Office: Prices for office space fell during the pandemic but not by as much as during previous downturns. Clara Harter

The state of Santa Monica’s office rental market is a case of bad news, good news.

The bad news is companies fled Santa Monica offices in higher numbers than the rest of LA, spiking vacancy rates and causing rental prices to drop for the first time since 2010.

The good news is academic experts and realtors are confident workers will soon return into the office in droves. They believe Santa Monica’s rental market is poised for a strong recovery due to its desirable location and constrained supply of office space.

Currently 15.1 percent of Santa Monica’s office spaces are vacant compared to 7.3 percent at the beginning of 2020, according to a report by commercial real estate data firm CoStar.

This rate rises to 20 percent when looking at four and five star rated office spaces, indicating that many companies who could leave expensive leases during the pandemic opted to do so.

The actual percent of vacant office space in Santa Monica is even higher as these statistics do not account for units on the sublease market.

In Santa Monica, companies including Bird, Lionsgate, Kite Pharma, Leaf Group, and TrueCar have put all or part of their office space up for sublease. This is a tactic taken by businesses who wanted to vacate their space, but were caught in multi year leases.

It appears that more companies sought to abandon their spaces in Santa Monica than the rest of Los Angeles. Subleases represent 7.2 percent of units being marketed in Santa Monica, compared to only 2.4 percent metro wide.

The drop in demand for office space has caused Santa Monica’s prices to dip for the first time in a decade, with average rents decreasing 4.7 percent over the last 12 months.

This is much smaller than the 16 percent drop witnessed during the financial crisis, pointing to a greater faith in businesses economic recovery and the future demand for office space.

Indeed, while much speculation has been cast and some employees have fantasized about the prospect of permanent remote work, experts say this is only a daydream.

“For a large percentage of the population work from home isn’t going to work, so we’re seeing offices opening up and people coming back into the office and back into the city,” said UCLA Economic Forecast Director Jerry Nickelsburg.

Nickelsburg outlined four reasons why people will return to the office — in-person interactions drive company culture, facetime with supervisors is important for promotions, distractions at home decrease productivity, and offices are valuable networking spaces.

Local commercial realtors also expressed confidence that most companies will bring back their employees, even if they offer more flexibility around part-time remote work options. This desire is already being reflected in the number of companies looking into new spaces.

“Our tour activity is about 80 percent of what it was pre pandemic,” said Bob Zelken, Director of Commercial leasing for Douglas Emmett. “People who put off making occupancy decisions are now back in the market looking to reestablish office spaces.”

Even though some companies downsized during the pandemic, Zelken is not worried that people will seek smaller spaces. He said there is greater interest in office plans that allow employees to space out more and that there are many other companies who expanded over the past year.

“There have been tech companies and sectors that have grown during the pandemic, we see that in the stock market,” said Zelken. “If you’re a company with three to four people leasing 1,000 square feet, it doesn’t take much to outgrow your space, and startups have always been an engine for Santa Monica.”

Santa Monica remains a highly desirable place to live and offers many amenities including great restaurants, retail, and beach access for office workers.

For realtors who accept the premise that the majority of companies will bring their employees back in-person, it follows that City office space will rise in demand.

“The whole world wants to be here and that’s why I have a pretty positive outlook,” said Jeffrey Jarow, Senior Vice President at PAR Commercial Brokerage. “It may take a little while to get back to normal, but companies are moving in.”

Even in the middle of the pandemic, one of the most expensive office sales was made in the City’s history indicating a faith in the long-term value of Santa Monica office space. In October 2020, the 92,000 square foot Colorado Campus was sold to Northwestern Mutual Life Insurance for $166 million.

An additional reason the local market may be poised to recover well is the limited supply of office space.

Both zoning regulations and general community opposition to additional density restrict developers’ ability to build new offices in Santa Monica. Since the beginning of 2010 square footage of office space has only increased by 2 percent.

While in the immediate future the market will remain depressed, it is expected to continuously improve as the pandemic subsides and people return to the office. Both Jarow and Zelken said they predict vacancy and rental prices to be back to normal in 2023.