b & c;/LK1st/21 inches/mark2nd
NOLA L. SARKISIAN
Staff Reporter
In most real estate markets, class-B and C office space is among the least desirable, a difficult sell at best.
But not on the Westside.
There, demand for class-B and C office space is almost as hot as that for premium class-A space.
“Three years ago, it was finding the best price. Now, it’s find me the space,” said Gary Weiss, senior managing director at Julien J. Studley Inc. in Westwood.
The vacancy rate for class-B space in Century City was a low 9.8 percent in the third quarter, according Cushman & Wakefield Inc. (The market has just one class-C building, with a vacancy rate of 7.1 percent.)
Contrast that with downtown’s Central Business District, where the class-B vacancy rate for the third quarter was 30.5 percent and the class-C rate was a whopping 50.5 percent.
“Most buildings try to maintain 95 percent occupancy. When they fall to 80 to 85 percent, then you have to do something to remedy the situation,” said Timothy Macker, president of commercial brokerage Westmac Commercial Brokerage Co. in West Los Angeles.
Some of the extreme examples of available downtown office space include Giannini Place at 649 S. Olive St., which is just 10 percent occupied; 617 W. 7th St., at 2.25 percent; and the University Club at 630 and 640 W. 6th St., which has no occupants at all.
Some buildings sit vacant as a result of recent acquisitions and in some cases, renovation efforts. A good example is 612 S. Flower, a 13-story, 480,000-square-foot building that was purchased last year by Downtown Properties II LLC from a subsidiary of the Bank of Nova Scotia.
“Right now it’s 100 percent vacant, but renovation plans that are upwards of $20 million are in the works to turn this into a class-A building,” said Eric Bender, director of property management for MAS Asset Management Corp. in downtown.
Major renovations may be the only way that downtown can compete with the Westside. Even with low lease rates of $1.10 per square foot for B and C structures in the Central Business District bounded by Third Street on the north, Olive Street on the east, 9th Street on the south and the Harbor Freeway on the west the area has been unable to compete with Century City, where similar space goes for $1.70 to $3.25.
Part of downtown’s problem stems from over-development. Between 1989 and 1992, the amount of premium space was increased by more than 25 percent to accommodate perceived future demand. Then the recession hit. Owners were forced to drop their lease rates, leaving large tracts of empty, sub-par office space.
“I don’t know that there is demand for C buildings anywhere. C buildings are economically obsolete,” said Steve Bay, a broker in the downtown office of Julien J. Studley.
Class-B and C buildings comprise less than half of downtown’s 32 million square feet of inventory in the Central Business District, according to Grubb & Ellis Co. Yet, the 45 structures comprise more than two-thirds of the area’s 66 buildings.
Class-A buildings are relatively new buildings with lots of bells and whistles and a good location. Class-B properties tend to be less attractive, with slower elevators, older bathrooms and deficient parking. Class-C structures are even less desirable, often marred by aging exteriors in dire need of facelifts.
Because of their age, location and lack of amenities, the owners of class-C properties are stuck in a vicious cycle. They can’t attract tenants because of less than desirable locations and amenities, and they are unable to upgrade because they don’t have the tenants paying into the revenue stream.
An adaptive reuse program, which would include state and federal tax incentives to encourage owners to refurbish their properties, is under way to convert historical office buildings into live-work spaces, said Carol Schatz, president of the Central City Association, a downtown business advocacy group.
“We have a wealth of buildings on 7th Street and on Broadway that would be perfect for lots and live-work situations,” Schatz said. “Every downtown that has been successful turning around has included a residential base.”
Getting wired is another way both B and C buildings are being repackaged. Telecommunications companies have been renting out space to hook up wiring, cables and computer circuitry to accommodate Internet service providers. One example is the 13-story, 398,000-square-foot 611 Wilshire Blvd. building, where GTE, British Telecommunications and Japan Telecommunications have come aboard, giving the building a 90 percent occupancy rate compared to just 50 percent two years ago.
“They can reuse the building and don’t have to really renovate them. There may be an initial investment to rewire them, but the tenant will absorb that cost,” said Ed Rosenthal, an investment sales agent with the downtown office of Grubb & Ellis. “It’s the wave of the future in downtown.”