A $557 Billion Drop in Office Values Eclipses a Revival of Cities
The sun-splashed streets of Los Angeles’ Century City evoke the prestige associated with the world’s entertainment mecca.
The aptly named Avenue of the Stars teems with traffic to the headquarters of Creative Artists Agency, talent manager for celebrities such as Brad Pitt, Steven Spielberg and Zendaya. LA’s wealthiest discreetly hand their cars off to valets at the offices of UBS Private Wealth Management and Goldman Sachs Group Inc. Cranes are hoisting I-beams for a new 37-story tower that will be the future home of CAA, law firm Sidley Austin and private equity manager Clearlake Capital Group.
It’s a starkly different scene 10 miles to the east, in LA’s downtown core. Buildings are losing tenants and going into foreclosure, with the area’s biggest commercial landlord — an affiliate of Brookfield Corp. — defaulting on $2.2 billion of mortgages since last year. Tent camps dot the streets in the epicenter of the city’s homelessness crisis. Oceanwide Plaza, a graffiti-covered project abandoned by a Chinese developer, is headed for a bankruptcy auction in September.
Such disparities are unfolding across the US, exposing deep divides in the commercial real estate market and the recovery of cities after the pandemic. From LA to Chicago and Boston, aging business districts are contending with empty offices and a slow return of workers, while neighborhoods just miles or even blocks away are faring better — or even thriving.
“We use the term ‘flight to quality’ often,” said Kevin Bender, executive managing director at Jones Lang LaSalle Inc. in LA. “It’s a movement not only to trophy assets, but also to more of a trophy environment.”
It’s a key to understanding the turmoil rocking the US commercial-property market, where big landlords including Brookfield, Blackstone Inc. and Starwood Capital Group have walked away from older downtown towers and foreign investors from South Korea to Germany have been burned by bad bets on what was once seen as a safe, high-yielding investment. Office values in US central business districts have plunged 52% from their highs, according to MSCI Inc., with San Francisco, Manhattan and the core areas of Washington and Boston posting some of the biggest price declines among global metropolises since the pandemic.
Nationally, the drop in values from the peak is much smaller — 18% — in US markets classified as suburban, or areas that are outside the traditional core. And in high-demand neighborhoods such as Century City, investor dollars continue to flow.
Even as many cities have returned to post-pandemic normalcy and employers have enacted stricter in-person work policies, office-rent growth in the central business districts of cities such as LA, Dallas and Seattle have lagged behind outlier areas, according to brokerage Savills. Companies trying to get employees back to their desks are instead paying top dollar for addresses in low-crime neighborhoods, with nearby parks, fitness centers, shopping, restaurants and entertainment. That’s creating a paradox of high vacancy rates in many markets, yet not enough of the type of space tenants want, said David Lipson, head of Savills North America.
About $557 billion of value was erased from US offices from 2019 through 2023 because of falling demand, with older, lower-quality properties disproportionately affected, according to a recently updated estimate by economists at Columbia and New York universities. At the same time, only 2% of the country's office buildings are considered to be top-tier — and they charge rents that average 84% more than the rest of the market, CBRE Group Inc. data show.
Investors are “indiscriminately putting all office in the same bucket,” said Rich Hill, head of real estate research at Cohen & Steers. “Office isn’t going away. The market is missing potential opportunities that might be beginning to emerge.”