The downtown housing boom is revealing itself in the latest vacancy rates. Vacancies are approaching a level not seen in 16 years, according to research from

Grubb & Ellis Co

. Second-quarter figures were at 14 percent, down from 15 percent in the first quarter and 15.9 percent a year ago.

"The overall vacancy rate in downtown dropped by over 30 percent between 2002 and 2006 period because the space that was converted was vacant inventory," said Chris Runyen, senior managing director of Charles Dunn Co. Inc.

Since the late 1990s, owners have been taking office buildings off the market and converted to tech gear storage sites and, most recently, condominiums and apartments. Expansions and new deals helped push vacancy even lower, with year-to-date absorption to 353,790 square feet at mid-year.

Two expansion deals were recorded in the first quarter.

City National Bank increased its space at 555 S. Flower St. by 51,068 square feet, bringing its total to slightly over 250,000 square feet. Terms were not reported.

Manning & Marder Kass Ellrod Ramirez LLP relocated and expanded to the 801 Tower at 801 S. Figueroa St. from 600 S. Figueroa St. in a $32-million, 80,000-square-foot deal. Real estate brokerage GVA Daum signed a 90-month lease for 11,775 square feet in a deal valued between $2.3 million and $2.5 million, bringing the tower's occupancy to about 95 percent.

"There are steadily more and more employers and employees in downtown," said Michael Shustak, senior vice president for Grubb & Ellis.

Other new signings included One Legacy, which leased 28,000 square feet in a $7.6 million, 10-year deal at 221 S. Figueroa St. and ING Clarion Partners, which established a downtown office with a lease for about 12,700 square feet at Figueroa at Wilshire, 601 South Figueroa St. The rate was not disclosed. In other transactions, Luce Forward Hamilton & Scripps vacated 777 S. Figueroa St. for approximately 29,000 square feet at Figueroa at Wilshire. Terms were not reported.

More than 70,000 square feet was leased at Los Angeles Center Studios, 1201 W. Fifth St. The two largest deals, amassing 50,000 square feet, were ReelzChannel, a new movie-themed television network, and the Entertainment Industry Foundation. Smaller deals included RightsLine (6,500 square feet), AdDynamix (5,000 square feet), ePrize (3,500 square feet), Look-Look (3,000 square feet) and Workplace Hollywood (2,300 square feet). Terms were not disclosed.

The prevailing fundamentals mean expanding tenants will have fewer options. "Vacancy rates for some buildings are getting so low that tenants wanting to expand may not be able to do it in their current building," said Scot McBeath, president of Scot McBeath Realty. "And they could find there are decreasing alternative buildings they can relocate to. The only solution may be to start arranging for larger space early on."

Rental rates
Average asking rates for Class A space dropped slightly to $2.80 per square foot from $2.83 in the previous quarter. Despite the drop, that's still 19 cents higher than the $2.61 reported in at mid-year 2005.

"They could decrease a bit more," cautioned Steve Bay, executive vice president for CB Richard Ellis. "Good-sized tenants (those over 10,000 square feet to 15,000 square feet) and/or those who are high-credit are able to get a very favorable deal from landlords who will eliminate whatever quoted price increases they're asking for to keep the tenants in place."

The squeeze in Class A buildings created demand for Class B space. Asking rates for Class A space were as low as $2.17 per square foot in late 2004. The increased demand pushed Class-B average asking rates to a level not seen in several years. Landlords asked $2.15 per square foot, up 9 cents from the previous quarter and $1.96 at mid-year 2005.

In the Central Business District, much of the deal making is traditionally attributed to tenants following deals from building to building. But Andrew Goodman, a director at Cushman & Wakefield, expects to see more outsiders entering the market in the near future.

"We have noticed an increase in prospective tenant activity from Westside tenants, primarily due to the lack of available space in the West Los Angeles office market," he said.

Downtown's trading rush slowed markedly in the first half of the year, and only one sale was recorded in the second quarter. Seck Group LLC acquired a 17-story building at 655 S. Hope St. CIM/7th & Hope LP sold the 104,453-square-foot property for $19.5 million.

"There are still buildings for sale, but I scratch my head at the prices," Bay said. "In markets like West L.A., landlords are bullish on pushing rents to meet purchase prices in markets, but in downtown, it's not realistic. Downtown doesn't have the same fundamentals these other markets have and tenants may not be willing to pay."

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