An improving economy and a jump in lease renewals and expansions led to a mostly bullish outlook for downtown at the close of 2004, when the submarket's vacancy rate dipped modestly to 19.1 percent.


Net absorption in the October-December period was nearly 100,000 square feet, helping bring vacancies down from the 19.4 percent level of the prior quarter.


Investment activity also remained strong as the prospect of higher interest rates sent buyers chasing office properties and those ripe for residential conversion.


"Most of the lease transactions were renewals, showing that landlords and tenants are finding that staying put usually provides the best lease terms for both parties," said Grubb & Ellis Co. Vice President Chris Runyen.


Many of these deals tended to be smaller, but the activity brought the vacancy rate to its lowest point since it reached 18.5 percent in the third quarter of 2002.


"Tenants that are informed and proactive will act quickly to do what they can to lock in current rental rates," said Scot McBeath, an associate and office tenant representative at GVA DAUM. Average asking rates for Class-A space, which hovered below $2.30 at the start of 2003, closed out 2004 at $2.62, just 1 cent lower than the quarter before.


The most significant new leases downtown came from within, continuing the submarket's reputation for musical chairs. The largest was the Capital Group's 106,354-square-foot, $36.4-million relocation to 400 S. Hope St. from 333 S. Hope.


Its vacated space was backfilled by Bank of America, which left Arco Plaza. That space has been taken by City National Bank, which moved from 606 S. Olive.


Other sizable deals included Heller Ehrman White & McAuliffe's 77,674-square-foot deal at 333 S. Hope St. and stock brokerage Crowell Weedon & Co.'s 48,746-square-feet agreement at 624 S. Grand Ave.


Milbank Tweed Hadley & McCloy renewed for 20,000 square feet in a 10-year deal at 601 S. Figueroa St., and another law firm, Steptoe & Johnson LLP, directly leased the 23,692 square feet it occupied in the US Bank Center, 633 W. Fifth St., for 10 years.


Expansions helped drive net absorption up from 39,997 square feet in the third quarter to 99,949 square feet in the fourth.


Engineering firm Nabih Youssef & Associates renewed and expanded to 14,235 square feet at 800 Wilshire Blvd. in a $3-million, eight-year deal. Lockton Insurance Brokers Inc. renewed and took an additional 23,994 square feet. Terms were not disclosed.


Absorption also benefited from residential development, as the conversion of office buildings to residential takes inventory off the market, said Ted Simpson, senior director at Cushman & Wakefield Inc.


Most notably, Amidi Real Estate Group will convert the 17-story 1010 Wilshire building into 200-plus high-end condos. The building's current tenant, SBC Global Pacific, will vacate this summer for new space at the TransAmerica building.


Residential conversions also increase investor interest, Simpson said, "because many people believe Los Angeles is at the front end of a transformation to a true 24-hour urban center."


There are still large portions of space putting downward pressure on Class-A rents and net absorption, and keeping vacancy rates from dropping more quickly.


"At Arco Plaza they're still very aggressive because there's so much space available, including full floors," said Todd Doney, vice chairman of CB Richard Ellis. "They're ready to commit today for an '06 or '07 commencement."


Also, Maguire Properties Inc. announced that the L.A. Unified School District had decided not to renew 250,000 square feet in Wells Fargo Center space that will come onto the market around mid-year.


Brokers said investors were still actively seeking acquisitions.


In October, Beacon Capital acquired the 607,349-square-foot Figueroa Plaza complex for $133 million. In December, the partnership bought the 472,000-square-foot office building at 1000 Wilshire from Sumitomo Life Realty for about $115 million. The 21-story Class-A building is 82 percent leased.

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