This time last year, the only thing downtown brokers wanted to talk about was the Staples Center and how it was the great hope to revive the region. Now that it's open, there's some scattered activity around it, but the real downtown story is about something entirely different: bandwidth.
Downtown's got commercial space of all classes and lots of wiring, making it fertile ground for telecommunications and Internet companies. And they grabbed a lot of prime space in the first quarter.
Two recent deals illustrate the point: Qwest Communications signed a 15-year deal for 68,000 square feet in the old Robinson's building at 600 W. Seventh St. for undisclosed terms, and Adelphia took 32,000 square feet for undisclosed terms in the AT & T; Center at 611 W. Sixth St., a building that is now fully leased by telecommunications firms.
Brokers also mentioned one key dot-com deal signed downtown during the first quarter. EStyle expanded to another half-floor at 865 S. Figueroa St. The company moved into 5,000 square feet eight months ago and now occupies 20,000. Terms were not disclosed.
These deals weren't enough to make up for downtown's ongoing problems, however, as tenants head elsewhere and vacant sublease space floods onto the market. The first-quarter vacancy rate, at 19.9 percent, is essentially unchanged from 20.0 percent in the fourth quarter of 1999, according to Grubb & Ellis Co. But class-A vacancies increased to 16.0 percent, from 15.4 percent at the end of last year.
The average monthly asking lease rate remained flat at $2.20 per square foot in the first quarter, vs. $2.19 in the fourth quarter. Net absorption, meaning the amount of space leased minus the amount vacated, came to 69,847 square feet during the first quarter. And telecom tenants drove much of that absorption.
"Downtown building owners welcome these (telecom) deals," said Chris Runyan of Grubb & Ellis. "These companies lease up a lot of space and don't need much parking it's a perfect fit. (Office buildings) without parking could be the savior for downtown."
Internet companies don't require the huge footprints of telecommunications firms, but they are also snapping up class B and C space, notes Steve Bay of Insignia/ESG. "It's not the Oklahoma land rush, but there's a lot of interest as more of these companies move east of the Westside," he said.
The entire building at 707 W. Seventh St., for example, is populated with dot-coms, Bay said. But no big Internet deals were recorded in the first quarter.
The vacancy rate for class-B space ticked up to 28 percent in the first quarter from 25.6 percent in the fourth, while C-space vacancy declined from 27.5 percent in the fourth to 23 percent in the first, according to CB Richard Ellis.
"The market is definitely in an upward swing," said Paul Stockwell of Julien J. Studley Inc. "People paying $4 per square foot in Santa Monica are looking at downtown's better-quality buildings at $2 per square foot. I expect we'll see Internet, telco and e-commerce businesses from the Westside and Tri-Cities giving us a look."
While advocates of a heavily populated downtown are less than enthused about the telecom trend because it brings more machines than people, others point out that the technology companies are contributing positively to the downtown community in their own way.
"The retrofits and other construction are pouring millions into the economy via contractors and engineers who are doing the work," said John Archibald, associate vice president with Grubb & Ellis. "The tenants pay taxes, the buildings are in use and there are some people working there. That's good."
Additionally, the city center's old-line businesses are, for the most part, holding their ground. Atlantic Richfield Co., despite its agreement to be acquired by BP-Amoco, renewed a five-year lease for 42,000 square feet in the Figueroa Courtyard. Union Bank re-upped for 325,000 square feet at 444 S. Figueroa St. California National Bank signed a new 10-year lease for 21,000 square feet at 221 S. Figueroa.
Two law firms renewed large footprints as well. Lewis, D'Amato & Brisbois retained 98,000 square feet at 221 S. Figueroa and Pillsbury Madison & Sutro re-signed for 70,000 square feet at 725 S. Figueroa.
"Downtown is still the best tenants' market in the city," Bay said.
This is particularly true for companies that are location-sensitive. "As supply diminishes and rents go up on the Westside, locations under consideration have to be expanded," Bay added. "Hollywood is seeing some effect from this, and so is the central business district. If you look at the incremental rate increases downtown vs. the warp-speed 20 to 25 percent increases in West L.A., downtown is an even better deal than it was a year ago."
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