Vacant/25″/mike1st/mark2nd

By JASON BOOTH

Staff Reporter

Two California Plaza is a trophy property by any measure.

The sleek 52-story, silver-blue structure towers over Bunker Hill in downtown L.A. One of the newest buildings in the city, it boasts the latest high-tech amenities. Its lobby features a selection of restaurants and a fountain garden. It even has a highly regarded museum of modern art right next door.

There’s just one problem: Two Cal Plaza can’t find enough tenants to fill its 1.27 million square feet of office space.

The building’s vacancy rate is currently 17.9 percent, about average for downtown, according to Cushman & Wakefield Inc. However, its two biggest tenants Aames Financial Corp. and the Metropolitan Water District are in the process of moving out. Those departures will cause the sparkling tower’s vacancy rate to soar to 44.8 percent, according to market research conducted by Cushman & Wakefield.

Accounting firm Deloitte & Touche LLP is negotiating to sublease much of the space being vacated by the MWD. However that deal has yet to be finalized.

Furthermore, the building’s tenant roster includes several Japanese financial institutions, which, as a group, have been at the heart of that country’s financial crisis. There are worries among brokers that these banks may be forced to downsize or shut their L.A. operations.

“Its history has been similar to other buildings completed at that period troubled,” said Nyal Leslie, a partner at development company PacTen Partners. “It was built at the wrong time.”

Leslie should know. As the top local executive for Metropolitan Structures, he oversaw construction of Two California Plaza and its sister tower, One California Plaza.

All these uncertainties exist despite the fact that Two California Plaza is considered one of the finest buildings in all of Los Angeles. Built in 1992, it boasts a fiber-optic communications backbone that allows tenants access to high-speed telecommunications. It also has room lots of it.

“If you are a tenant that needs 250,000 to 300,000 square feet of space there are only three of four choices in the city,” said Todd Doney, senior vice president at Cushman Realty Corp. “Two Cal Plaza is one of them.”

While the departure of its two biggest tenants and the shakiness of its Japanese tenants pose challenges, arguably the biggest challenge is location.

“It is no reflection on the building itself,” said Craig Silver, real estate analyst at Sutro & Co. in West Los Angeles. “It’s a reflection of the downtown situation in general.”

He pointed out that with an increasing number of major L.A. companies moving to the Westside, to be close to the Los Angeles International Airport and upscale housing, finding enough bodies to fill Two Cal Plaza may be a tricky proposition.

Development of the project began during the boom economy of the late ’80s, when downtown office vacancy rates hovered around 5 percent.

The developer, Metropolitan Structures, spent around $350 million, touting it as the city’s premier business address. Expecting that tenants would be lining up at the door, the building was financed on a speculative basis meaning it was built without a single tenant commitment.

But when the doors opened in 1992, the local economy was in the midst of its worst recession since the 1930s.

At the same time, major downtown banks began to be acquired by out-of-town competitors. As a result, the downtown headquarters of First Interstate Bancorp and Security Pacific National Bank were vacated.

“Downtown relies on traditional occupations for its lifeblood,” said Andy Ratner, executive director of Cushman Realty. “All of these industries got hit hard during the recession. And even when the recession was over, they got hit hard by acquisition.”

As a result, rather than attracting top-tier anchor tenants and premium lease rates, the building had to settle for leasing space at a discount to the MWD and other less-prestigious tenants.

“It was like swimming upstream,” said Stephen Bay, senior vice president and downtown branch manager for Julien J. Studley Inc., which is representing Deloitte & Touche in its negotiations to move into the building. “It was only able to lease at prices lower than anticipated, which could not support the construction costs.”

As a result, Metropolitan Structures lost the building through foreclosure to its lender, a group led by Citicorp.

Real estate magnate Sam Zell’s Chicago-based real estate investment trust, Equity Office Properties, bought the building at a bargain price of around $90 million in 1996, and still owns it today.

By having purchased the building for about 25 percent of its construction cost, Equity Office can be more flexible with rents. And with less financial constraints, it can afford to spend a little longer to find those tenants that will enhance the tower’s image.

“Two California Plaza is probably one of the best deals Equity Office has done in the country,” said Doney. “So what we find is that they are not prepared to just give space away.”

Brokers also said that the dwindling supply of available office space and soaring rents on the Westside will make downtown space more attractive to an increasing number of tenants. And with so much of Two California Plaza coming on the market, the building could be among the first to benefit from that added demand.