After a slow first half of the year, investment transactions in the downtown area rebounded energetically in the third quarter, with six buildings changing hands and the promise of at least two more going on the block.


At the same time, the vacancy rate for the area rose slightly to 14.3 percent from 14 percent the previous quarter, while the market for the first time in two years gave back space instead of absorbing it, according to Grubb & Ellis Co.


Net absorption dropped to a negative 105,000 from a positive 326,000, largely driven by the decision of Transamerica Occidental Life Insurance to lease 260,000 square feet over 12 floors at the AT & T; Tower at 1150 S. Olive St. and the AT & T; Hill Building at1149 S. Hill St.


The leases, which begin in June 2008 and are valued at $75 million, represent a 90,000-square-foot reduction in space Transamerica has been occupying at the AT & T; Tower for 43 years. At least one downtown broker shrugged off the news.


"Downtown Los Angeles has had eight solid quarters of positive absorption in the past two years," said Mike Shustak, a senior vice president at Grubb & Ellis. "Only three other submarkets can say that Pasadena, West LA, and Santa Monica and they're much smaller."


Shustack also noted that two of the sales involved historic office buildings that are planned to remain in the commercial office market, instead of being converted into residential condominiums.


"The downtown office market is now looking strong enough that two historic office buildings were acquired with the intention of keeping them office buildings," Shustak said. "This may finally signal a change in investor outlook from housing conversions back to traditional office investment."


Colorado-based Alliance Commercial Partners picked up the historic 113,070-square-foot Fine Arts Building, 911 W. Seventh St., for $17.25 million from Blue Real Estate. Alliance also purchased the 218,000-square-foot office property at 617 W. Seventh St. for $28 million from Hiro Real Estate.


The other historical edifice, the Standard Oil Building at 605 W. Olympic Blvd., was sold by Hertz Investment Group. Women's clothiers Bisou Bisou purchased the 100,000-square-foot building, built in 1927, for $20 million.


Two newly acquired assets were slated for conversion to mixed uses. The former Union Bank & Trust Co. building will be redeveloped by Meruelo Maddux Properties. The firm will spend $75 million to convert the 137,000-square-foot office building into condominiums, apartments and retail. Developer Broadway and 8th Investments plans to turn the Chapman Building at Broadway at 8th St. into 68 loft-style condominiums. The Beaux Arts building will undergo a $20-million renovation led by Santa Monica's Killefer Flammang Architects.


Brokers expect sales to continue into the fourth quarter, fueled by Beacon Properties' announcement that it plans to sell a portfolio of buildings that includes 444 S. Flower St. and 1000 Wilshire Blvd.


"Downtown L.A. is a good value with sale prices still well below replacement cost," noted Chris Runyen, senior managing director for Charles Dunn Co. "Purchase prices and rental rates are up about 10 percent, and occupancy levels are slowly improving. Investors believe that these will continue to increase for the next few years."


Lease activity


Aside from the Transamerica deal, brokers said overall lease activity weakened somewhat but remained fairly strong as growing downtown businesses expanded their operations.


"Organic growth propelled a majority of third-quarter leasing velocity led by existing tenants acquiring additional space," said Peter Best, managing director of Jones Lang LaSalle Americas Inc. "Regional economic expansion and a robust job market continued to positively impact occupancy rates during the third quarter."


Average asking rents increased for Class A rose to $2.82 per square foot from $2.80 in the second quarter and $2.64 last year. Landlords of Class B space dropped rates to $2.11 per square foot from $2.15 in the second quarter, but still markedly higher than the $1.98 recorded in the third quarter last year.


The busiest property was 601 S. Figueroa St. Morgan Stanley, which has occupied space in the building since the 1980s, renewed for 40,000 square feet over two floors. San Diego attorneys Luce Forward Hamilton & Scripps, expanded to a full floor and part of a second in a 30,000-square-foot, 10.5-year lease.


Other renewals and expansions included litigators Knott & Glazier LLP expanding in an 11,000-square-foot deal, insurer Liberty Mutual renewing 4,000 square feet and media firm Yomiuri New Inc. renewing for 2,000 square feet. The lone new deal: real estate advisors ING Clarion Partners took 13,000 square feet. Terms were not reported.

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