Downtown L.A.'s office market finally hits bottom.

As 1993's first quarter ended, downtown Los Angeles' perennially optimistic real estate community seemed excited that the market may have finally found its true bottom.

Now that most of the newest big downtown highrises have leased more than half their space, developers are frequently asking tenants to finance interior "build-outs" in exchange for rock-bottom "net" rents, real estate sources noted.

"When tenants start financing build-outs, I think that's a real indication that 'effective' rents won't get any lower," suggested John Semcken, director of marketing for Los Angeles Center, the project proposed for the Unocal Corp. headquarters site west of the Harbor (110) Freeway.

While Semcken and other sources declined to identify exemplary recent deals -- it's rarely a topic for public consumption -- he said the emerging trend helps both landlords and tenants.

"Landlords are running out of cash, as their lenders decline to put more money into developments," he explained. "And many strong tenants can probably finance and build improvements more economically on their own -- and they prefer the better rents anyway."

While many downtown L.A. sources confirmed Semcken's analysis, some qualified their acknowledgments.

"It's not so much that developers can't get any more tenant improvement funds," commented Joe Faulkner, senior vice president with CB Commercial Real Estate Group. "I think that because many of the new projects have passed critical occupancy stages, developers don't feel they have to offer huge build-out allowances."

Among the most recently completed downtown highrises, brokers indicated that Two California Plaza still has about 600,000 square feet available, 865 S. Figueroa approximately 300,000 square feet, the 801 Tower almost 250,000 feet, 550 S. Hope less than 200,000. Assuming the 777 Tower follows up its big first-quarter lease to American International Group with a second 100,000-foot commitment from a Mid-Wilshire insurance giant -- Marsh & McLennan Inc. is the expected signee -- "triple seven" will also have less than 200,000 square feet available.

Onno Zwaneveld, a downtown broker with Charles Dunn Co., concluded that 777's insurance coup "marks a significant turn in the market." While much of downtown's recent activity entailed internal "churning" of the tenant base among downtown properties, the big relocations from outside downtown "are just what we need to solve (downtown's) space woes," Zwaneveld elaborated.

Rents at top-notch downtown properties may actually be on the way back up, added Steve Hogan, managing director of the partnership that developed 777 Tower.

"We hit the trough and we're starting to emerge," Hogan announced. But he cautioned that the comeback's resilience is "still to be determined" amid a market with few major tenant prospects and a vacancy factor of 19 percent -- 26 percent if sublease space is included -- according to Semcken's survey of 37 modern downtown office properties.

Steve Marcussen, a vice president with downtown-based brokerage Cushman Realty Corp., isn't as convinced as Hogan and others that the market has seen its softest bargains. He said the still-heated competition could drive developers to new effective-rent lows.

"If a great tenant opportunity comes along, you can bet they'd get even more aggressive," Marcussen commented.

Along with the oversupply of "Class A" space downtown, a problem plaguing downtown is that there just aren't many large tenants shopping for space in the market. Beyond Bank of America's $120 million renewal/extension at Arco Plaza, the first quarter didn't see anything in the "blockbuster" category.

"The marketplace is still sluggish," lamented Greg Schultz, senior vice president with Metropolitan Structures West, which leads the California Plaza development team. "The tenants we expected to be in the market are still there. But there's a lack of urgency to make a commitment today, so deals take longer than ever" to consummate, he added.

Other than Marsh & McLennan and the big public and quasi-public agencies seeking "build-to-suit" headquarters facilities, downtown property pros aren't expecting an abundance of major commitments through the balance of the year.

Besides AIG and Marsh & McLennan, a third Mid-Wilshire-based firm, Sedgwick Deetert Moran & Arnold, is the only other major tenant sources said they expect to move downtown this year. Bigger downtown firms expected to play musical chairs in the core highrise market include U.S. Trust Co. and Bronson Bronson & McKinnon, along with the merging Shearson/Smith Barney operations.

A couple of other market trends further darken downtown's immediate outlook. Developers have frequently "assumed" existing leases in order to bring big tenants into their new towers, and the slumping economy has reduced the space needs of several large Central Business District tenants. The result is an abundance of "sublease" space on the market and a shortage of prospects to fill the availabilities.

"We've gone to the well and taken tenants two or three years before 'normal' market conditions would have dictated, so we may not see much major leasing activity until 1996," warned Ray Lepone, a senior vice president with Grubb & Ellis Co.

And with all the sublease space on the market, savvy tenants "can get into nice space for (the cost of) operating and tax expenses alone," Lepone added.

Downtown "is making progress on 'direct' space, but it's offset by the additional sublease coming on the market," added Zwaneveld. The practical effect is that rents won't improve significantly any time soon, the broker added.

Soon to supplement big blocks of sublease space now available at both Wells Fargo Center towers, Arco Plaza and First Interstate World Center is perhaps 90,000 feet of former Carter Hawley Hale offices at 444 S. Flower St.

These competitive conditions did in two older downtown properties during the first quarter, as lenders foreclosed on One Bunker Hill and the Subway Terminal building. And the WCT building at 1100 Wilshire Blvd., on which Great Western Bank foreclosed last year, was put on the market during the quarter. Transamerica Life Cos. also announced it would probably vacate 180,000 square feet at its South Park highrise.

In this environment, an alphabet soup of public and quasi-public agencies planning new headquarters projects came under fire during the first quarter.

Metropolitan Transportation Authority is reviewing its tentative deal with Watt City Center. The Southern California Rapid Transit District held a Union Station groundbreaking, but reportedly hasn't accomplished anything resembling actual construction. Metropolitan Water District dismissed its broker and, under heavy scrutiny, is negotiating directly with three headquarters finalists. Twin Little Tokyo office towers for city agencies should get under way soon. And Los Angeles Police Department is shopping around for a Parker Center replacement.

Hopeful developers of downtown's likely next private highrise also made big news during the first quarter. Hillman Properties/Smith & Hricik "bought back" Los Angeles Center's $200 million-plus "land loan" for a reported $30 million and can pursue financing for Unocal's new headquarters sans the heavy debt load.

New leasing and property management teams also took over two signature downtown properties during the quarter. Shuwa Investments took Arco Plaza's management in-house and turned leasing over to Cushman & Wakefield Inc., while a Metropolitan Life management affiliate assumed responsibility for Security Pacific Plaza.

Brad Cox, who's been directing the leasing of 550 S. Hope St., is moving over to market the 700,000-some square feet at Security Pacific Plaza that the Bank of America/Security Pacific merger is expected to drop on the market.

"Fortunately, that's the only (substantial) new space coming on the market in the near term," assessed Semcken. "Unfortunately, it will also postpone downtown's recovery."