Investors Banking on Rebound To Fill Buildings, Boost Values

By MARGOT CARMICHAEL LESTER
Contributing Reporter

The downtown real estate community is an optimistic one, even by the generally upbeat standards of the business.

How else to explain an almost constant swapping of properties and rising rents in a market where vacancy rates have been hovering around 20 percent for years? In the first quarter of 2004, more than 66,000 square feet of space was put back onto the market.

Downtown closed the January-March period with a 19.8 percent vacancy rate, up 0.2 percent from the previous three months and 0.4 percent from the year earlier, according to Grubb & Ellis Co. Average Class-A asking rents rose to $2.56, compared to $2.53 in the October-December period and $2.41 in the year-earlier quarter.

With interest rates still low, many investors are looking at the high vacancy figures as an opportunity rather than a liability, banking that an economic rebound will fill buildings and boost the value of their holdings.

That outlook has received support with the residential conversion craze that has taken a number of Class-B buildings off the market. And even while many of those were underused, they still take inventory out of circulation.

In the latest round, Kor Group closed on the Eastern Columbia building at Ninth Street and Broadway. The 270,000-square-foot building, which is mostly vacant, and two adjacent vacant lots sold for close to the $24 million listing price, according to sources familiar with the transaction.

The Brockman Building Lofts LLC, a joint venture of Urban Pacific Builders and West Millennium Homes, paid $7.5 million for the Brockman Building near Seventh Street and Grand Avenue. The building will be converted to condominiums.

Outlook brightens

"Whether vacancy is slightly up or slightly down for the first quarter is nowhere near as significant as the recent positive change in tenants' outlook regarding the economy," said Scot McBeath, an office tenant representative with GVA DAUM.

"For the past few years, tenants wanted to postpone office leasing decisions," he said. "(They) are now making plans and taking actions regarding their future office space requirements. These actions include renewals, relocations and size changes."

That optimism resulted in a small increase in lease velocity.

Great American Custom Insurance Services announced its relocation to 47,982 square feet at 725 S. Figueroa St. from 801 S. Figueroa. The 11-year lease is valued at $14.2 million, or $2.25 per square foot.

Other first-quarter leases included Innovative Digital Technologies' 9,600-square-foot deal at Pacific Center for five years at $1.60 per square foot; Yasuda Fire & Marine Insurance's renewal of 16,902 square feet at 777 S. Figueroa for 10 years at $2.60 per square foot; and Whitmont Legal Copying's lease of 18,416 square feet at 600 Wilshire for 10 years at $1.60 per square foot.

Three substantive subleases were recorded in the period. Bank of America took an additional 25,587 square feet at BP Plaza, adding to the 163,905 square feet leased late last quarter.

Klinedinst, a law firm, expanded its space at 777 Figueroa St. in a 6,900-square-foot sublease from Prudential Securities for four years at $1.50 per foot. Elsewhere, Unlimited Reprographics subleased 7,900 square feet at Citibank Center.

Absorption (the amount of space newly occupied less the amount newly available) slipped into the negative, with 66,000 more square feet put back on the market than was taken off in the first quarter. In the previous quarter, the market absorbed 105,753 square feet. The shift may look big on paper, but brokers aren't alarmed. "Even 170,000 square feet of space represents only a half of a percent of the total inventory in downtown," said Chris Runyen, vice president of Grubb & Ellis.

Some of the change in absorption is attributable to how the number is calculated. The U.S. Bank Tower at 633 W. Fifth St. (formerly Library Tower) and 1000 Wilshire have listed about 221,000 square feet as available that isn't actually vacant yet.

And the new owners of 606 S. Olive St. are beginning to market the 300,000 square feet that will be vacated by City National Bank later this year.

Downtown's investment market stayed hot for another quarter. Dr. David Lee's Jamison Properties Inc. continues its downtown buying spree, picking up the Los Angeles World Trade Center from Haseko Corp.

Mani Bros. Real Estate Investment Group sold its Figueroa Tower, a 280,000-square-foot building, to Milbank Real Estate Services for $62.4 million. The 24-story building is 80 percent leased.

Ratkovich Co. snapped up 800 Wilshire Blvd. for about $30 million from a joint venture of Praedium Group and ScanlanKemperBard Cos.


Major Events:

- Great American Custom Insurance Services relocated to 47,982 square feet at 725 S. Figueroa St. in a deal valued at $14.2 million.

- Whitmont Legal Copying leased 18,416 square feet at 600 Wilshire for 10 years at $1.60 per foot.

- Jamison Properties Inc. bought the Los Angeles World Trade Center from Haseko Corp. for more than $53 million.

- Milbank Real Estate Services purchased Figueroa Tower for $62.4 million from Mani Bros.

- Ratkovich Co. bought 800 Wilshire Blvd. for about $30 million from a joint venture of Praedium Group and ScanlanKemperBard Cos.

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