The office-to-residential conversion trend that recycled underperforming downtown inventory extended its reach into the Wilshire Corridor in the fourth quarter of 2005.


Taking office buildings off-line in an already tight market drove vacancies down across Wilshire Center, Miracle Mile and Park Mile, to 8.5 percent in the fourth quarter from 12.9 percent a year earlier. Tenants looking for leases along this stretch of Wilshire Boulevard have few options, especially in Class A buildings.


"This submarket experienced increasing lease rates, dropping vacancies and the conversion of older office properties to residential condos," said Michael Ross, managing director at Colliers-Seeley International.


Average asking rates for Class A space along the corridor increased to $2.05 per square foot, up two cents from the third quarter and up from $1.87 in the fourth quarter of 2004. That came despite few large lease deals in the Wilshire Center area, which includes bustling Koreatown.


"Most tenants in Wilshire Center stay in that market when their leases expire," said Chris Runyen, senior managing director of Charles Dunn Co. Inc. "In addition, Wilshire Center can no longer offer a variety of large contiguous blocks, as it did in the late 1990s, so we won't see any major transactions that will significantly impact the vacancy rate."


With no notable leases recorded, small renewals and expansions were what pushed vacancies down slightly in the Wilshire Center area, to 7.3 percent from 8.0 percent in the third quarter and 11.9 percent at the end of last year. Average Class A asking rates were essentially unchanged, dropping one cent at $1.46.


Instead, conversion deals dominated the landscape. Gerding/Edlen Development Co. LLC is under contract to buy the 2.2-acre site on Wilshire Boulevard in Koreatown between Vermont Avenue and Shatto Place for $27.6 million. Across from a Red Line subway station, the two buildings on the site will be replaced by a transit-oriented, mixed-use residential and retail development.


The American Red Cross of Greater Los Angeles sold its 43,500-square-foot headquarters at 2700 Wilshire Blvd. to Arkland Inc., an investor and developer, for $10.6 million. The new owner plans to develop condominiums on the site, while the Red Cross decentralizes into other existing locations across the Southland.


Two private investors also cashed in on the conversion trend. A 39,200-square-foot property at 3033-37 Wilshire Blvd. changed hands from a private family trust to a development group headed by Williams & Dame for $7.1 million. W & D; plans to develop residential condos there later this year. An office building at 3223 West 6th St. owned by a private investor was sold to Apollo Advisors LP for $13.2 million. The property, which has been vacant for over a decade, also will be converted to residential apartments or condominiums.


"The conversion of office buildings makes sense in Wilshire Center because they can be acquired for $80 to $100 per square foot and sold for significantly more after the conversion," Runyen said. "This trend will definitely continue in 2006, because there is significantly more demand than supply in that submarket."


The conversion trend hasn't made it to the tonier end of the Wilshire Corridor, however, given the difficulty of development in the Park Mile and Hancock Park area.


And there's not much activity in the office sector, either. Miracle Mile has few vacancies of any size and Park Mile has "no space to speak of," according to Chris DuMont, senior vice president at Grubb & Ellis.


A lone investment deal was recorded in Miracle Mile where Ratkovich Co. and Prudential Real Estate Investors bought the People's Bank building at 5900 Wilshire Blvd. from RMR Management Co. for $102.5 million. The building was 70 percent leased at the time of sale. The new owners plan a $22 million upgrade.


With few large spaces available, there were no significant lease deals completed in the closing period. Still, vacancy rates shifted down to 10.1 percent in the fourth quarter, from 10.7 percent in the third.


"With the economy motoring along, existing smaller tenants are absorbing some space with expansions," said Guy Eisner, assistant vice president with Grubb & Ellis Co.


Over the course of the year, about 237,100 square feet of space was absorbed in the area, compared to about 101,700 for 2004. That was a dramatic improvement over 2003 when the market gave back nearly 250,000 square feet. The tightening market propelled average Class A asking rates to $2.43 per square foot in the fourth quarter, up 9 cents from the third quarter.


The average rate for Class A buildings was held down in previous quarters by a few landlords striking cheap deals, while the fourth-quarter rise is attributable to new landlords raising rents something that is expected to continue, brokers said.

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