Downtown activity in the July-September period continued to be a game of musical chairs, with much of the activity generated by players already in the submarket.
As a result, vacancy remained essentially unchanged, dipping to 19.4 percent from 20 percent in the previous three months, according to Grubb & Ellis Co. Vacancy rates have hovered in the 20 percent neighborhood since the beginning of 2003 even as no new buildings have been constructed and some older stock has been taken off the market for conversion to residences.
The modest tightening in vacancies came as average asking rents for Class-A space rose by a nickel over the April-June period, to $2.63 per foot per month. The rise was the greatest since the first quarter of 2003 and is more than 10 cents higher than the like period a year earlier.
"The reason for the increase in A asking rents is mainly due to the higher expectations that many new owners have with newly-acquired buildings," said Chris Runyen, vice president at Grubb & Ellis. "The increase is not related to absorption or any significant change in the buildings themselves."
Some brokers noted that asking and effective rates, which include free rent, build-out allowances and other incentives, remain far apart.
"Some new owners of buildings Arco Plaza and 700 S. Flower and 626 Wilshire are being quite aggressive to attract tenants," said Scot McBeath, office tenant representative for GVA DAUM. "If tenants want to expand or relocate and do so at a low cost, now is the time to act."
Thomas Properties Group, which purchased the 2.1 million-square-foot, twin-tower Arco Plaza last year, may be the most aggressive, cutting sweet deals to lease about 260,000 square feet in new tenants and renewals in the last quarter. That filled almost 25 percent of the vacant space there.
Deals with three law firms led the way: Jones Day will be relocating from the Gas Co. building to 555 S. Flower St. in a 15-year, 162,680-square-foot lease valued at approximately $80 million; Fulbright & Jaworski will leave the TCW Building for 63,014 square feet of space in a 12-year lease estimated at $25 million; and Ropers Majeski Kohn & Bentley signed a renewal and 5,000-square-foot expansion deal that brought its occupancy to 25,000 square feet in a 10-year lease. Terms were not disclosed.
Barker Pacific Group, which paid just $9 million for the under-leased building at 626 Wilshire Blvd. in September 2003, swung third quarter deals with the Central City Association (9,470 square feet), Consensus Planning Group (5,859) and Gianelli & Morris (5,125) in bringing the building to 80 percent occupancy. Terms of those deals were not disclosed.
Barker bought the building from AEW Capital Management. "They had to stretch to get those deals," said John Anthony, senior managing director with Charles Dunn Co. "But they look at those firms as anchors to establish the towers and reposition the asset."
AEW got a better number in its third-quarter sale of 600 Wilshire, where it struck a $44 million deal with Legacy Partners. The two buildings were failed telecom conversions.
In other relocations, law firm Gordon & Rees LLP signed for 19,000 square feet at the US Bank Tower, 633 W. Fifth St., in a 59-month lease valued at $2.3 million. It is moving from 300 S. Grand Ave. Also there, landlord Maguire Properties Inc. renewed Steptoe & Johnson LLP's 22,309-square-foot lease for 10 years at unreported terms.
The building will also be home to Ogletree Deakins Nash Smoak & Stewart, which signed a 19,171-square-foot, 6 & #733;-year sublease and will be relocating from 5,969 square feet at 888 W. Sixth St.
Internal movement, even with some expansions, will do little to fill the more than 6.2 million vacant square feet in the submarket, and some are pondering where the demand for still-vacant space will come from.
"There's no significant influx of tenants from other markets," said Steve Bay, executive vice president with CB Richard Ellis Inc. "Some tenants may consolidate operations into downtown, but there are not many banks and corporations left. That's why a solid tenant in place is worth its weight in gold and why landlords will continue to contemplate what they can do to keep tenants in place."
Investment activity, strong all year, continued in the third quarter, thanks to low interest rates, new residential and retail projects and shrinking office inventory, Runyen said.
Among the Class-A properties sold in the July-September quarter was 333 S. Hope St., purchased by Trizec Properties for $435 million from Beacon Capital Partners.
"That's the largest investment deal in downtown in years," said John Eichler, senior director of Cushman & Wakefield Inc. "And among the largest in the county."
Jade Enterprises Inc. picked up 888 S. Figueroa St., a 412,000-square-foot office building, for $51 million from South Park Associates Inc. The new owners will renovate the building, which is currently 73 percent full.
Brokers said the buying spree should carry on at least through year-end.
For reprint and licensing requests for this article, CLICK HERE.
Stories You May Also Be Interested In
- Properties Changing Hands but Leasing Activity Remains Low
- Conversions and Higher Rates Highlight Local Lease Activity
- Historically Low Vacancies Contribute to Office Squeeze
- Latest Conversion Plans Take More Space Off Submarket
- Prime Properties' Continued Rise Strengthens Submarket
- Investors Still Betting on Revival As Vacancies Narrow Modestly
- Market Tightens, but Landlords Still Making Deals for Tenants
- Prospect of Vibrant City Center Brings Big Boost to Rents, Sales