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By ELIZABETH HAYES

Staff Reporter

Despite hundreds of millions of dollars in new projects including a sports arena, cathedral and concert hall the true power center of Los Angeles is shifting to Century City. The shift, which began years ago but is just now accelerating toward critical mass, has been driven by structural changes in the local economy.

“I would say the two major business centers cast their lot years ago. Downtown was institutional and the Westside was entrepreneurial. And with the restructuring of our economy over the last decade, the institutional lost out, got consolidated, outsourced, downsized and distributed,” said Steve Marcussen, senior vice president at real estate brokerage firm Cushman Realty Corp.

Meanwhile, Century City has boomed with an expanding number of deal-oriented companies that are the financial engines driving L.A.’s new entrepreneurial economy.

Century City’s tenant roster includes Donaldson Lufkin & Jenrette, Merrill Lynch, Bear Stearns & Co., Morgan Stanley, Colony Capital, Houlihan Lokey Howard & Zukin, 20th Century Fox Film Corp. and the Davis Cos.

In recent months, the mergers-and-acquisitions law firm Sullivan & Cromwell and investment banking firm Credit Suisse First Boston have relocated to the Westside from downtown. And now investment banking firm Goldman Sachs & Co. and law firm Skadden Arps Slate Meagher & Flom are looking to relocate from downtown to the Westside.

Each successive move out of downtown acts as an additional enticement for like-minded firms to follow suit. That’s because such firms want to be where the action is so much so that they’re often willing to pay more than twice as much in office rent.

“We’re seeing the investment banking community say they don’t have to be downtown,” said Howard Sadowsky, executive vice president of Julien J. Studley Inc.

“Our professionals’ lives revolve around the Westside of L.A. The town has drifted in that respect very much,” said Robert Sacks, a partner at Sullivan & Cromwell. “The core of this city has moved west.”

That’s not to say downtown has become a ghost town. It retains a heavy concentration of professional-services providers and government agencies the biggest concentration of government outside Washington, D.C., by some estimates. Downtown’s tenant roster includes Times Mirror Co., Arthur Andersen LLP, Deloitte & Touche LLP, Latham & Watkins and O’Melveny & Myers LLP.

A few Westside firms are even moving downtown to take advantage of the bargain rents, including Sidley & Austin and Paul Hastings Janofsky & Walker. Insurance company Johnson & Higgins moved earlier this year from Century City to the 777 Tower on South Figueroa Street when it merged with Marsh & McClennan Cos. to form J & H Marsh & McLennan.

“If the decision-makers are in La Canada, Pasadena, Hancock Park or Orange County, they’re typically going to stay downtown,” said John Eichler, a broker at Cushman & Wakefield Inc. “A number of firms have gone west and a number have gone east, too.”

In addition, several major developments are in the works, including Staples Center, Disney Concert Hall and the Cathedral of Our Lady of the Angels. But while these projects are expected to draw many thousands to downtown, the people are likely to come for entertainment or spiritual purposes, not for business.

Meanwhile, many of the corporate giants that once made downtown the hub of L.A. power have dramatically downsized, moved away or have been merged out of existence. First Interstate Bancorp, Security Pacific National Bank and Crocker Bank no longer exist. Unocal Corp. has moved to El Segundo, and now downtown’s pre-eminent corporate citizen, Atlantic Richfield Co., is troubled and downsizing.

The tale of L.A.’s shifting power base is visible in the numbers. The office vacancy rate for downtown class-A space is 20.4 percent. Century City, by contrast, has a vacancy rate of just 8.5 percent, while vacancy for the Westside as a whole is 9.3 percent, according to Cushman & Wakefield.

As for class-B space, downtown’s financial district is almost 30 percent vacant, compared with less than 9 percent in Century City. And several of Century City’s class-B buildings are undergoing multimillion-dollar upgrades to become class-A properties.

The trend is likely to continue with plans by JMB Realty Corp. to develop a 38-story tower called Constellation Place. While completion of that tower remains a full three years away, JMB and brokers say they already are getting inquiries from tenants eager to lease space there.

That strong demand, coupled with single-digit vacancy, has caused Century City’s average asking monthly lease rate to climb to $2.62 per square foot, up from $1.95 three years ago.

Downtown’s average rent remains stuck at $1.75 a foot, due at least partially to the huge amount of space available. A building frenzy during the late ’80s and early ’90s has brought downtown’s inventory of office space to more than 27 million square feet, while the entire Westside contains only 22 million square feet.

Stephen Bay, senior vice president and downtown branch manager for Julien J. Studley Inc., said he does not see downtown rents rising any time soon, due to growing uncertainty over the direction of the world and U.S. economies.

“There is too much vacancy and too many questions for rents to change much,” he said.

In a recent article in Corporate Real Estate Executive, Marcussen described downtown as “glistening towers composing a skyline known around the world.” He called it the best tenants’ market in the country. “It’s beautiful, but it’s empty!”

That emptiness carries advantages for cost-conscious tenants. “The key selling point of downtown is class-A office space and great rental rates,” said Jack Kyser, chief economist at the Economic Development Corp. of Los Angeles County.

The premium price of Century City space, however, was not enough to deter Sullivan & Cromwell from moving there.

“The cost differential to us for being here was not enough to outweigh the substantial benefits of being on the Westside, the convenience and the lifestyle,” Sacks said.

The westward drift started during the recession, when rents on the Westside were not that much steeper than those in Mid-Wilshire or downtown. Some firms perceived that the quality of those central city areas was slipping.

The shift has occurred “very quietly over the last three years,” Kyser said. New York investment bankers opened offices in West L.A. and were “pleasantly surprised at the results.”

“L.A. is a happy hunting ground for them there are middle-market firms in rapid growth looking for venture capital,” Kyser said.

The need to be downtown isn’t as great for many firms because they don’t have the space requirements of several years ago, said Frederick Chin, managing partner of the real estate consulting group for E & Y; Kenneth Leventhal.

“You’re decreasing your space needs,” Chin said. “The traditional rule of 200 square feet per person is being challenged because of technology. You more precisely identify when people are at their desks. I’m out of the office 50 percent of the time.”

That reduction makes the cost differential between downtown and Century City space less significant for office tenants.

Downtown has not totally abdicated the fast-growing industries to the Westside. A partnership led by Smith, Hricik and Munselle is developing movie/TV production sound stages on the former Unocal headquarters site near downtown. But that speculative project has not yet signed up any tenants.

“We have gotten a lot of interest from entertainment companies that really do like filming and being downtown,” said Steve Smith, a partner in the project.

Also, some smaller telecommunications firms have been moving downtown, leasing space in several buildings, said Carol Schatz, president of the Central City Association. About 25 such firms have leased about 150,000 square feet collectively this year, and another 10 to 15 are expected to sign leases for another 100,0000 square feet, said Whitley Collins, first vice president at CB Richard Ellis.

But the technology and entertainment industries are not likely to migrate eastward to downtown in any significant numbers.

One factor that has steered many firms to the Westside is its proximity to executives’ homes in Beverly Hills, Brentwood, Pacific Palisades and other upscale Westside communities where an increasing number of today’s power elite reside.

“These guys make lots of money, so even though they pay dramatically more (for office space) on the Westside, they prefer to be there because it’s where they live,” Sadowsky said.

That was a big factor for Sullivan & Cromwell. “Downtown for people in this office is off the beaten track. You’re not down there at all, other than to go to and from work,” Sacks said.

That’s also why Skadden Arps is mulling a move west. “The great majority of the partners and lawyers at the firm live on the Westside, so there’s a convenience factor. We’re finding many of our clients currently are on the Westside, or have recently moved to the Westside,” said Rand April, managing partner at Skadden. “Many of the investment banking firms are on the Westside, or are in the process of moving there. Many of the opportunity funds are located on the Westside.”

Then there are the lifestyle amenities of being close to the beach, Los Angeles International Airport and shopping and entertainment, as well as the ocean breezes. Cheaper parking and safety are two other considerations. “If they built downtown next to the ocean, it would be a completely different story,” said Thomas Landau, a Santa Monica-based architect.

Meanwhile, the long-sought goal of attracting a critical mass of white-collar residents to downtown has not yet materialized.

“If we had a solid middle-class neighborhood with good schools, you might find a difference here in terms of an environment to attract industries,” said William Fain, an architect and urban designer at Johnson Fain Partners.

Efforts continue to secure public subsidies to help convert boarded-up historic office buildings on Seventh Street and Broadway into loft-style housing. In addition, Schatz said, the downtown business improvement district plans to launch a marketing and economic development program early next year to promote downtown as “the best place to do business in the region.”

“The first critical piece will be a brochure or package available to anyone with an interest in leasing space,” she said. “The perception downtown is unsafe is not true.”

Staff Reporters Jason Booth and Jill Rosenfeld contributed to this article.