Downtown L.A. office vacancy above 20% as firms build a housing-lending case

Downtown Los Angeles' office vacancy rate has spent years running above 20 percent, and in mid-September the Urban Land Institute brought its Advisory Services Program into the district to work out how the urban core might be brought back. The panel opened on three problems: helping the unhoused community while addressing crime and a deteriorating public realm; the difficulty and expense of doing business in the region relative to other U.S. cities; and housing and affordability challenges that have been decades in the making. For an owner working through a maturity, that is a long agenda to sit through.

Sentiment has been the missing ingredient for a while; investors with a good word for Los Angeles have been hard to find for at least six years, which is why the region's case is now argued on arithmetic. The greater Los Angeles area would rank among the world's 20 largest economies if it were its own country, the figure optimists keep returning to. Marilee Utter, president of Citiventure Associates and a prominent member of the Urban Land Institute, came away from the panel pointing at the assets: "The overwhelming impression was that there are so many assets here, and this downtown was hopping along until the pandemic, and there's no reason it can't return and will return."

Bill Witte, the recently retired developer who founded Related California almost 40 years ago with Stephen Ross, made a version of the same case late last year: "It's not as bad as you think it is. It's better than you think it is. It's still the cultural core of the region."

The Ross name Witte attached to California has been building in Florida of late. PRED reported last month that Palm Beach County approved a $300 million convention hotel tied to a land sale-leaseback, and that Related Ross bought Wellington land for a ground-up village center. Those are the affiliated pipeline's recent starts, which is one answer to the Los Angeles question from developers who could build anywhere.

Against the optimists sit the pragmatists, who treat the region's problems as an entry price rather than a warning. David Brickman, president of residential real estate and a partner at D2 Asset Management, said at a late-September roundtable that his firm has been active in Los Angeles recently and that he reads the outlook as steady because of the affordability challenges themselves. Solid middle-income workforce housing, in his telling, is where debt can earn a higher return, particularly across the region's moderate-income neighborhoods.

G4 Capital Partners is making a comparable move from the other coast, with the New York-based firm announcing in April that it was expanding into the Los Angeles market to provide private lending for residential projects.

Both of those are lending stories. The capital that is actually moving into Los Angeles is housing debt, against rents that already exist and tenants who have few alternatives.

Some of what is changing in California has nothing to do with Los Angeles. San Francisco, which the pandemic hit harder, has rebounded recently on demand for office and residential space from principals and executives at AI companies, the kind of concentrated, high-income demand that moves a clearing price quickly. Whether Los Angeles can start charting a positive investment trajectory of its own is an open question; the trajectory that is visible runs through housing debt and moderate-income rents.

Downtown office has the longer road. The ULI convening read as less than a vote of confidence for existing or prospective investors, and a vacancy rate that routinely sits above 20 percent explains why. Trophy office is clearing tenant by tenant and trade by trade, with the bid reserved for occupied square feet and the AI demand that has concentrated in a handful of markets. Commodity downtown product in a city with a public-realm problem sits on the wrong side of that split, and an advisory panel does not move it.

The apartment side is where the Los Angeles case sharpens. Nationally the bid has split between patient capital underwriting the supply gap expected in 2028 and 2029 and buyers trading on rent resets, and the income half clears on rent. Brickman's workforce-housing thesis is a clean version of that logic, with affordability as the demand driver, moderate-income neighborhoods as the yield, and debt as the instrument.

The open question is what clears first: a downtown office trade at a basis an all-cash buyer will defend, or a compression in housing-lending yields steep enough to send the same money up the risk curve. The fall has produced a ULI panel on homelessness, crime and the cost of doing business, a retired developer's verdict that the place is better than its reputation, and two firms writing residential loans while the towers wait.