Major events in Los Angeles County commercial and industrial submarkets in the second quarter.

The downtown L.A. office market was shaken by a few large departures during the second quarter that plunged the market back into negative territory.

Overall, 131,000 square feet more space was put on the market than was taken up in new or renewed leases, according to Grubb & Ellis Co. That’s a reversal from the first quarter, when nearly three times that much was absorbed.

The vacancy rate reflected the change, rising nearly a half-point to 15.4 percent.

Hitting the market hard was the sudden dissolution in March of Washington, D.C., law firm Howery LLP, which had slightly more than 100,000 square feet at MPG Office Trust Inc.’s 550 S. Hope St. tower.

“They just walked away from that space,” said John McAniff, managing director in the downtown L.A. office of Jones Lang LaSalle Inc. “All that space hit the market early in the second quarter and it had a huge impact.”

Another major chunk of space came on the market as a result of a huge lease renewal that Bank of America signed at its namesake 333 S. Hope St. tower. While sources estimate that the 10-year lease for 173,000 square feet should be worth more than $75 million for owner Brookfield Properties Management, it is still 50,000 square feet smaller than the past lease.

The deal continues a trend over the last two years of major downtown firms downsizing, which has been the major headwind that has offset new lease signings.

In the second quarter, the largest new downtown deal was done by Zurich North America, which inked a 10-year, 44,000-square-foot lease at MPG Office Trust’s 777 S. Figueroa St. property for an estimated $16 million. The firm, a unit of Swiss insurance giant Zurich Financial Services Ltd., vacated 50,000 square feet of space at another MPG building at 801 S. Brand Ave. in Glendale.

McAniff said he expects the market to remain soft for several more quarters. Besides the general trend of professional firms downsizing, there are multiple properties in MPG’s huge downtown office portfolio tied up in loan restructurings, hampering the landlord’s ability to sign new leases or renewals.

Once those properties complete their restructurings, McAniff said he expects MPG will have more flexibility in negotiating leases. While that will drive up transaction volume, it will likely put downward pressure on lease rates.

MAIN EVENTS

  • Bank of America signed a 10-year lease renewal with Brookfield Properties Management for 173,000 square feet at Bank of America Plaza at 333 S. Hope St. Downtown commercial real estate sources said the deal was worth somewhere around $75 million, making it by far the largest downtown office lease in recent quarters. Bank of America originally had 225,000 square feet in the tower, so the deal put around 50,000 square feet on two floors back on the market.
  • In June, a federal bankruptcy court judge ordered Richard Meruelo and John Maddux removed from management of Meruelo Maddux Properties Inc., once the largest property owner in downtown. The firm is about to emerge from bankruptcy under a new ownership team, led by major investors Global Asset Capital LLC of Palo Alto and Mount Kellett Capital Management LLP of New York. The company is expected to put several downtown industrial properties on the market starting in the third quarter.
  • As part of its portfolio restructuring, MPG Office Trust Inc., the largest office landlord downtown, sold its 565,000-square-foot Class A office tower at 555 S. Hope St. to LBA Realty LLC of Irvine for $158 million.
  • Lockton Insurance Brokers renewed its lease in May at Brookfield Properties Management’s 725 S. Figueroa St. office tower. The eight-year lease for 72,000 square feet on three floors is valued at roughly $19.5 million. The Kansas City, Mo.-based insurance brokerage has reserved the option to expand to a fourth floor.

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