Making up for lost time, downtown's Class A landlords pushed average rental rates to $2.70 per square foot in the fourth quarter as the area continued to strengthen.

Rates for downtown's prime properties have risen steadily since 2002, when they closed the year at $2.27 per square foot, according to figures from Grubb & Ellis Co. Class A rates were up 6 cents from the third quarter and 8 cents on the year, a 3 percent increase.

Still, rents haven't kept pace with the ever-increasing sums paid by investors for office properties. That could signal even steeper rent hikes on the horizon, as landlords try to recoup what they paid for their property.

"That percentage increase is actually lower than the average for other submarkets in the region for the same period, (so) the fact that purchase prices for Class A buildings have risen by nearly twice as much means that there are more increases to be expected in downtown," said Chris Runyen, senior managing director for Charles Dunn Co. Inc.

Decreasing vacancy rates, which dipped to 14.9 percent from 15.6 percent in the third quarter helped to buoy prices.

"Landlords of Class A buildings will and should continue to raise rental rates as their buildings continue to absorb new tenants," Runyon said.

Class B asking rates rose one cent to $1.99 per square foot at year-end, 12 cents higher than the same quarter last year and 16 cents higher than the same quarter 2003. The mark is just higher than the $1.98 recorded in the fourth quarter of 2001, when technology and telco companies were eating up second-tier space to take advantage of the Central Business District's trunk lines.

The market also is tight for tenants seeking large footprints. Of downtown's 15 trophy buildings, only four can accommodate a contiguous block of 100,000 rentable square feet and only three can accommodate a contiguous block of 200,000 rentable square feet," said Eric Duncanson, senior vice president at CB Richard Ellis Group Inc.

"These 100,000 rentable square foot spaces are in buildings that are owned by three major owners, Maguire Properties, Trizec Properties and Thomas Properties," Duncanson added. "The world of options and the world of owners have narrowed considerably."

The crunch put a damper on lease deals. "Office leasing activity is currently close to its lowest level since 1997," said independent commercial real estate broker Scot McBeath.


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