After seeing a huge amount of space dumped on the market late last year, downtown Los Angeles recovered a bit during the first quarter.

A spate of lease signings and smaller space give-backs from renewals took 145,000 square feet off the market, lowering the vacancy rate two-tenths of a point to 17.2 percent from the prior quarter, according to Jones Lang LaSalle Inc.

“The market appears to be stabilizing,” said Josh Wrobel, managing director in the downtown office of Jones Lang LaSalle. “Companies are feeling a little more comfortable about the economy and their business.”

But the downtown market is still far from healthy. The vacancy rate remains near historic highs and there’s little evidence that the professional firms that dominate the market are going to expand soon.

These longer-term trends are the primary factor behind the quarter’s biggest news event: Korean Air’s scaling back of its project to replace the now-shuttered Wilshire Grand Hotel. A subsidiary of shipping giant Hanjin Group, the airline had planned two skyscrapers, including a 60-story office tower. But after deciding the market couldn’t sustain new offices, Korean Air’s new plan calls for a single tower of up to 80 stories, mostly filled with hotel rooms.

The soft office market is also behind one of the other major stories: the continued troubles at MPG Office Trust Inc., once downtown’s largest landlord of Class A space. Last month, MPG relinquished control of Two California Plaza, a 54-story office tower at 350 S. Grand Ave. atop Bunker Hill, after failing to restructure its debt. The property then went into receivership.

The foreclosure reflected the diverging fortunes of different neighborhoods. The central Financial District at the southern base of Bunker Hill has recovered quite nicely in recent quarters, driven by the arrival of trendy restaurants, L.A. Live and major new tenants like architecture firm Gensler, as well as the activity generated by a new generation young downtown residents.

But Bunker Hill is struggling. Many tenants have either downsized their space or decamped for the Financial District, while a long hoped for revival of Grand Avenue sputtered during the recession.

“Bunker Hill has been suffering quite a bit,” said Arty Maharajh, a senior research analyst with Transwestern.

Construction of the Broad Collection contemporary art museum next to Walt Disney Concert Hall is expected to solidify the area as a cultural destination, but that alone will not draw in new commercial tenants or professional firms, Maharajh said.

MAIN EVENTS

  • Wal-Mart Stores Inc. signed a lease and received city permits to establish a supermarket in a 33,000-square-foot vacant space at 701 W. Cesar Chavez Ave., a senior housing complex on the southern edge of Chinatown. Opponents have appealed the city’s granting of permits.

  • The L.A. office of Chicago law firm Kirkland & Ellis LLP renewed its lease at 333 S. Hope St. a few years early in one of the quarter’s largest lease deals. The firm signed a five-year deal with Bank of America Plaza landlord Brookfield Office Properties Inc. for 102,000 square feet, starting in 2015. Financial terms were not disclosed, but sources pegged the value at roughly $20 million.

  • Brookfield also retained another large law firm at Bank of America Plaza. Alston & Bird LLP signed a 10-and-a-half-year lease for 80,000 square feet. The law firm had been subleasing the space. Financial terms were not disclosed, but sources pegged the value at roughly $40 million

  • The former Meruelo Maddux Properties, once the largest private downtown property owner, changed its name to Evoq Properties, seven months after emerging from bankruptcy. The firm is developing a new strategy for its holdings, which include parking lots and warehouses on the east side of downtown.

  • Korean Air switched its development partner and downsized its plan to replace the Wilshire Grand Hotel with two high-rises. The airline dropped Thomas Properties Group Inc. and hired AC Martin Partners Inc. to manage the project. The revised plan calls for a single tower of up to 80 stories with up to 900 hotel rooms and some office space.

For reprint and licensing requests for this article, CLICK HERE.