California CBDs Set for High Office Distress as Expiration Cliff Approaches
Between 2026 and 2028, a significant number of 10-year leases signed in 2018 and 2019 will begin to expire.
In California, Adam Siegel, vice president of product growth at Crexi, told GlobeSt.com that the greatest distress is expected in larger office spaces within central business districts, such as downtown Los Angeles and San Francisco.
These expirations will force tenants to reassess space needs in a radically different environment that now includes hybrid work, tighter capital markets and a widening gap between Class A and Class B/C assets.
This “lease expiration cliff" will act as a market reset, triggering consolidations, downsizing, relocations to higher-quality space and inevitably, vacancy spikes in older buildings, according to Siegel.
“Although these [California] markets have already experienced notable challenges, a substantial number of large leases of 40,000 square feet or more remain in place, creating potential risk for landlords if they are not renewed,” Siegel said.
Other markets, including Orange County and San Diego, also face pressure in certain submarkets, particularly the airport area of Orange County, he said.
Landlords are actively working to understand their tenants’ intentions and future needs, according to Siegel.
“Engaging early and assessing market availability allows landlords to gauge their positioning better,” he said. “Many owners are also focused on enhancing their properties with additional amenities and concessions to attract and retain tenants.”
But overall, office space is starting to regain appeal for buyers after several years of hesitancy.
“With institutional players exiting certain markets, private capital has stepped in to acquire high-quality assets at significant discounts,” Siegel highlighted.
“These new owners can leverage a lower cost basis to offer competitive rents and attract tenants, while others may view these properties as strategic land-bank opportunities, generating cash flow in the near term with potential for future redevelopment.”
Although office market sentiment has begun to recover after several challenging years, caution remains due to potential ripple effects from ongoing uncertainties.
Even five years after the onset of Covid-19, many tenants who signed 10-year leases between 2017 and 2019 have yet to reach renewal.
“Those who have not already 'right-sized' their space by subleasing or returning excess square footage will soon face important decisions,” Siegel said.
“For larger tenants, this could create notable challenges for landlords, as these expansive floorplates are often tricky to reconfigure and may require significant capital investment.”
Source: GlobeSt/ALM