Despite Signs of Tightening, High Vacancy Rates Persist.

GOING slightly against the grain of a softening regional economy, the downtown Los Angeles office market actually tightened a bit in the first quarter. But there are literally millions of square feet of space still available there, and for relatively modest rents.

Downtown has 35.4 million square feet of office space, and about one-fifth of that is vacant, according to Grubb & Ellis Co. However, in the first quarter, the vacancy rate actually edged down to 20.3 percent from 21.4 percent at year-end 2000 -- this while other markets, especially West Los Angeles, noticeably softened.

"In the first quarter, downtown was the exception for a change, with good, positive net absorption, a drop in vacancy rates, and a mild rise in rental rates," said Dennis Macheski, real estate economist with the Colliers Seeley International Inc. real estate brokerage. "Downtown is a bargain, relative to the other first-rate office markets in the Los Angeles area."

True, downtown has been overbuilt for years, a situation made worse by seemingly relentless corporate downsizing and mergers in the last decade. But there is an upside -- as a result, the area has some of the most impressive office buildings, for the lowest rents, anywhere in California. Tenants in other markets are taking note of that, said brokers.

"We (downtown office brokers) have seen a significant amount of interest from tenants on the Westside," said John Eichler, a broker with Cushman & Wakefield in downtown. "And now nobody is leaving downtown. The decrease has mostly been due to corporate consolidations and acquisitions. There is no flight, on a net basis."

Eichler, like other brokers, noted that a slowing economy -- and perhaps decreasing profits -- has tenants thinking about controlling costs, and that includes the amount they spend on office rent.

"When you can get similar quality space for half of the cost of the Westside, then downtown looks more and more attractive every day," Eichler said.

For tenants willing to play hardball, and take sublease space, quarters can be had downtown for under $2 a square foot a month, and even under $1.75 a square foot for very comfortable, even class-A environs, said Eichler.

Looking into the second quarter, veteran broker Carl Muhlstein with Cushman Realty Corp. expects several large marquee leases to take some space off the market. There will be a trend toward modestly higher rents and slightly lower vacancy rates for downtown, he said.

Though leasing activity is healthy, buyers are evidently still shying away from downtown skyscrapers, with only one major transaction underway in the first quarter: the sale of the Union Bank Plaza tower, next to the Harbor (110) Freeway, for $89 million. Additionally, Marmar Properties bought the 46,000-square-foot Jewelers Mall Building at 625 S. Hill St., from Manulife Financial for $15 million, or about $322 a square foot -- a reminder that there is more to downtown than just office towers. As central business district building values slowly appreciate again after years of softness, there may be some sales soon, said brokers.

"I expect to see some of the Japanese companies sell off their portfolios," said William Atha, senior vice president with Grubb & Ellis.

Not all is solidifying downtown, of course. The twin towers of Arco Plaza remain heavily vacant, with hundreds of thousands of square feet overhanging the market. The sale of the complex has been rumored for years, but brokers warn of $100 million in deferred maintenance costs that encumber the black-granite-clad structures. Japanese finance house Shuwa Corp. bought the complex in 1986 for more than $600 million. Brokers say it might be worth half that among today, 15 years later.

But though it has vacant space, downtown seems to be slowly gathering strength and amenities. Staples Center is, of course, up and running, and a new "Universal City-style" retail-entertainment complex is planned to go in next to it. The massive Catholic cathedral is being built, as is the Disney Concert Hall.

Developer Ted Gilmore is renovating old offices in downtown along Spring Street, and leasing up as loft housing. The Medici, a new high-end apartment building just west of downtown, has leased up well, noted Muhlstein, The combination of new amenities and more housing could well spur downtown in the months ahead, as office tenants come to re-evaluate the area.

Los Angeles Studios, in the old Unocal headquarters building just west of downtown, has leased up its production sound stages so well that it is planning to build more, while the office space in the early 1960s-era headquarters building is being leased to production companies, said brokers.

Downtown

Major Events:

* Paine/PR, a national public relations firm, signed a lease for 14,500 square feet at 660 S. Figueroa St., with landlord Mani Bros.

* ClickAction.com, an e-mail marketing service, signed a 12,000-square-foot lease at 633 W. Fifth St. (Library Tower) for five years, at $2.58 a square foot per month.

* LivePlanet, a Hollywood production company whose principals include actors Ben Affleck and Matt Damon, relocated its headquarters from Robertson Boulevard near Melrose Avenue to Los Angeles Studios. The film outfit took 10,000 square feet; terms were not disclosed.

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