The weakened downtown Los Angeles office market suffered another setback in the first quarter after two more high-profile companies vacated space and several leases expired.
If that weren’t bad enough, news that Atlantic Richfield Co. is about to be swallowed up by London-based BP Amoco brings with it the prospect that thousands more square feet of office space will soon flood the market.
The downtown office vacancy rate increased to 18.9 percent, from 17.3 percent in the fourth quarter of 1998, according to Cushman & Wakefield Inc. The biggest loss of the quarter was the departure of Southern California Gas Co. and Pacific Enterprises, both acquired by San Diego-based Sempra Energy. Nine floors of the Library Tower downtown’s tallest building and two floors of the Gas Co. Tower were vacated.
Other factors for the increase include the expiration of Arco’s lease of long-vacant space at 1055 W. Seventh Street and the expiration of Ernst & Young’s lease at Arco Plaza.
Stephen Bay, executive managing director with Insignia/ESG, said that the downtown office market will likely stay soft for a while, especially as a result of the Arco deal.
“The consolidation of corporations and financial institutions will continue to impact downtown particularly hard,” Bay said. “It is one of the only major downtown areas that hasn’t really rebounded yet.”
Though a rash of lease deals involving telecommunications companies has been brokered recently, Bay said a good deal more is needed before downtown can stage a comeback. “Telecom alone is not going to cause downtown to rebound,” Bay said. “We do not see many high-tech businesses heading downtown.”
Some brokers believe the entertainment industry eventually will discover downtown a belief that could be tested when the $40 million Los Angeles Center Studios opens in early July. The 900,000-square-foot project, which will have sound stages and production space occupying the former Unocal tower at Fifth Street, is already attracting some heavy hitters, according to co-owner Chris Urstti.
“With 14,000 shoot days last year, Los Angeles is the most-filmed location in the world,” Urstti said. “And we are sitting next to the best backdrop.” The classic building will get a “full facelift celebrating and restoring the architecture from when it was built in 1958,” Urstti said.
Downtown’s class-A office buildings continue to fare better than the lower-quality buildings. The vacancy rate for class-A buildings declined to 13 percent during the first quarter from 14.8 percent in the fourth quarter of 1998, according to Cushman & Wakefield.
Downtown’s class-B and C space continues to weigh down vacancy rates. The class-B market is 29.9 percent vacant, down from 32.5 percent a year ago.
In the downtown industrial market, vacancy rates remained below 1 percent for class A and B sites.
“Any new product put on the market is already being leased or is in escrow,” said Bart Pucci of Grubb & Ellis Co. “That is pretty much the case with all older industrial markets. They are much tighter because there is not as much land.”
Industrial lease rates stood at 45 cents a square foot in the first quarter of 1999, up from 40 cents for the like period a year ago. At the high end, two recently completed class-A industrial buildings were leased to several garment manufacturers, including Hot Kiss Inc., at about 70 cents a square foot. Two more 10,000-square-foot buildings are currently under construction in the downtown area, and medical and garment-related companies have offered to lease the space, Pucci said.
The only large project under construction is Phase II of Lowe Development’s 20-acre Alameda Trade Center near Eighth Street. That was also the site of the only major industrial land sales, with three buildings of Phase II being sold to several entrepreneurs, according to Neal Engstrom, project manager for Lowe Enterprises Commercial Group.
The 175,000-square-foot industrial site includes 9 buildings. Three others are in negotiations and three are still on the market. The sales were to a luggage importer and two food distributors.
“The one commonality all the buyers have is that they are all entrepreneurs of small to medium-sized companies that want headquarters in a 24-hour master-planned distribution community,” Engstrom said.
Meanwhile, construction continued on the Staples Center, the Disney Concert Hall, and Our Lady of the Angels cathedral, while the $22 million expansion of the Japanese American National Museum at First and Central was completed during the first quarter. The 83,000-square-foot building, which opened in January, features a 90-foot-long wall of water and has the potential to increase foot traffic in Little Tokyo, brokers said.
Several independent and corporate retailers have expressed interest in the downtown retail area, according to Armando Aguirre, a senior associate at Grubb & Ellis. “In a nutshell, the area has tremendous density and has been underserved as far as retail for a while,” Aguirre said. “It is kind of a blue-collar area, very highly Hispanic, and retailers are starting to notice that.”
Grocery stores, especially those that cater to the Latino market, seem interested in following in the footsteps of Liborio and Numero Uno markets, which relocated to the intersection of Pico and Alvarado last year and have brought increasing foot traffic to the area.
Others that have penned deals to serve the high-density market include ValuePlus market and McDonald’s. Construction is about to begin on a mixed-use project that includes housing, a ValuePlus market and a McDonald’s near Sixth Street and Virgil, Aguirre said.
Major Events
? Southern California Gas. Co. and Pacific Enterprises vacated a total of 160,000 square feet of space after they were acquired by Sempra Energy of San Diego.
? Lowe Enterprises Commercial Group sold three buildings in Phase II of the Alameda Trade Center near Eighth Street to several entrepreneurs.
? Atlantic Richfield Co.’s long-vacant space at 1055 W. Seventh Street returned to the market when Arco’s lease expired, releasing about 245,000 square feet of space.
? The recent Arco merger could put more sublease space on the market, further saturating it.
? Construction continued on Staples Center, Disney Concert Hall and the Los Angeles Center Studios.
