership in April. 777 Tower is currently on the market.

In July, Gas Company Tower was appraised at $270 million, around 40% of its last valuation of $632 million in 2021. The value is also well below the $465 million in loans Brookfield has on the property. In December, Ernst & Young Plaza was appraised at $210.7 Million, less than half its valuation of $446 million three years ago. As loans come due on other office properties in the L.A. metro, additional landlords will likely default.

Most future office sales will likely garner a discount in pricing to what was likely possible before early 2020. However, a handful of recent sales demonstrate some investors are willing to pay top-dollar for select properties.

The largest 2023 office sale in Santa Monica, as well as the L.A. metro, closed in August, when J.P. Morgan Asset Management purchased from CalSTRS the Pen Factory, a 220,000-SF building at 2701 Olympic Blvd., for $178 million ($810/SF). The property is fully leased to video game publisher Activision Blizzard and healthcare company GoodRx Holdings, which have headquarters in the office building. J.P. Morgan financed the acquisition with a $97.9 million loan (55% loan to value) from PCCP.

The strong price achieved was driven by the asset being a creative office conversion that finished in 2017 (latest generation space), was 100% leased, and was in a favorable location in Santa Monica, historically one of L.A.'s most sought-after office locations. Properties with all three attributes represent a small portion of L.A.'s office market.

Looking forward, average market pricing is expected to continue to decline at least through 2024. Market pricing is forecast to experience a peak-to-trough decline of around 30% by 2025. The market faces numerous headwinds. Vacancy is expected to continue to reach new heights during the next several years, and asking rents are expected to witness declines. Uncertainty around the long-term trajectory for office space use due to the increased use of hybrid work strategies persists. Additionally, as interest rates are anticipated to remain elevated for at least the near term, debt will likely remain more costly.

Here are several graphs illustrating the current office market in Los Angeles County: