One of L.A.'s premiere office properties is becoming a ghost tower.
Arco Plaza, which consists of 515 and 555 S. Flower St., will be 55 percent vacant by early next year because of massive downsizing by its namesake tenant.
And it's possible that the vacancy rate in the two 52-floor towers could go much higher in the next few years thanks to a lack of maintenance on the buildings and the inability of owner Shuwa Investments Corp. to offer competitive terms to tenants.
"Within the two towers there are some very big holes," said Clay Hammerstein, senior managing director at Insignia Commercial Group Inc. "In the 1990s, Shuwa has not been very successful in leasing space in the buildings. Until there is new ownership, I think that will continue to be the case."
Shuwa officials did not return calls for this story.
Hardest hit has been 515 S. Flower, which until recently served as the headquarters of oil giant Atlantic Richfield Co., now in the process of being acquired by BP Amoco.
The building already is 57 percent vacant, according to Cushman Realty Corp., and by early next year, that figure could top 70 percent, brokers say. That compares with an average vacancy rate among downtown class-A office buildings of around 17 percent.
"It's a ghost town," said Cushman analyst Matt Perrigue.
Since the start of the year, Arco has been moving most of its operations out of the building. It already has vacated eight floors, or 200,000 square feet of space. Early next year it will vacate the top two floors.
Arco isn't the only major company to leave. Accounting firm Ernst & Young LLP has vacated 200,000 square feet, and Deloitte & Touche is in the process of leaving 100,000 square feet it had occupied on a temporary basis.
In an indication of just how hard it is to find tenants, the 68,000 square feet vacated after law firm Kindel & Anderson went out of business three years ago remain empty.
The South Tower has fared a little better. Currently, 555 S. Flower is more than 60 percent occupied.
That's largely because its biggest tenant, Bank of America Corp., leases 15 floors, along with a foreign exchange center in the basement and a 50,000-square-foot retail banking branch located between the two towers. All told, the bank leases around 470,000 square feet of space in the building, which is its Southern California headquarters.
BofA's lease expires in 2003, and a spokesman said there are no plans to move out though some brokers question whether such a large operation is needed at a time when so many financial service companies are downsizing their brick-and-mortar offices.
Another major tenant is law firm Paul, Hastings, Janofsky & Walker LLP, which occupies 225,000 square feet. The firm's lease also comes up by 2003, but brokers say it already is testing the market for another location.
For many, the question of whether to stay or go could be determined by whether Shuwa remains the landlord.
"Shuwa suffers from a cash-flow inadequacy," said Jeffrey Woolf, president of commercial real estate firm Lee & Associates. "So tenants and brokers are hesitant about looking at the building."
Shuwa bought the property for $650 million at what was arguably the top of the market in 1986. In the early '90s, the Japanese investment firm saw its financial fortunes decline as real estate prices collapsed both in Japan and the United States.
This could be one reason Shuwa has deferred maintenance on the building. And maintenance needs appear substantial. The elevators shake and sometimes fail to stop at the right floor, say current tenants. Others talk of bug infestation on the unoccupied floors. In addition, government-mandated upgrades in fire safety and asbestos mitigation are not completed, brokers say.
Shuwa's lack of cash also has hobbled its attempts to attract new tenants. Most buildings offer financial incentives to attract lessors, but Shuwa has been unwilling to do much of that.
Brokers say the rent for new tenants is over $2 per square foot per month. That compares with an average for class-A space downtown of around $1.80. Sublease space is available for as little as $1.20.
"The perception in the market is that they are not very aggressive in attracting new tenants," said Hammerstein. "Until the building has new ownership, I think that will continue."
And unlike most class-A office owners, Shuwa has been unwilling to assist new or existing tenants in remodeling or upgrading their office space. "Shuwa does not have the cash to do tenant improvements," said Brian Ulf, vice president at Cushman.
The building also has design flaws that trouble potential tenants. The complex includes two floors of retail space below ground level, but many of the stores are vacant the result of a confusing floor plan and dwindling tenancy in the towers.
In order to make more space for retail, the building's designers put only one level of parking under the building. That forces many tenants to park in a lot across the street.
Faced with prospect of major capital expenditures, the property is expected to fetch under $200 million, less than one third the amount that Shuwa paid.
Still, the complex has some very attractive features most especially its location, possibly the best in downtown Los Angeles, with close proximity to major hotels. A subway station is down the street, easing the commute for employees. The building also is close to a freeway onramp and within walking distance of the Bunker Hill financial district. Its large, rectangular floor plan is also seen to be desirable for large tenants.
After years of sitting on its depreciating Southern California properties, Shuwa finally looks like it is ready to sell. It recently sold off its Orange County portfolio.
"Shuwa is just waiting for their lenders to give them the green light to sell the building," said Ulf.
With a new owner and a cash infusion, the buildings may one day be downtown L.A.'s hottest turnaround story. "I think with the right owner, it has the ability to be the most incredible opportunity in Los Angeles," said Woolf.
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