Downtown vacancy rates dropping?

After years of depressed conditions due to departures out of downtown, the office vacancy rate fell to 17.1 percent in the third quarter, according to Grubb & Ellis Co., with several major deals being transacted.

The third-quarter figure compares with 18.5 percent in the second quarter and 19.2 percent a year ago.

What’s driving the action? Bargain rents, which are routinely half what Westside landlords charge for comparable space. And the supply of available top-quality space is abundant: More than 5.5 million square feet of downtown’s total inventory of 32 million square feet.

One of the city’s oldest and largest law firms, Loeb & Loeb LLP, is among those being drawn by downtown’s bargain rents.

Loeb & Loeb in the third quarter decided to extend its lease at 1000 Wilshire Blvd. for another five years, agreeing to take space in the tower from years 2002 to 2007. The firm had considered a move to Century City, but determined that rents were higher there, said Jim Friedman, Loeb & Loeb partner specializing in real estate.

The timing seemed right too. “We think real estate prices and rents are cyclical in nature, and that downtown is ready for an upturn, and therefore wanted to lock in today’s rents,” said Friedman.

Among the largest third-quarter deals downtown was Prudential Healthcare’s decision to move 1,200 employees into nearly 300,000 square feet of space at the 1200 W. Seventh St. building, formerly home to First Interstate Bank’s operations center.

Another big third-quarter deal was a 286,000-square-foot lease by the city of Los Angeles in Figueroa Plaza, in the northern reaches of the Central Business District.

While third-quarter deals tightened downtown a bit, the market’s overall outlook remains decidedly mixed. The direct-lease office vacancy rate, for example, doesn’t count available sublease speace.

“The vacancy rate seems to be coming down slowly,” said said Ray Lepone, a senior vice president at Grubb & Ellis. “But every time someones takes space, some other space opens up.”

That phenomenon is pointed up by the recent announcement of a merger between Irwindale-based H. F. Ahmanson & Co. and downtown-based Coast Savings Financial, said Lepone. Coast will likely unload at least some of its downtown headquarters space as its operations are merged with Ahmanson’s.

Downtown’s softness is largely the result of a huge amount of new office space built by developers in the late 1980s and early 1990s, after which L.A. was hit by a recession and wave of corporate downsizings and mergers. Nonetheless, some downtown brokers contend it’s only a matter of time before that glut of space is absorbed.

“There is nothing really wrong with downtown Los Angeles. We added 8 million square feet of new space from 1989 to 1992 (bringing the total to 32 million square feet). We are struggling to get through that construction boom,” said Stephen Bay, senior vice president with Julien J. Studley Inc., a real estate brokerage.

“But rental rates have begun to creep up, and in the long run I think you’ll see more new construction downtown than anywhere else. There is no other part of town that will see as much new construction the neighbors don’t want it,” he said.

But any new office construction in downtown is most likely years away, industry sources conceded, despite the continued leasing activity.

Meanwhile, other noteworthy third-quarter deals included Washington, D.C.-based law firm Steptoe & Johnson moving into 23,000 square feet in Library Tower (formerly First Interstate World Center). Another D.C. firm, Hogan & Hartson, took about 20,000 square feet in the Biltmore Tower downtown.

The fact that Washington, D.C. firms are moving downtown is noteworthy, said Bay. “We haven’t really seen them move in before, but now they are coming in to be associated with Pacific Rim business,” he said.

Additionally, Baltimore-based State Street Bank International moved into Library Tower in the third quarter, taking 23,000 square feet, according to Bay.

Another major third-quarter transaction was the move of insurance company Johnson & Higgins into the 777 S. Figueroa tower, taking roughly 75,000 square feet.

Also, three of the major accounting firms downtown Arthur Andersen & Co., KMPG Peat Marwick, and Ernst & Young all indicated during the third quarter that they are interested in renewing their downtown leases or securing other downtown space, said Bay.

Too, the major law firm Morgan, Lewis & Bockius in the third quarter signed a lease for 82,000 square feet at One California Plaza on Grand Avenue downtown.

Managing partner John Hartigan said he is enthusiastic about the new quarters. “We are taking beautiful space at a very reasonable price,” said Hartigan. “Downtown is a great place to have law offices.” The firm plans to move in toward the end of the year.

Arguably the most unusual downtown-area event of the third quarter came in September, when Hillman Properties, along with Smith & Hricik, filed an application with the city of Los Angeles to build sound stages at the old Unocal Corp. headquarters, on the west side of the Harbor (110) Freeway.

But even with millions of square feet available downtown and scads of nearby industrial space that could conceivably be converted into studios or sound stages most industry sources agree that Tinseltown is too entrenched on the Westside and in the Burbank-Glendale-Universal City area for downtown to become a major hub of entertainment industry activity.

“I think there is too much of a cultural difference. I can see them going into areas of the (San Fernando) Valley before they come downtown,” said Lepone. He pointed out that there is abundant, and large, warehouse space in parts of the Valley that could be converted into studio space, or trendy offices.

“They want space closer to where they live,” Lepone said of entertainment industry executives.

One section of downtown that may see some limited upgrades in the near term is an area bounded by First Street on the north, Olympic Boulevard on the south, the Harbor Freeway on the west, and Hill Street or Main Street on the east.

That area will become a business improvement district (BID) as of Jan. 1, allowing property owners in the BID to tax themselves to finance street crews for clean-up and security, and to implement a downtown marketing effort, said Carol Schatz, president of the Central City Association, a group of downtown business interests.

“In fact, downtown has the lowest crime rate of any precinct in the city,” said Schatz. “But the street crews, which will be uniformed, will act as eyes and ears of the police department, and give greater comfort.”

In the longer term, three major downtown cultural projects are on the horizon: the proposed $250 million sports arena, the $260 million Disney Concert Hall, and the $50 million Catholic cathedral.

Major Events

– Hillman Properties, in concert with Smith & Hricik, filed an application with the city of Los Angeles in September to build entertainment industry studios on the Hillman property site west of the Harbor Freeway downtown. May mark initial foray of Hollywood into downtown.

– Sam Zell of Chicago-based Equity Office Properties bought the 566,000-square-foot 550 S. Hope St. tower for $100 million.

– Law firm Morgan, Lewis & Bockius, in an expansion move, agreed to take three-and-a-half floors at One California Plaza on Grand Avenue. It will move from Chase Plaza, also on Grand Avenue, near the end of this year. The firm is taking 82,000 square feet, compared with 75,000 it occupies now.