Utility giant Southern California Gas Co. is joining the cohort of national office tenants relocating and downsizing their real estate footprints with a deal to leave its longtime Los Angeles hub in the utility's namesake tower.
The company signed a lease with CIM Group to fill about 200,000 square feet in the landlord's Two California Plaza office tower at 350 S. Grand Ave. The move will shed about a third of the utility's presence in the downtown area.
Despite the downsizing, the lease marks the largest office deal to be signed in downtown Los Angeles so far this year, according to CoStar data.
While terms of the agreement were not publicly disclosed, representatives with CIM Group and SoCalGas said the utility is slated to move to its new digs sometime in 2026 following finish-out work that will be done to the eight floors it will soon fill in the 52-story tower. The gas company will also have an office on the ground floor to serve customers.
SoCalGas occupies more than 411,000 square feet in its Gas Company Tower building a block away at 555 W. Fifth St., according to CoStar data. The company — the largest gas distribution utility in the United States — has been headquartered at the tower for more than three decades. Its current lease is scheduled to expire by October 2026.
The move comes as a broad range of office tenants across the U.S. continue to adjust their real estate portfolios to adapt to a pandemic-era reality where they don't need as much space.
Tenants collectively signed on for about 395 million square feet last year, according to CoStar data, about 13% below the annual average reported in the years leading up to the coronavirus pandemic's 2020 outbreak. What's more, those deals are about 16% smaller on average than those signed between 2015 and 2019, exacerbating the vacancy challenges and onslaught of available space littered across the country's largest office markets.
In Los Angeles, a higher volume of leases signed prior to the pandemic have expired compared to most U.S. markets, resulting in "more adverse impacts from the trend seen nationally of many firms downsizing, often utilizing hybrid work strategies," according to a CoStar analysis.
Uncertain path forward
The loss of its largest and namesake tenant is the latest chapter in a troublesome saga for the Gas Company Tower, a property spanning 50 stories and nearly 1.5 million square feet.
After former owner Brookfield DTLA, a local affiliate of Brookfield Properties, defaulted on its loans and handed the office tower back to lenders last year, the building fell into receivership. A team of JLL brokers was hired in May to market the property, and the county of Los Angeles emerged with a tentative agreement to acquire it for $215 million in a foreclosure sale.
The Gas Company Tower was appraised in 2020 at $632 million but was valued at about $200 million when it hit the market earlier this year, according to financial services firm Barclays. Court filings tied to the receivership indicate the property could land a price tag of as much as $220 million. However, the loss of SoCalGas as the building's anchor tenant could be a drag on any potential deal.
The county's pending purchase is expected to take several months and still requires final approval from the Board of Supervisors.
Similar to other markets, office valuations in Los Angeles have collapsed under the impact of flexible work trends, depressed leasing volume, bleak refinancing conditions and high interest rates. The fall in office values could match or surpass the depreciation reported throughout the Great Recession, credit rating agency Fitch Ratings wrote in a recent report, adding that prices have yet to bottom out.
Office values have fallen to a near four-year low, and any recovery effort is likely to stretch beyond the time it took for the market to bounce back from the 2008-era crash. Average pricing among recent sales in downtown Los Angeles — where vacancy rates have climbed to about 21.5% — represents a 70% discount compared to previous price tags.
As part of the new deal, CIM Group will swap out City National's signage, Two California Plaza's largest office tenant, and replace it with SoCalGas' name on the exterior of the nearly 1.4 million-square-foot property.
“SoCalGas is excited to maintain our headquarters in downtown Los Angeles, where we have a long history as one of the area’s largest tenants,” Erica Berardi, a SoCalGas spokesperson, said in a statement. She did not provide details as to why the utility chose to relocate. News of SoCalGas' deal was reported earlier by the Los Angeles Times.
For the record
Geno St. John, CIM Group's vice president of leasing, along with JLL's Peter Hajimihalis and Hayley Blockley, represented the Two California Plaza landlord in the deal. Clay Hammerstein and Danny Rees, both with CBRE, represented Southern California Gas Co.