Comparing Office Space Costs: LA vs. San Francisco

Los Angeles and San Francisco are home to some of the largest and most dynamic office space markets on the US West Coast. However, there are important differences in the costs involved in setting up an office in these locations. In this article, we offer a comparative cost analysis of office lease costs between Los Angeles and San Francisco.

Los Angeles: The US creative capital

Being the nation’s creative capital, Los Angeles is a magnet for businesses looking for office space to carry out media, entertainment, design, and advertising activities.

In 2023, the city’s creative industries contributed nearly 15% of the state’s total economic output.

The majority of these businesses are located in downtown LA but also in exclusive hillside and waterfront locations, such as Hollywood, Silicon Beach, the Arts District, Playa Vista, and Burbank.

San Francisco: A global tech city

San Francisco’s business community is known for its strengths in tech and innovation, not only in the nearby Silicon Valley but also in the city’s financial district and SOMA, which are renowned tech powerhouses.

Despite its compact layout, San Francisco is one of the largest US office markets by square footage, offering space in a variety of office unit sizes and locations.

Trends affecting office costs in LA and San Francisco

In Los Angeles, the most notable trend is the surge in demand for flexible and coworking space, driven by a growing startup and freelancer population. The city is home to the second biggest flexible space market in the US. This had repercussions on the conventional office market, given the preference for flexible models and the need to downsize, which has led to record-high vacancies and decreasing rental rates.

In San Francisco and Silicon Valley, the high adoption of hybrid models and demand for satellite offices has caused an exodus from downtown offices, whose base rents have been dropping and becoming more affordable after being one of the most expensive office markets in the US until 2019. Despite this, in comparative terms, San Francisco office space is pricier than space in Los Angeles.

Comparative cost analysis

Let’s move on to a breakdown of the costs involved in leasing office space in Los Angeles and San Francisco.

1.    Base Rent

Los Angeles: Average listing rates across the LA metro area are $41 / sq ft for all office building classes. County-wide rates for Class A average $40 / sq ft and $30 / sq ft for Class B space. 

In downtown LA, base rent averages $46 / sq ft, although there are noticeable cost disparities between downtown sub-markets, with costs in Little Tokyo staying under $30 but exceeding $50 in the Fashion District. 

Outside of downtown LA, the priciest office spaces are in Beverly Hills, Century City, Hollywood, Miracle Mile, and El Segundo, all commanding average rates above $40 / sq ft. The most affordable offices are in Mid Cities, under $30 / sq ft.

San Francisco: Average base rent for San Francisco office space comes in at just under $70 / sq ft for all property classes and $54 / sq ft in the Bay Area. By building class, asking rates across the city are $58 for Class A offices, $46 for Class B, and $39 for Class C. In Silicon Valley, the average base rent is close to $60 / sq ft for Class A offices.

The priciest sub-markets (but still under $100 / sq ft) are Mission Bay, China Basin, the Financial District, and Yerba Buena. The most affordable office rents are in South of Market West and Potrero Hill, both around $50 / sq ft, and are also below average in Van Ness Corridor and Waterfront.

Despite recent rental rate declines, San Francisco remains one of the priciest US markets for large headcount and square footage requirements, and it remains oriented to large corporations.

2.    Utilities and Maintenance

The compounding factors affecting operating expenses, like office utilities and maintenance, range from office unit size, lease type, and occupancy numbers to major weather differences between both cities.

In Los Angeles, utility costs for the average small business are around $4.60 / sq ft. On the other hand, the Bay Area generally experiences higher utility costs, in particular electricity, which costs more than 67% than the national average.

3.    Taxes and Concessions

Additional costs related to property taxes may be passed to office occupiers, putting additional pressure on budgets. Although there has been a sharp decline in commercial property values in both cities due to work-form-home arrangements, these are more noticeable in San Francisco, which has led to a drop in commercial tax rates.

Concessions and incentives, such as the Tenant Improvement Allowance, can also impact overall lease costs. In Los Angeles, TIA is between $60 and 80 / sq ft, whereas in San Francisco, the average is noticeably lower at $32 / sq ft.

Rent abatements on long-term leases average 10 months in LA vs. 3 months in San Francisco.

Conclusion

Although Los Angeles generally offers more affordable office rental rates, San Francisco provides unparalleled access to a tech and innovation-oriented ecosystem. Businesses must consider their specific needs and growth plans when deciding between these two Californian office markets, to make decisions aligned with their goals and budget requirements.

Take a look at the office space available in Los Angeles and San Francisco.

Even though Florida’s office sector held strong during the pandemic, some investors are now feeling cautious as a result of geopolitical tensions, inflation, reduced spending, and rising interest rates. Despite the cooling sentiment, vacancy rates for commercial spaces are continuing to decrease across the State, especially in the office market. Fuelling Florida’s continued market positive is an overall increase in jobs, combined with low unemployment rates and generally favorable business conditions.

Market Highlights

Asking rates in Miami Beach have increased significantly, with some offices costing more than $120 sq/ft. On average, however, actual rental prices for this premium market are much lower, at roughly $70 sq/ft.

Additionally, the vacancy rate for Miami Beach is relatively low at 12.7%, just behind Brickell and Wynwood. Consequently, there has been a recent uptick in development activity driven by those looking to take advantage of the favorable conditions. Some notable projects include 1177 Kane Concourse (101,000 sq/ft) and Terminal Island Office Project (161,000 sq/ft), slated for delivery in 2024.

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The Las Vegas commercial real estate (CRE) market has continued its recovery and stabilization since emerging from the pandemic. Positive signs for Q2 2022 include reduction in vacancies, positive net absorption, increased asking rents, and the delivery of two projects adding 188,909 square feet (sq/ft) office space to the market.

Strong pre-leasing and inquiry numbers for planned and under-construction projects, along with a rise in companies looking to the Las Vegas Valley to expand or relocate operations entirely, round out the positive sentiment currently seen in the market.

For office product in particular, Las Vegas saw a Q2 of mixed results. On the back of some notable expansion in Q1 2022, Southern NV’s office market has appeared to cool at mid-year. Investment prices reached record levels, however, vacancy rates edged higher. The Southwest submarket continues to see rising rents and additional leasing activity as tenants continue to funnel to this historically popular region. 

There are currently 4,660 CRE spaces for lease in Las Vegas, amounting to 41.5 million square feet of space. Out of the 1280 commercial buildings available for sale, 505 have been leased in the past month, with 12 new listings coming onto market at time of print.

Key Takeaways

• Total inventory under construction – 468,400 square feet 
• Overall vacancy – 12.7% (a rise from 12.5% in Q1)
• Net absorption – negative 284,323 square feet
• Availability – 6.2 million square feet
• Average asking rents – $28.50 per square foot per year (a decline of $0.02 from Q1)
• Investment sales – $50.5 million (down from $75.5 million in Q1)

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Houston Office Market

Latest data from Q2 2022 shows Houston’s total office space inventory at 349.5 million square feet, a significant bump in supply from the mid-2021 figure of 173 million square feet. Despite the increase in stock, there have finally been gains in occupancy, with Q1 signalling this healthy marker for the first time since the start of the pandemic.

There were hints of this recovery at the end of 2021. The trend of last year’s subpar market performance was bucked by Class A and trophy office space (Class A+), which accounted for more than 60% of all leasing activity in Houston during Q3 2021. This positive influence has continued into Q2 2022, with Class A demand being the sole driver for occupancy gains in roughly half of Houston’s office submarkets.

Recently refurbished Class A offices, in developments built after 2005, are bucking the vacancy rate trends. These buildings report only 17% vacancy in Q2 2022, compared to the overall Class A vacancy rate of 25.6%. The new renovation programs undertaken by these mid-age office suppliers have clearly been a hit with Houston businesses, serving to satisfy post-pandemic amenity demands better than their newly developed A Grade counterparts.

Despite these low vacancy rates, the five largest leasing deals during Q2 2022 were for new and Class A CBD office space. This trend can be further illustrated by the newly completed Texas Tower, with occupancy already at 70% leased, despite only opening in the first quarter of 2022. As with the vast majority of major cities in the United States, the Houston CBD appears to be the focal point for the highest activity. 

Key Takeaways

• Inventory – 349.5 million square feet
• Overall vacancy – 23.4% (a slight decrease from Q1’s 23.6%)
• Net absorption – negative 90,000 square feet (due to coming off the back of the bumper mid-year figure of +641,7000 when several substantial tenants moved into newly completed offices)
• Availability – 27.6%
• Average asking rents – $30.80 (up 1.9% YOY)
• Investment sales – $156 per square foot (up from $116 in Q2 2021)

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Among the many changes brought about by COVID-19, the disruption to work arrangements and mobility patterns is perhaps the most profound. 

Since 2020, companies of all shapes and sizes have decided to re-structure their workforce, implementing new working models and providing employees with previously unforeseen levels of mobility. This freedom has resulted in many of these employees re-structuring their lives, relocating to more affordable or personally preferable cities. Moreover, the increased implementation of remote and hybrid office-work models has changed the way employers and employees think about location, causing many workers to reassess the need to live close to major business centers.

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Office Space

As of Q2 2022, we’re continuing to see signs of Atlanta’s increased post-pandemic recovery when compared to its peers. Office occupancy rates have shot up dramatically since Q2 2021, though leasing overall has still not reached pre-pandemic levels. Major players — including Google, Microsoft, Visa, and Airbnb — have been in the process of opening up thousands of high salary jobs in offices throughout Atlanta, heavily contributing to the increased positive sentiment that has permeated throughout the office sector in 2022.

Rents have settled after the turbulent events of the early 2020s. Vacancy rates in the metro are still sitting around 18%, making it harder for providers to hike rates. Overall vacancy rates have dropped from 18.8% in Q1 2022 to 18.4% in Q2, providing more evidence of recovery. Despite this, vacant square footage by volume has increased in the metro area, with just over 43 million sq/ft vacant in the middle of 2022 representing a rise compared to the same time in 2021, which saw 42 million sq/ft of vacant office space.

Vacancy rates in Midtown are down to 19% in Q2 2022, compared to 22% in Q2 2021. South Atlanta still shows the lowest vacancy rates across the metro area at 11.7%, though this is up from the Q2 2021 figure of 10%. Despite this increase, recovery is still trending positively when compared to other areas in Atlanta — though reaching the healthy metrics of 2019 is still a ways off. Read the rest of this entry »