Q2 2024 Data For LA Office Market Explains Why Iconic LA Skyscraper Faced Foreclosure

The Q2 data for Los Angeles' troubled office market was full of bad news for investors and helped explain why the Gas Company Tower, an iconic fixture of the LA skyline, is facing foreclosure. The city's office market is showing signs of deep distress, which is why many investors are eagerly anticipating a rate cut from the Federal Reserve. However, saving the Gas Company tower from a trip to the auction block will come too late.

Two of the most alarming aspects of the Q2 Data compiled by CBRE are the occupancy and net negative absorption rates. Regarding occupancy, the developers, investors, and real estate investment trusts (REITs) who own office assets depend on occupancy rates to stay between 94-96% annually. With that in mind, the Greater LA average occupancy rate of 23% is disastrous, while downtown LA's 29% is slightly better but still concerning.

Trending Now:

• This city has one of the biggest economies in the world and a real estate market to match. Invest now and earn returns.
• Discover the compelling reasons behind the staggering $110.5 million price tag of this painting and explore the world of high-value art investments. Don’t miss out on the opportunity to understand the art market dynamics.

However, the net negative absorption figures also depict an office market struggling for new tenants as work-from-home employment proliferates. The absorption rate for commercial real estate measures how much total square footage was moved during a given period by taking the total square footage of all the spaces moved into by the tenants and subtracting the total square footage of all the move-outs.

Ideally, the absorption rate is positive or at least neutral. Los Angeles had a net negative absorption rate of 1.7 million square feet in Q2 2024. That means tenants moved out of 1.7 million more square feet of office space than they moved into in the second quarter of 2024. Downtown LA's 493,228 square feet worth of net negative absorption accounts for almost 30% of the Greater LA Market total, the largest of any submarket.

The 52-story Gas Company Tower has been a part of the LA skyline since it was first built in 1991. Perched on the top of Bunker Hill, it was the ultimate Class A office property and immediately became home to some of Los Angeles' most recognizable businesses. The Gas Company, which provides natural gas service to much of the Los Angeles area, along with major law firms and accounting giant Deloitte, all once called the tower home.

It featured 1.3 million square feet, making the Gas Company Tower an impressive moneymaking machine during its heyday. As recently as 2020, the Gas Company Tower was appraised at $615 million. However, COVID changed everything and as tenants began vacating this iconic building en masse, there weren't enough to replace them.

As occupancy plummeted, the Gas Company Tower faced a doom loop. Revenue was declining, so the building couldn't make money for its investors or service its debts. Since the purchase value of commercial assets is based on how much revenue it generates per square foot, the asset's value decreases along with the occupancy rate. The only way to entice new tenants is to lower rents, which further depresses the asset's value.

Don’t Miss Out:

• Investor alert: Triple-net properties can put a check in your pocket every quarter—a can’t-miss opportunity for accredited investors.
• Can you guess how many retire with a $5,000,000 nest egg? More than you think! People are using this free retirement questionnaire to speak to a vetted financial advisor about their pacing towards retirement.

By some estimates, occupancy at the Gas Company Tower had plunged into the 50% range. That left its owner, Brookfield Properties, unable to pay the tower's debts, resulting in a foreclosure auction. The winning bidder was the County of Los Angeles, who purchased the property for $215 million. That works out to about $150 per square foot, a catastrophic fall from the Gas Company Tower's estimated 2020 value of about $520 per square foot.

Losses like that on commercial loan portfolios can take regional banks down. This is why there is so much concern from the investor community and regulators alike about the future of office real estate. However, another way to look at this may be as an opportunity. Real property assets have shown tremendous resilience through the years; the office market is no exception.

The sector is facing issues, but bad times don't last forever, any more than good times do. Somewhere, someone is going to figure out how to successfully repurpose America's vacant office properties. When that happens, the fact that these commercial and office assets in prime markets were sold for pennies on the dollar will create a massive opportunity for the right investors.

Looking For Higher-Yield Opportunities?

The current high-interest-rate environment has created an incredible opportunity for income-seeking investors to earn massive yields, but not through dividend stocks… Certain private market real estate investments are giving retail investors the opportunity to capitalize on these high-yield opportunities and Benzinga has identified some of the most attractive options for you to consider. 

For instance, the Ascent Income Fund from EquityMultiple targets stable income from senior commercial real estate debt positions and has a historical distribution yield of 12.1% backed by real assets. With payment priority and flexible liquidity options, the Ascent Income Fund is a cornerstone investment vehicle for income-focused investors. First-time investors with EquityMultiple can now invest in the Ascent Income Fund with a reduced minimum of just $5,000. Benzinga Readers: Earn a 1% return boost on your first EquityMultiple investment when you sign up here (accredited investors only).

Don't miss out on this opportunity to take advantage of high-yield investments while rates are high. Check out Benzinga's favorite high-yield offerings. 

© 2024 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.