Office Sublet – An Indication of Valuation Uncertainty

Rent chart

Westside Los Angeles Office is a relatively narrow market.  It is also an area of the country that is seeing a particularly acute problem for office rents.  Some may say that it is a mistake to interpolate these data as indicative of the rest of the country.  We have noted ourselves quite recently that not all MSAs are the same.  However, there is also a chance that West Los Angeles is the canary in the coal mine.  

Asking rent per square foot data is often difficult to interpret because it deals with longer term.  There may be multi-year leases that are legacy to an agreement signed long ago.  But Sublet data is a bit more interesting because it gives us a better idea of what is going on right now. 

In Westside Los Angeles, sublet discounts are growing.  Amazingly, direct rent per square foot has not come down, but the rent that is actually paid by subletters is starting to.  Is this the beginning of a new paradigm for underwriting office space? 

We’re far from certain of that.  But this chart starts to do something that we have yet to see… it’s discounting office space in a recognition of a changed world.  Is this the canary in the coal mine?  Yet to be determined. 

Source: CoStar

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