Law firms continued to drive activity in downtown's Central Business District, as the third quarter sluggishly came to a close.
"We're still seeing law firm expansion or relocation," said Chris Runyan, a broker for Grubb & Ellis Co.
At 355 S. Grand Ave., Oakland-based law firm Crosby Heafey Roach & May took 60,000 square feet for 10 years at a total lease
value of $15 million. New York-based law firm Dewey Ballantine committed to a $15 million lease for a 10-year term on 50,000 square feet at 333 S. Grand.
But Steve Bay, executive managing director of Insignia/ESG said that to get a really accurate picture of the downtown market "you can't take a macro view. You have to look at Bunker Hill sublease and telco."
A good chunk of the 7.1 million square feet available for lease in the downtown market is sublease space. For instance, the Arco tower has a couple hundred thousand square feet of sublease space available. Ames Financial is offering about 175,000 square feet, and the Sempra building has around 100,000 square feet.
"Most of those leases are long-term," Runyan explained, "which means the sublease opportunity will be around for quite awhile."
With so much space available in premium buildings, Runyan and other brokers expect the market to continue to attract tenants needing lots of square footage at a good price. "Large users have a great opportunity to lock in some very favorable rental rates," Runyan said.
Bay expects the Arco and Sempra spaces to continue to fill (Arco's 515 S. Flower has been active all year and is almost half-leased). The Ames space, however, could be another story.
"We'll have to see who will lease that much space from a troubled lessor," Bay said.
The sublease situation is especially troublesome when added to the market's 22 percent direct-lease vacancy rate down just a bit from 22.5 percent in the second quarter and up a few points from 19.7 percent this time last year. According to Grubb & Ellis, net absorption (the amount of space newly occupied less the amount newly available) has swung dramatically from a negative 743,947 square feet in the second quarter to a positive 95,709 square feet in the third. That remains a far cry from the positive 421,611 square feet absorbed downtown in the year-ago quarter.
Rental rates are firming up for the premium space at buildings like the Sanwa Tower, 777 Flower and the Wells Fargo Center. Deals are being done in this area for upwards of $30 per square foot, annually.
While telco tenants had been a major driver in the second quarter, there were few telco deals of any size in the third quarter.
"Much of the class-C space was gobbled up in the second quarter," Bay said. "Now you'll see the telcos making an African Bee-like march through class-B buildings."
This is pushing conversions at the AT & T; building and 707 Wilshire in order to meet demand. "I expect to see some rich deals coming in the fourth quarter for historically less-desirable buildings," Bay said.
Both Runyan and Bay are predicting a strong year-end flurry for downtown.
"The third quarter is traditionally slow as people work for end-of-year deals," Runyan said. "I think we'll see a lot more activity in the fourth quarter."
"Downtown is still the best opportunity in Southern California," Bay said. "We've got the biggest blocks of premium space and highest tenant improvement allowances. It's a great time to do a deal," he said.
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