The Hollywood office market, whose star had been steadily rising, suffered a setback in the third quarter as a direct result of the dot-com fallout.
After posting a respectable 39,410 square feet of positive net absorption in the second quarter, Hollywood was hit with 62,225 square feet of negative net absorption in the third quarter, according to Grubb & Ellis Co.
"The heavy movement out of 6565 Sunset is largely responsible for the negative absorption in this area," said David Lachoff of Grubb & Ellis.
The pullout caused the vacancy rate to jump to 11.7 percent, up from 9.4 percent in the previous quarter. Meanwhile, the average monthly asking rent ticked downward slightly from $2.47 per square foot in the second quarter to $2.42 in the third.
"Part of the slowdown for the submarket is the decline in popularity of the dot-com industry with Wall Street, which is constraining cash flows and forcing many out of business," Lachoff said.
That has translated to lagging interest in new leases and renewals for 10,000-square-foot spaces at buildings like the Lincoln Savings Building at 7060 Hollywood Blvd. and 9255 Sunset Blvd.
Bucking that trend was Replay Networks, a developer of digital television recording systems, which leased 8,400 square feet at 9200 Sunset Blvd. for $2.60 per square foot. The total lease value is $1.35 million over five years.
In a much larger transaction, the House of Blues expanded its 48,000-square-foot space at 6255 Sunset Blvd. by 27,000 square feet. The nine-year lease deal has a total value of $6.5 million.
"6255 is the real success story of the Entertainment District," noted Paul Stockwell of Julien J. Studley Inc. "In a couple of years, it went from being an ugly box building to the best building in Hollywood."
The property, represented by Madison Partners, has been sold several times at a profit.
"There weren't a lot of deals completed in the third quarter because there's so little significant space," said Madison's Mitch Stokes. "Still, I expect we'll see a lot of deals consummated in the fourth quarter."
Hoping to snag some of that expected action is Paramount Contractors, which is chasing tenants to occupy its five-story, 75,000-square-foot Manufacturers Building at 6565 Sunset Blvd. The building currently has almost 30,000 square feet vacant, and Paramount is looking for big tenants interested in leasing at least a full floor.
Paramount may have to wait awhile, if the forecast by Chris Runyan of Grubb & Ellis is correct.
"We're about a year or so out for meaningful space," noted Runyan, who expects deal flow to increase markedly when the first of several renovation and development projects come on-line beginning next year.
Among the major projects underway are TrizecHahn Corp.'s Highland and Hollywood, Tom Gilmore's Hollywood and Vine, and Accord Interests LLC's Fountain and Vine project.
Another project could be underway soon. In September, the L.A. Community Redevelopment Agency agreed to put $4 million into a development deal with Capitol Records Inc. The planned $21 million renovation includes a modernization of the landmark Capitol Records headquarters building and an adjacent office campus, as well as a new parking facility on Vine Street and the purchase of a surface parking lot on Argyle Avenue.
"These projects will create much needed inventory for large users," Runyan said. "And that's going to really make Hollywood take off."
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