Once a symbol of urban prosperity, the downtown Los Angeles office market now tells a different story. Although it’s been five years since the pandemic started, leasing office spaces is still challenging. 

Thanks to the integration of hybrid work models, vacancy rates are high, even surpassing those during the Great Recession. While the market may seem bleak, a closer look into downtown L.A.’s commercial real estate may suggest otherwise. 

The hybrid work model is here to stay; however, according to business and economics research center McKinsey Global Institute, the demand for office spaces will remain below pre-pandemic levels. Commercial real estate firm Avison Young reports an overall vacancy rate of around 30% for 2024 in downtown L.A., which has increased since the pandemic. The study also reports decreased office leasing activity compared to pre-pandemic numbers.

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Because vacancy rates are increasing, buildings don’t have rent flowing in, leading to lower revenues and cash flow. UCLA finance and real estate lecturer Paul Habibi says that many of these office owners have large loans, and without the rent revenue, they are forced to default or change ownership.

Ownership in many downtown L.A. office buildings changed. Last year, Oaktree Capital Management acquired 444 S. Flower St. after Coretrust Capital Partners LLC failed to pay off loans. Brookfield Corporation defaulted on $784 million in loans as it failed to pay many of its L.A. properties’ loans. Wedbush Securities announced its move to Pasadena to accommodate hybrid work schedules. This year, Ace Hotel Downtown will close its doors Jan. 31.

Barriers to entry, such as operation and borrowing costs, demand and competition, affect investment decisions. General Manager and Vice President of Project Management Advisors Inc. Sonnet Hui said in an interview with the Los Angeles Business Journal, “Safety is a big issue…[it] is a priority for a lot of employers.”

However, despite these challenges and market distress, the downtown L.A. commercial real estate market will likely improve. Habibi says the environment is good news for prospective owners. The 1.1-million-square-foot office tower Aon Center was the biggest downtown L.A. office sale of 2023. Carolwood LP bought the building for $148 million, 45% less than its last price. This may signal investor confidence, indicating that some are purchasing these discounted assets, assuming there will be growth in the future. 

Downtown L.A. is also a major commercial and economic hub. It’s positioned close to many esteemed educational institutions, is home to iconic buildings and has many well-established firms that continue to use its office spaces. These factors suggest that downtown L.A. is a convenient and strategic location for businesses to further corporate functions and access clients and partners. As an economic hub, downtown L.A. has a strong global reputation and competitiveness. 

Moreover, downtown L.A. is expected to have increased economic activity in the coming years because of the World Cup, the Super Bowl and the 2028 Olympics. These events will revitalize the city and bring about a halo effect as more global coverage will focus on the games and Downtown. Office owners can expect a short-term demand for office space and enhanced market visibility.

While COVID-19 has shifted how companies conduct business immensely, in-person workdays will continue. One-third of companies require in-person office time fully. About 43% of U.S. firms have hybrid models, and 14% of larger established organizations provide fully remote work flexibility. The majority of workers prefer some sort of in-person contact, ensuring that office spaces will never become obsolete. 

Currently, the Downtown commercial real estate market is experiencing high office vacancy; however, that doesn’t mean office spaces are doomed to fail. Downtown L.A. is well positioned as an important component of Angeleno culture, economy and history. 

However, investors can’t rely on Downtown’s potential upturn if they don’t actively change their operations to sustain long-term efficient performance. Office owners must diversify their business models and revenue streams to minimize vacancy rates. McKinsey & Company suggests constructing more adaptable buildings to create multi-use offices. Other methods may include targeting a heterogeneous tenant base and investing in spaces that support a hybrid model.

 Combining office owners’ pivot to multi-use offices and downtown L.A.’s competitive advantage can create a satisfying return on investment. Office space owners must remain flexible to continue the momentum that upcoming major L.A. events will bring because the Downtown commercial real estate market conditions will continue to improve. 

Janette Fu is a junior writing about her thoughts on recent financial, economic and business news in her column, “Wealth & Wisdom: Finance 101,” which runs every other Friday.