Contributing Reporter

Downtown Los Angeles continues its long, slow mend.

The vacancy rate for class-A buildings fell to 17.5 percent in the second quarter, from 18.2 percent for the previous three months, according to Cushman & Wakefield of California Inc. Meanwhile, in a positive sign for the long-struggling district, rents are on the rise.

Of course, they didn't have anywhere to go but up. The average asking lease rate was $1.65 a square foot per month, a veritable bargain compared with the Westside or Burbank, where the average rent runs 50 percent to 75 percent higher and premier space is easily double the price. Which partially explains why the downtown vacancy rate is declining.

"The rents in all the high-end markets (West L.A., Burbank, and even the South Bay) are going up, forcing tenants to take a hard look at downtown," said Gordon Pattison, senior vice president and chief economist at Investors Property Services Inc. in Santa Ana, a real estate research firm.

For years, tenants have pretty much had it all their way in downtown, as landlords scurried to fill just some of their floors, let alone most of them. But the tide may have turned in the second quarter, said Haden Eaves, a senior leasing agent with Cushman & Wakefield.

"In the past couple of years, a lot of major buildings downtown have been refinanced, or sold," he said. "The owners are doing a lot better in terms of cash flow. Rather than submitting to the market's terms, or tenants' terms, the landlords of premium buildings are not going to give away sweetheart deals. They are making deals the landlord wants to make."

Peter Adams, senior vice president of Chicago-based Equity Office Properties Trust Inc., concurred. Adams' employer bought the 1.3 million-square-foot Two California Plaza and the 570,000-square-foot 550 S. Hope Tower in 1997, both in downtown Los Angeles an in-your-face bet that downtown had nowhere to go but up.

Downtown property owners are not blind to market forces: Maguire Partners and Equity Office, which between them control 21 percent of the class-A properties downtown, both raised their rents 10 percent by the end of the second quarter, according to Cushman & Wakefield. Since the second quarter a year ago, average rents for downtown buildings have risen 13 percent.

There were some big deals in the second quarter. Accounting firm KMPG Peat Marwick leased 125,000 square feet in the south tower of Wells Fargo Center, and real estate sources say that Deloitte & Touche is looking for 300,000 square feet of premium space and is close to signing downtown. Big-five giant Ernst & Young is also looking to settle into 100,000 square feet somewhere downtown, said brokers.

In addition, Access Communications leased 24,000 square feet in the Library Tower, and City of Hope took 55,000 square feet at 716 S. Olive.

On the sale side, Insignia/ESG completed the purchase of the Figueroa Plaza I and II buildings east of First Street, while the Shidler Group bought the 446,330-square-foot 801 S. Figueroa Tower from its Indonesian owners.

Powerhouse law firm Skadden, Arps, Slate, Meagher & Flom, with much work tied to the securities industry, needs a good deal of space and is nosing around downtown, according to brokers.

"I can't see them moving to the Westside," said Clay Hammerstein, senior managing director with Julien J. Studley Inc. "It wouldn't be economically attractive, and besides, I don't think they could even find the space."

Brokers also hint that buyers are lined up and close to a deal on the 260,000-square-foot Home Savings tower downtown, as well as the 95,000-square-foot Northwestern Mutual Life Tower.

Still, not all the news is good. Out of 29.5 million square feet of downtown space, 5.2 million square feet is vacant and the vacancy rate would be even higher if it included sublease space or class-B buildings.

Downtown Los Angeles is just not the location chosen by name-brand publicly held companies, said David Zoraster, appraiser with the CB Richard Ellis Group.

"Take a look at a list of the 100 largest publicly held companies in Los Angeles," he said. "Only nine of them are downtown, and that includes Guess jeans (which has a plant on 15th Street, far from downtown proper) and the Los Angeles Times (Times Mirror Co.), and the gas company (Pacific Enterprises Inc., which has agreed to be sold to a San Diego company). For whatever reason, these companies, which are again hiring, are not choosing to be downtown."

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