By Jeffery W. Potter, MRED | H&M Investment Advisors, Inc. | May 2026
If you read the headlines about the Southern California office market, you would think the whole thing is on fire. It is not. The truth is more interesting. Some submarkets are doing just fine. Others are getting crushed. The difference matters, and it is going to drive a wave of lawsuits over the next two years that most people are not ready for.
Century City versus downtown LA: a tale of two markets
Century City is on fire right now. Tenants are looking hard for the right space with the right tenant improvements, and there is not much to choose from. The reason is simple. Century City is clean, safe, has good security, and the parking actually works. It is expensive. Premier tenants pay the premium anyway because the other things matter to them.
Downtown Los Angeles is a different story. A large part of the financial district is suffering. Buildings that traded at high prices a few years ago have been handed back to their lenders. Several friends of mine lost their jobs when one major owner’s portfolio was recaptured. When buildings change hands at distress, the first thing that gets cut is the operating budget, and that means people.
Opportunity funds are circling these towers and buying at pennies on the dollar, often well below replacement cost. The original owners, many of them family offices, are holding on where they can. They are returning buildings only when the math forces them to. The hard part for everyone, buyer, seller, lender, is controlling operating expenses, what we call OpEx. That is where the fight lives day to day.
Orange County and Newport Beach
Orange County tells the same split story on a smaller scale. Newport Beach and the better parts of Irvine are holding their own. Older OC product is not. Tenants want light, parking, security, and amenities, and they will move across a freeway to get them.
Adaptive reuse: harder than it looks
A lot of people are talking about converting empty office buildings to apartments. Los Angeles has expanded its adaptive reuse rules to make this easier. I have looked at the numbers on several of these and I will tell you what I see.
The economics work on paper more often than they work in real life. Office floor plates were not built for residential use. Column spacing is wrong. Plumbing risers are wrong. Bathroom count is wrong. The window openings often do not match what code requires for a bedroom. The structural and mechanical work to fix these problems can run from $150 to $400 per square foot before you add the residential finishes.
The deals that pencil are the ones with the right floor plate, the right location, and a capital stack that can absorb the cost. Most office buildings do not have all three.
Three kinds of lawsuits I see coming
I have spent over forty years in California real estate, and I have watched a lot of these cycles come and go. The litigation that follows a downturn falls into three buckets, and the next two years are going to fill all three.
The first bucket is lender against borrower. Foreclosure actions, guaranty enforcement, fights over loan modification terms. When a lender takes a building back, the personal guarantees come up next. Sponsors who thought their guarantees were limited often find out otherwise when the workout starts.
The second bucket is partner against partner. General partners and limited partners turn on each other when value drops. Capital calls get refused. Fund extensions get fought over. Limited partners start asking questions about the original offering memorandum, what was promised, what was actually delivered, and what the general partner knew at the time. California Corporations Code section 16404 sets out the fiduciary duties a general partner owes its limited partners, and those duties become the spine of these cases.
The third bucket is borrower or owner against appraisers, brokers, and other professionals. When a building loses half its value, somebody is going to argue that the original valuation was too high or the lease comps were wrong. These cases are harder to win but they happen in every cycle.
Where an expert witness makes a difference
The cases that turn on a clean factual story usually settle. The cases that get tried are the ones where the underlying real estate facts are complicated and contested. That is where expert testimony matters.
I see five places where an expert adds the most value. The first is testing whether the original underwriting was reasonable at the time. The second is evaluating whether an adaptive reuse plan was feasible or whether it was a hope dressed up as a plan. The third is calculating damages in diminished-value cases. The fourth is reviewing a general partner’s conduct in a workout against the standard of care in the industry. The fifth is looking at disposition decisions, when a building was sold, how it was marketed, and whether the price was reasonable given market conditions.
What attorneys should preserve early
If you are taking on one of these cases, the documents matter and they go missing fast. Get the original offering memorandum and all amendments. Get the loan file, including the appraisal, the rent roll at funding, and the underwriting memo. Get the partnership agreement and every capital call notice. Get the property management reports for the last three years. Get the broker’s listing file if there was a sale. Get email between the general partner and the lender during any workout discussion. The discovery fight is easier when you start it early.
Closing thought
I have been in this business since the early 1980s. Every downturn looks different on the surface and the same underneath. People made decisions when times were good. Times changed. Now they are arguing about what was said, what was promised, and who pays.
If you are handling a matter involving Southern California commercial real estate, partnership disputes, lender litigation, valuation arguments, or workout disagreements, I would welcome the chance to talk through whether expert testimony fits your case.
Jeffery W. Potter, MRED
President, H&M Investment Advisors, Inc.
California Real Estate Broker License No. 00964173
California General Contractor License No. 408893
949-891-2797 | jeffery@hminvestco.com
PotterExpertWitness.com | Newport Beach, California
Disclaimer: The information provided in this article is for informational and educational purposes only and should not be construed as financial, investment, or legal advice. While the analysis is based on publicly available data and current market conditions, future outcomes are uncertain and subject to change. The views expressed are solely those of the author. Readers should conduct their own due diligence or consult a licensed professional before making decisions.