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Report: Sustainability, Flexible Space, Drives Occupancy in West Coast Office Markets

Prologis, Duke Realty, Goldman Sachs Group, Inc., Citigroup, Wachtell, Lipton, Rosen & Katz
Courtesy of Zhifei Zhou

By Catherine Sweeney 

Across the globe, rental demand for office space is beginning to pick up, but some markets are showing higher levels of demand than others. According to a recent report from JLL, several of the nation’s largest office markets showed increased demand and high levels of occupancy costs, including West Coast markets, like Los Angeles and the Silicon Valley. 

“The report was very timely, and I think it is reflective of what we are seeing in Los Angeles as well,” said Hayley Blockley, a managing director for JLL’s Los Angeles office. “Three major important pieces of a successful office building right now would be commitment to sustainability, a commitment to wellness and this flex component. Overall, we are very much in a recovering market.”

The report, which compared occupancy costs for 127 office markets across the globe, found New York ranked highest on the list, with an occupancy cost of $261 per square foot. Silicon Valley followed closely behind, ranking fifth on the list at $174 per square foot, and West Los Angeles reported occupancy costs of $110 per square foot. Other West Coast markets, like Seattle, ranked much lower on the list at $50 per square foot. 

With the pandemic causing an overall shift in office working habits, the report found that markets that focus on tenant health, wellness and flexibility showed the highest levels of demand. Approximately 84 percent of premium office buildings surveyed for the report were designed with sustainability in mind, and in high-end markets, nearly 100 percent of buildings carried some level of environmental certification. Despite this, only 13 percent of office buildings contained health and wellness certifications. This is expected to increase as demand for high-quality amenity spaces also increases. 

Additionally, as tenants are gravitating more toward flexible lease terms and flexible space options, approximately 43 percent of offices surveyed across the globe contained flexible space options for tenants. 

The report also showed that corporate occupiers are largely favoring properties located within central business districts. While COVID-19 briefly pushed occupiers out of the urban core and into suburban markets, landlords are seeing a renewed interest in their respective business districts. This was true in some of the markets with the highest occupancy costs, including in Hong Kong, New York, Beijing and Tokyo. Despite this, tenants seeking smaller spaces and more affordable product are likely to find space at 40 to 60 percent cheaper in decentralized locations, according to JLL.  

However, this was not the case in all markets. In Los Angeles, western submarkets like Burbank, Culver City and Hollywood continue to meet the needs of the tech and entertainment industry while the central business district has not seen nearly as much activity, according to Blockley. Overall, occupancy costs were much lower in Los Angeles’ central business district, with the region reporting $54 per square foot. 

“The tenants there are primarily under 10,000 square feet; there’s not a whole lot of big tenants in the market, but these smaller nickels and dimes and quarters are coming out of a work-from-home scenario where they have the ability to look wholesale at new space and how they can program it for themselves. There’s a lot of growth on the westside,” Blockley said. 

In general, technology companies are driving demand across the global office market. According to the report, technology firms account for 17 percent of demand across the surveyed office markets. The banking and financial service industries also continue to occupy space, with both industries accounting for 43 percent of total office demand. 

Looking ahead, office developers will need to adapt space to new standards of health, wellness and sustainability in order to keep occupancy numbers up. According to JLL, approximately one-third of office workers globally report a lack of energy at work and an additional one-third report feeling unsatisfied with their current company. Moving into 2022, JLL suggests property owners and developers will have to address these issues to keep demand from faltering.

“Existing buildings are going to find space that they can use as flex space. Tenants are going to be more open to sharing space — such as conferencing centers in downtown Los Angeles or sound stage space in Burbank, Hollywood and the surrounding areas — and looking at outdoor space as an expansion of their existing office and programming a lot more than that,” Blockley said. “In our existing developments, we’re seeing a lot more of that, and then, in terms of new developments, the sky is the limit. Everybody wants everything on site. If you’re coming into the office, you want the comforts of home that you’re used to.”