Los Angeles’ commercial real estate investment activity seemed ugly last year, until 2024 reared its gruesome head.
Commercial property sales in L.A. County are down 18.4 percent this year compared to the first three quarters of 2023, according to a new market trend analysis by NAI Capital.
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That precipitous drop of activity is quaint compared to the City of L.A., which has experienced a nearly 40 percent year-over-year plunge in sales, or $1.9 billion less than 2023’s total at this point last year.
A variety of factors have caused or contributed to the stark decline, including falling property values, inflation, the Federal Reserve’s decision to keep interest rates elevated for most of the year, and government fees on transactions. L.A.’s Measure ULA, which places a 4 percent tax on deals over $5.15 million and a 5.5 percent tax on deals over $10.3 million, went into effect last year and induced a particularly chilling factor in activity, per NAI Capital.
Industrial and office sales in the city have especially suffered. Industrial sales are down 63.2 percent so far this year, with office sales down 45.1 percent, compared to a relatively balmy decline of 32.6 percent and 14.8 percent in retail and multifamily deals, respectively.
Few things embody the city’s dismal office situation more than the saga of Downtown L.A. office towers, many of which have recently faced some sort of financial distress. That includes Gas Company Tower, the 52-story husk that has been searching for a new owner since it was transferred to a receivership this past spring. L.A. County is inching closer to acquiring the tower for well below its estimated value of $632 million just a few years ago, but that deal has not yet gone through.
The 25-story 801 Tower in Downtown in August meanwhile traded hands for just $60 million via loan sale, or about $118 million less than seller Barings bought it for in 2014, sources told Commercial Observer at the time. Or there’s the 40-story Union Bank Plaza, which recently sold for $80 million, roughly $30 million less than seller Waterbridge Capital acquired it for just last year.
Office is likewise the worst-performing asset class in L.A. County so far this year, per NAI’s report, tanking 55.4 percent, or just over $1 billion, year-to-date compared to the third quarter of 2020, during the throes of the pandemic.
“The office market in Los Angeles County continues to face a slow recovery,” the report said. “Landlords are offering substantial concessions, such as rent reductions and tenant improvement allowances, to attract tenants, further eroding market values.”
Still, the median per-square-foot sale price of offices in the county rose 9.2 percent year-over-year, indicating that the market may be adjusting to its new normal. The price per square foot of retail properties in the county also rose 9.2 percent year-over-year, per NAI’s report, though sales volume was still 7.7 percent below 2020’s low.
One of the more notable exceptions was One Cole Group’s $39.2 million deal in August for just 11,124 square feet of retail space in Beverly Hills’ Golden Triangle district. That deal equates to $3,524 per square foot, well above the county’s median sale price for retail properties.
Industrial sales in the county also dropped by 20.4 percent year-to-date due to declining lease rates and continually high interest rates, per NAI Capital. Median sale price per square foot of industrial properties fell by 16.6 percent quarter-over-quarter and 9 percent year-over-year.
Looking ahead, the report notes that several pieces of state legislation could further affect market activity L.A., particularly Proposition 33, a measure on the November ballot which aims to expand rent control in California and which opponents argue could discourage housing development. Real estate interests are also waiting to measure the effects of AB 98, which will further regulate statewide warehouse development once it goes into effect at the beginning of 2025.
Nick Trombola can be reached at ntrombola@commercialobserver.com.