Downtown vacancy rate climbs as more new buildings come on line.

Downtown vacancy rate climbs as more new buildings come on line

The vacancy rate in downtown office buildings reached 15.8 percent at 1990's end by one estimate, but unleased space may be even more abundant in the next 18 months as a total of 7.4 million square feet becomes ready for occupancy.

By 1992, the new buildings will expand the downtown market by 30 percent to a total of 32.9 million square feet. In addition, construction is set to begin in the next two years on up to 4.4 million square feet more of space.

Because of downtown's large supply of office space and construction activity, "Competition in the `Class A' (top of the line) building market is very fierce. However tenants' demand has remained fairly strong," said Charles Charis, leasing manager for Two California Plaza, a 1.3 million-square-foot project of Metropolitan Structures on Bunker Hill, which is slated for completion in early 1992.

Chicago-based law firm Meyer, Brown & Platt preleased 55,000 square feet of space in the building and will move from its current location across the street at Wells Fargo Center I at 333 S. Grand Ave. when the building is completed.

The lease symbolizes the current movement of tenants to newer buildings to take advantage of today's favorable rates.

"Tenants who are moving are looking for a better environment, more space and space that is more functional," said Bob Ortiz, vice president at Cushman Realty Corp. He added that the most successful new buildings are those with the best location, architecture and construction.

"It's the same success story throughout downtown: location, location, location," he said. Ortiz's own company is now looking for a new location when its 35,000-square-foot lease at the Wells Fargo Center ends in 1992.

Downtown landlords are still vying for what will be one of the largest lease deals in Los Angeles County history. Unocal Corp. headquarters' relocation, which will be worth an estimated $75 million to $100 million and require between 450,000 and 600,000 square feet.

So far, the commercial office building with the best chance for this large lease is a planned complex, being jointly proposed by Hillman Properties and Smith & Hricik, called Los Angeles Center IA, according to real estate insiders. Newly completed or almost finished "Class A" buildings with preleased tenants include:

* First Interstate Tower World Center, a project of Maguire Thomas Partners. The 1.3 million-square-foot building is 85 percent leased with a tenant list that includes anchor Pacific Enterprises with 200,000 square feet, First Interstate Bancorp, CPA firm Arthur Andersen and law firms Latham & Watkins and White & Castle.

* Southern California Gas Center at Fifth and Grand avenues, a project of Maguire Thomas Partners. The 1.2 million-square-foot building is slated to open in the summer of 1992, and it's already 75 percent preleased. Major tenants include Southern California Gas Co. with 550,000 square feet, and the law firms Morrison & Foerster and Jones Day, Reavis & Pogue.

* Sanwa Bank Tower, at Figueroa and Wilshire, developed by Mitsui Fudosan  (USA) Inc. The 950,000-square-foot, 50-story story building's tenants include Sanwa Bank with 200,000 square feet and the law firms of Buchalter, Nemer Fields & Younger and Milbank, Tweed, Hadley & McCloy.

* 801 Tower, at 801 S. Figueroa, scheduled for completion in the spring of 1992. The 435,000-square-foot, 24-story tower is a project of R&T Development Corp. and is 19 percent preleased. Two leases were signed for a total of 80,000 square feet and worth approximately $40 million.

Another new project that will be completed in 1992 is 550 South Hope building, a 565,000-square-foot structure developed by Koll & Ohbayashi. The San Francisco-based law firm of Brobeck, Phleger & Harrison just preleased space in the building.

In the past year, "A true tenant's market has developed with effective rental rates at the lowest level in a decade," said Steven E. Marcussen, a broker with Cushman Realty Corp.

Brokerage Julien J. Studley reports that downtown rates on 10-year leases in "Class A" buildings range from $28 to $30 per square foot gross over the five years of the lease and increasing to $34 to $35 in the second five years.

In addition, tenants are being offered free rent on 10-year leases that average 10 to 15 months and tenant improvements in the $55 to $65 range.

Just as in the Westside commercial real estate market, owners of older structures are renovating their buildings to retain tenants.

Cushman Realty's Ortiz cited the successful refurbishment of the 42-story AT&T Center at 611 W. Sixth St., which is owned by a 50-50 partnership of Mitsui Fudosan (USA) Inc. and Dai-Ichi Seimi American Corp.

After the owners renovated the building, tenant AT&T decided to stay there and signed a new 10-year, 183,000-square-foot lease, worth an estimated $40 million. AT&T's new lease begins Nov. 30, 1994, when the company's present 10-year, 182,000-square-foot lease expires.

AT&T was able to negotiate savings of $732,000 a year, or $7.32 million over the 10-year term of the lease, because of the large downtown office space glut.

Owners of the 30-year-old Eight Eleven Wilshire building recently began installing a new metal skin on the edifice's outdated facade at a cost of $5.7 million. The building is a joint venture development of affiliates of Treptow Development Co. and GE Investment Realty Partner I, L.P.

As a further limitation on automotive commuting in Los Angeles, the Southern California Air Quality Management District passed a rule three year ago that requires every business with more than 100 employees to participate in a ride sharing plan. Recently, the AQMD announced that businesses must comply by June 30 or face large fines.

The greater emphasis on ride sharing and public transportation in the Southland should benefit downtown in the long run, said Cushman Realty Corp. broker Steve Marcussen.

"Downtown has a distinctive advantage over suburban office markets. It's served by four freeway systems and is the hub of the rapidly expanding regional rapid transit system," he said. "As personal automobile use is further restricted across the Los Angeles basin, this rapid transit infrastructure will serve to make downtown an attractive location for large space users."

PHOTO : Downtown: New buildings will increase market by 30 percent