Earlier this year, downtown boosters were crowing about the telco insurgence into downtown. Last year, it was the promise of Staples Center.
Momentum, it seemed, was finally shifting in the Central Business District and its perimeter. Yet, while the first quarter was strong, deal flow in the second was not.
Some of the downtown sluggishness is simply seasonal, notes Chris Runyan, a broker at Grubb & Ellis Co. “The second quarter is normally kind of slow. The flurry of deals at year-end spills over into the first quarter and bumps those figures (up) a bit. Deals usually pick up again early in the third quarter.”
Another factor contributing to the second-quarter lull was the Nasdaq’s decline and ensuing belt-tightening among previously flush dot-coms, industry observers said.
And the ultimate direction of dot-coms could significantly affect the $20-million transformation of the Terminal Annex at Alameda Street and Cesar Chavez Avenue into the Infomart, a fully wired hub for e-commerce firms. If dot-coms flourish and migrate downtown, that project would likely be a winner.
On the leasing front, the second quarter’s biggest deal was law firm Baker & Hostetler LLP’s 37,000-square-foot relocation from 600 Wilshire Blvd. to the Wells Fargo Center.
Elsewhere, the city of Los Angeles renewed for 27,000 square feet at the Figueroa Courtyard and, in a new deal, Minnesota Public Radio took 16,000 square feet there, as well.
“As rents stay low, we’re seeing more and more tenants upgrading (to better-quality offices) particularly service firms,” notes Steve Bay, executive managing director with Insignia/ESG. “It’s been happening for the last 10 years, but it’s really picking up now.”
The average asking monthly rental rate for class-A space was $2.23 per square foot in the second quarter, up slightly from $2.21 in the prior quarter, according to Grubb & Ellis Co.
The office vacancy rate was 22.5 percent, up from 20.4 percent in the first quarter and 20.6 percent a year ago. Net absorption (the amount of space newly occupied minus the amount newly available) dropped dramatically from a positive 69,847 square feet in the second quarter of 1999 to negative 743,947 square feet in the most recent quarter.
A key driver behind the emptying-out was BP Amoco plc’s decision on the heels of its acquisition of Atlantic Richfield Co. to put some 300,000 square feet of downtown Arco space back on the market. Nine contiguous floors of 25,000 square feet each at 333 S. Hope St. and 75,000 square feet at 444 S. Flower St. are available for lease. That’s in addition to 515 S. Flower/Arco Plaza, which has been on the market all year after BP Amoco went looking for tenants to sublease Arco’s former space.
But the downtown space-glut is not hitting all buildings.”Both 777 Flower and the Sanwa building are virtually fully leased,” Bay said. “Tenants will pay to be there.”
Despite the slowdown, downtown developers believe that additional commercial construction is viable, particularly near Staples Center. In the second quarter, L.A. Arena Co. unfurled plans for the next stage of development around the arena. The plans call for office, retail and restaurant space, as well as a 1,200-room convention hotel on Olympic Boulevard, an Internet campus and a 5,000-to-6,000-seat theater.
As for the short-term outlook, Bay is betting on the telcos to have the most immediate impact through year-end. He predicts that rents will tick up in telco buildings and that landlords of other buildings will begin converting them to meet growing dot-com and service-firm demand for bandwidth and connectivity.
“The telcos continue to have a voracious appetite for space in downtown,” Bay said.
“They simply can’t get enough. When things were rosy, dot-coms could say they had to be on the Westside, but as their funding situation changes, they need to find ways to control expenses without losing valuable employees or slashing marketing budgets,” he explained. “One obvious way to do that is to consider (relocating to) the downtown market, where rents are 30 to 50 percent less than other markets.
