Telecom Woes Affect Downtown Property

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Once touted as a prominent piece of L.A.’s downtown renaissance, the telecommunications industry has, like its dot-com cousin, hit a wall.

The result is more than a million square feet of unoccupied office space, even as real estate and civic officials are touting the submarket’s resurgence.

Fully one third of the 3.43 million square feet in downtown buildings built out to accommodate telecommunications companies is vacant, according to Grubb & Ellis Co. The broader downtown office vacancy rate is 19.1 percent.

Telecom space must have several specific features, such as ceilings high enough to accommodate large computers; floors able to bear heavy loads; high power capacity; fiber vaults, and roof space for outdoor HVAC units requirements unique in the market.

What’s more, the space carries a premium over standard full-floor rental rates, which average less than $30 per foot annually.

One Wilshire, known as the hub of telecom downtown, is largely built-out for telecom use. Rents in the 570,000-square-foot building are $35 per foot annually, according to one real estate source. The building is fully leased, and more than 300,000 square feet is devoted to telecom use. The balance is conventional offices, according to Pamela Stevens, general manager for the building’s owner, Paramount Group Inc. Among the tenants are MCI Worldcom, Nextel and Wiltel.


Revival seen in necessity

Those in local real estate do not believe that higher rates and a soured telecom sector are as much a drag on the market as the vacancies created by the dot-com collapse on the Westside.

“Save for a couple of properties that didn’t land any tenants and will remain as (conventional offices), we don’t have too much overbuilt telecom space,” said Mark O’Brien, a vice president at CB Richard Ellis Inc.

O’Brien believes telecom companies can fill in the existing space over time.

“They’re coming into L.A.; they’re just not coming in at the size they were eight months ago,” O’Brien said “You’re going to see a lot more 10,000 and 20,000 (square-foot leases) from the (creditworthy) carriers and 5,000 and 10,000 (square-foot leases) from the youthful startups.”

Despite one major lease Sprint Corp. this spring signed a 100,000-square-foot lease in the former Terminal Annex building at 900 Alameda St., now called the Infomart much of the activity is likely to be for smaller spaces.

Nationally, the telecom situation is more dire than in Los Angeles. A Grubb & Ellis report said the national telecom vacancy rate stood at 39 percent. And cities such as Boston (52 percent), Chicago (50 percent) and Dallas/Ft. Worth (53 percent) are in much worse shape.

“It says good things about your market,” said Michael Gerard, national director of Grubb & Ellis’ telecom division, in Detroit. “Your market is one the major cities where telecom companies like to locate.”

That said, Gerard warned that while telecommunications is a core business, like energy utilities, landlords are not likely to see a quick recovery. The market has bottomed out, he said, but will not swing back up for some time.


Less traffic, smaller deals

One downtown telecom source said foot traffic among prospective tenants has slowed considerably since early in the year. The area of telecom space that will survive, the source said, are the “meet me” rooms, where telecommunications carriers set up switching gear in close proximity to facilitate communication.

Todd Anderson, a senior director at Cushman & Wakefield in charge of leasing for Hiro Real Estate at 617 W. Seventh St., said 40,000 square feet of the building’s 220,000 square feet was renovated for a telecom tenant.

He claimed there have been telecom tenants interested in 617 W. Seventh St. Even if none of them pan out, Hiro will cope. “We’ll lease all the rest of the building and if it’s only the lower space left, we’ll lease it to another creative tenant,” Anderson said.

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