downtown/jb/19 inches/1stjc/mark2nd


Staff Reporter

Real estate analysts keeping tabs on the downtown Los Angeles market are warning that while the area is showing some improvement, no one should expect an overnight turnaround.

Slammed by recession and corporate relocations, the area once considered the heart of L.A.’s business community had become something of a corporate ghost town. But as occupancy picked up around the region, downtown also began showing signs of recovery.

Brokers say that downtown battling to keep corporations from relocating to cheaper rates in the suburbs is slowly showing signs of improvement.

“A couple years ago we heard 10 bad things and one good thing,” said Ray Lepone, senior vice president with Grubb & Ellis. “Now, it’s more like six or seven good things. We’re making changes and rebounding it just might not be as evident as in other areas.”

The first quarter of 1997 showed slight improvement in vacancy rates, and was about two percent better than the like period last year.

The vacancy rate is currently at 18.6 percent, according to Grubb & Ellis down from 18.7 percent in the last quarter of 1996.

The report also shows that downtown tenants collectively occupied about 530,000 more square feet of office space at the start of 1997 than they did a year ago.

But it wasn’t all good news for downtown L.A. in the past quarter.

The O’Melveny & Myers-led partnership that owns the firm’s headquarters on Bunker Hill filed for Chapter 11 bankruptcy protection last month. The partnership known as 400 South Hope Street Associates was forced to file after being unable to negotiate a debt restructuring plan with its lender.

Lease payments at the 26-story tower, called the Mellon Bank Center, had decreased significantly less than the $132.7 million in debt that comes due in September, according to an attorney representing the partnership. The partnership which includes Price Waterhouse and Club World plans on filing a reorganization plan.

Market rents remained below peak rates in the 1980s, Lepone said, although some brokers contend that rates will improve as downtown regains more composure.

The area has shown some signs of doing this, he said. Future development in downtown like the proposed downtown sports arena and entertainment complex has generated excitement in the market.

“Tenants are looking at downtown with a great deal of enthusiasm they are looking long term,” said Kathy Schloessman, senior vice president of CB Commercial Real Estate Group Inc. “Major corporations are wanting to be here, and are making a financial commitment to do so.”

She said that companies are taking a serious look at downtown’s affordability, and positioning themselves before developments like the new sports arena are built.

The average rate for space today hovers at about $15-to-$16 per square foot (gross annual rate), compared with about $25 on the Westside, she said. Downtown hit a peak in the 1980s with rates at about $30-to-$35 per square foot.

The sports arena project a public-private partnership between the city and a team headed by Los Angeles Kings’ owners Ed Roski and Philip Anschutz would be built adjacent to the Convention Center. With it would come an entertainment area similar to Universal City Walk, as well as a new hotel.

Other projects scheduled to be completed within the next five years include the Disney Concert Hall, refurbishment of the Music Center, and a new Catholic cathedral complex.

In addition, the city is pushing to rebuild the L.A. Coliseum, as well as revamp portions of Exposition Park.

“This will all add a certain amount of pizzazz to downtown, increasing the energy,” said Carol Schatz, president of the Central City Association. “This will completely revitalize downtown L.A., which is what’s needed to increase occupancy.”

Schatz is currently pushing for the formation of a “business improvement district” for the central city area. The BID would allow property owners to assess themselves to fund streetscape improvements, security measures, marketing programs and other services.

As for the past quarter, analysts say downtown received its biggest boost with an announcement by Prudential Healthcare to locate a regional customer service center there.

The project would bring the biggest influx of jobs about 1,400 into downtown Los Angeles in the past decade. The center will occupy 300,000 square feet in the former First Interstate Bank operation center, which Prudential is subleasing from Wells Fargo Bank.

Prudential is opening four regional offices nationwide to consolidate billing, and expects its L.A. office to be fully operational by the fourth quarter of 1997.

The company had been considering locating to one of six other sites around the nation, but was persuaded to move to downtown by L.A.’s Business Team a unit of Mayor Richard Riordan’s office.

In addition, because the downtown location is in one of the city’s designated revitalization zones, Prudential will be eligible for state tax breaks that could total several million dollars.

“Through a combination of things including the mayor’s office, price and locaton we were able to lure them here. This is a major coup to the area,” said Schloessman. “We believe this deal will help show the way for others and there are rumors that’s happening already.”

Major Events

– Prudential Healthcare announced plans for a 1,400-employee regional customer service center located in downtown. The center will occupy 300,000 square feet in the former First Interstate Bank operation center, which Prudential is subleasing from Wells Fargo Bank. It is slated to be fully operational by the fourth quarter of 1997.

– Downtown Los Angeles kicked off the first quarter of 1997 with some good news: the City Council gave initial approval for the proposed downtown sports and entertainment complex.

The Council endorsed the project in a mid-January vote, and is expected to rule on environmental reports next month. The $250 million sports arena which will host the Lakers and Kings sports teams would open before the year 2000.

– Downtown got its biggest dose of bad news when a real estate partnership led by O’Melveny & Meyers filed for Chapter 11 bankruptcy protection. The partnership known as 400 South Hope Street Associates cited the deterioration of the local commercial real estate market for reducing the value of the 1982-vintage, 26-story tower. The building is where the law firm is headquartered.

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