Office Market At a Glance

Inventory: 32.2 million square feet

Under Construction: 0

Class A Asking Rents: $3.27

The downtown L.A. office submarket resumed its struggle during the first quarter as downsizing law firms put more space on an already saturated market.

Absorption turned sharply negative, with 323,000 square feet more coming onto the market than being taken up with new or expanded leases. That in turn pushed the vacancy rate up more than a point to 15.2 percent, according to Grubb & Ellis.

“Given the economy, companies are either relocating or renewing for less space,” said Kevin Bender, senior vice president with CB Richard Ellis Group.

After relocating to smaller offices last year, Kirkland & Ellis LLP put all five floors of its former offices at the 777 Tower on South Figueroa Street on the market – a total of about 120,000 square feet. Prestigious law firm O’Melveny & Myers LLP shed two floors of its lease at 400 S. Hope St., putting about 50,000 square feet of space back on the market.

With so much space available and few companies looking to expand, brokers said that this trend of negative absorption is likely to continue for several quarters, pushing up vacancy rates.

Making matters worse, government agencies – long a pillar of downtown – are entering a prolonged period of retrenching as they grapple with huge budget deficits.

“We haven’t seen significant cutbacks yet in terms of space, but we could see that happen later this year,” said John McAniff, managing director of Jones Lang LaSalle’s downtown office.

McAniff said that the impact of these cutbacks will be felt most around the periphery of the downtown office market, not in the core financial district on Bunker Hill.

MAIN EVENTS

• Shenzhen New World Group, a Chinese development company, purchased the Los Angeles Marriott Downtown Hotel, which filed for bankruptcy last year. The hotel was sold for $63 million by Leeward Strategic Properties, which took ownership of the hotel after it entered foreclosure in August. The previous owner, bankrupt Brentwood businessman Ezri Namvar, had purchased the hotel for $109 million in 2007. Shenzhen plans to spend $12 million to $13 million on renovations and upgrades.
• Two L.A. city departments leased space in the Garland Center at 1200 W. Seventh St. The Los Angeles Community Redevelopment Agency leased 94,976 square feet and the Los Angeles Office of Finance leased 52,247 square feet. The CRA relocated from 354 South Spring St. while the Office of Finance relocated from 3700 Wilshire Blvd.
• Pillsbury Winthrop Shaw Pittma LLP renewed its lease for 62,000 square feet at Ernst & Young Plaza, 725 S. Figueroa St., which is owned by Brookfield Properties. Pillsbury reduced its space by 5 percent.
• Two law firms that had been sublease tenants at the U.S. Bank Tower, 633 W. Fifth St., signed direct leases with building owner Maguire Properties. Barger & Wolen LLP signed a lease for 29,000 square feet, while Carroll Burdick & McDonough LLP signed a lease for 15,000 square feet. Both firms were subleasing from Sempra Energy.
• The Consulate General of Canada renewed its lease of 21,273 square feet at 550 S. Hope St. with landlord Maguire Properties.