Investors Still Betting on Revival As Vacancies Narrow Modestly
By MARGOT CARMICHAEL LESTER
Contributing Reporter
One big downtown lease at year-end did little to tighten a vacancy rate hovering just below 20 percent, but the torrid pace of investment activity showed signs investors believed there was cause for optimism.
Class-A vacancy rates slipped a modest 0.3 percent, to 19.6 percent, in the October-December period compared with the earlier quarter. It was unchanged from the year-earlier period, according to Grubb & Ellis Co. data.
The slight tightening was reflected in the 105,000 square feet absorbed in the submarket, off the 200,000-square-foot pace set in the July-September quarter but a good swing from the negative 171,000 square feet put back on the market in the last quarter of 2002.
The lower rate of absorption did not faze brokers.
“It was outstanding for such a large market and a short period of time,” said Chris Runyen, a vice president with Grubb & Ellis. “Many expected the fourth quarter to be flat or even negative after a very strong third quarter.”
The leasing activity came at the cost of rental rates, which fell to $2.17 per foot per month for Class-A space, a dime below the asking rate of the previous quarter. Class-B rents dropped to $1.83 in the fourth quarter from $1.91 in the third.
The year closed with announcement of the long-rumored City National Bank deal at Arco Plaza, at 555. S. Flower St.
“The significant lease deal downtown was City National Bank’s announced relocation to Arco Plaza from 606 S. Olive St.,” said Scot McBeath, a leasing agent at GVA Daum. The bank will consolidate seven Southern California offices in 310,000 square feet at the building, and is scheduled to complete the relocation in 2005. Though terms were not disclosed, the 15-year deal has been estimated at more than $100 million.
Earlier in the quarter, the family of City National Chairman Bram Goldsmith sold the Olive Street building for $29.1 million to a partnership that included Jewelry District real estate investor Mousa Hanasab. The bank took about a third of the building, which was 97 percent occupied at the time of the sale, and the deal spurred further speculation that it would be moving.
In other deals, Yasuda Fire & Marine Insurance renewed its 16,902-square-foot lease at 777 S. Figueroa St. in a 10-year deal, O’Melveny & Myers took an additional 6,989 square feet at 400 S. Hope St. and Cyberverse took 6,500 square feet at 600 W. Seventh St.
Law firm Brown Winfield & Canzoneri Inc. signed a $16 million, 12-year expansion and renewal at One California Plaza, increasing its footprint to 46,000 square feet.
The steep drop-off in deal size reflected tenants’ “go slow” attitude at year-end.
“Tenants had a general desire to delay decision making and not move,” McBeath said. “It’s an understandable desire, given the difficulty in predicting the direction of the overall economy.”
Waiting too long may prove a mistake.
“Rents will remain level as the remaining sublease vacancy is absorbed,” said John Anthony, managing director with Charles Dunn Co. “Look for rents to increase late in the year as the amount of available sublease space shrinks.”
It was the expectation of that change that helped keep investors, looking to buy based on current cash flow and benefit from higher rent rates, hover around the market.
“Low interest rates and the optimistic mood surrounding the revitalization of downtown spurred the investment activity in 2003,” Anthony said.
Among the fourth quarter deals were Beacon Properties’ purchase of Citibank Center at 444 S. Flower St. for about $175 million from Grosvenor USA and Meiji Seimei Realty. The 891,000-square-foot building is Beacon’s second purchase in Bunker Hill in just over a year and is 95 percent leased.
Shuwa Investments Corp. continued to divest downtown properties, transferring ownership of its 132,000-square-foot building at 800 S. Figueroa St. to 800 Figueroa Corp. for $10 million.
Barker Pacific Group acquired 626 Wilshire Blvd. from AEW Capital Management for an estimated $9 million. The 12-story, 149,000-square-foot building is 60 percent vacant. Transwestern Investment Co. purchased the 1 million-square-foot Aon Center at 707 Wilshire Blvd. for $119.5 million from Wells Fargo & Co.
Two properties were up for sale at year-end. Haseko Corp.’s 373,000-square-foot Los Angeles World Trade Center, anchored by UCLA, was being marketed, as was Mani Bros.’ Figueroa Tower at 660 S. Figueroa St. The asking price for both could not be determined.
“With the continued development of the new housing and retail base as well as the ongoing civic projects, look for the strong interest in downtown assets to continue in 2004,” Anthony said.
Major Events:
– City National Bank leased 310,000 square feet at Arco Plaza for $100 million in a 15-year deal. It will relocate from 606 S. Olive St., which the family of Chairman Bram Goldsmith sold for $29 million.
– US Bank inked a 154,000-square-foot, 12-year lease at 633 W. Fifth St. at an undisclosed rate.
– Transwestern purchased the Aon Center for $119.5 million from Wells Fargo & Co.
– Yasuda Fire & Marine Insurance renewed its 17,000-square-foot lease for 10 years at 777 S. Figueroa St.
– Brown Winfield & Canzoneri Inc. expanded at One California Plaza in a $16-million, 12-year deal.
– Barker Pacific Group acquired 626 Wilshire Blvd. for an estimated $9 million.
