Investment Activity Takes Center Stage as Leasing Stalls
By MARGOT CARMICHAEL LESTER
Contributing Reporter
Downtown leasing activity was largely a game of musical chairs during the second quarter, but investment activity picked up significantly.
Buildings large and small changed hands in the April-June period while the vacancy rate took another step up, rising to 20.6 percent from 19.4 percent in the first quarter and 18.5 percent for the like period a year ago, according to Grubb & Ellis Co.
Average asking rents for Class-A space did inch up, to $2.32 per foot per month from $2.27 in the first quarter.
Net absorption (the amount of space newly occupied less the amount newly available) fell to negative 350,691 square feet from positive absorption of 29,165 square feet in the first quarter.
The swing is mostly due to one of two substantial lease deals: Bank of America’s downsizing from 425,000 square feet at Arco Plaza to 163,000 square feet at BP Plaza in an 8-year, $43 million deal. The move put 262,000 square feet back on the market.
The other large lease deal saw US Bank lease 165,000 square feet in the Library Tower, occupying space formerly held by Arthur Andersen. The building will be renamed the US Bank Tower as part of the 12-year, $53 million deal.
“You don’t see anyone leaving,” said Tom Bohlinger, senior vice president at CB Richard Ellis. “Tenants are looking at early renewals to take advantage of market opportunities, and landlords have an opportunity to get as much stability to their rent rolls as possible, which helps with financing. They can create a stable and predictable cash flow.”
Said Chris Runyen, vice president of Grubb & Ellis’ office services group: “There’s a big ‘for sale’ sign on downtown Los Angeles.”
Three investment deals closed in the second quarter, all notable because they involve a housing component.
The largest was the long-anticipated purchase of the 1.3 million-square-foot Transamerica Center for $100 million by New Pacific Realty and Canyon-Johnson Realty Advisors. The partners plan on converting a large portion of the office complex to residential use.
CIM Group purchased 655 S. Hope St. from Shuwa Investments. The 95,000-square-foot building went for around $7 million.
Also going under contract: Pacific Center, at 523 W. 6th St., 911 Wilshire Blvd. and 1100 Wilshire Blvd., which would be converted to residential.
Several other properties are on the block, including Chase Plaza (801 Grand Ave.), 811 Wilshire Blvd., and the MCI Center at 7th and Flower streets.
On the leasing front, PricewaterhouseCoopers renewed its lease for 140,000 square feet at Two California Plaza.
Additionally, the Hospital Association of Southern California took a $5 million, 10-year renewal/expansion to bring its headquarters to 20,000 square feet at 515 S. Figueroa St.
Brokers also said that money management powerhouse TCW Group is in negotiations to remain at 865 S. Figueroa St. and is likely to cut back on the 225,000 square feet it presently leases.
Elsewhere, executive suite operator Elite Business Centers took over HQ Global Workplaces’ 31,000 square feet at Union Bank Plaza in a 10-year, $7 million deal and Standard & Poor’s leased 13,000 square feet at Two California Plaza. Those terms were not disclosed.
“The downtown submarket is being increasingly impacted by subleasing,” said Scot McBeath, marketing consultant with DAUM Commercial Real Estate Services. “Tenants are converting unused office space into cost savings.”
McBeath said subleases accounted for one third of all new transactions in the second quarter, up from around one quarter in the first three months of the year.
Jonathan Larsen, a principal at Trammel Crow Co., expects the absorption tide to turn as the year progresses. “I think we’ll see gradual positive absorption by smaller 10,000- to 20,000-square-foot tenants that are new to downtown, but at nominal numbers,” he said. “And we’ll continue to have people from the Westside and Pasadena come downtown.”
Additionally, he expects to see a few more big-time tenants enter the market. “There are some 100,000-square-foot tenants that could get building-top signage,” said Larsen. “That’s attractive because it’s free advertising.”
Traditionally upbeat brokers remain muted in their expectations for the submarket.
“The market’s not expanding it’s still shrinking,” said Joe Faulkner, a broker with Charles Dunn Co. “But tenants are making forward commitments and that’s a positive sign.”
Many law, banking and accounting firms are looking to re-up.
“That signals people are confident,” Faulkner said. “It’s not party hats and horns down here, but it’s looking good.”
