Huge deals establish new lease on life for Arco Plaza. (Real Estate Special Report--L.A. Turns Inward).

IF ever a building complex could be said to reflect the fortunes of its market, none provides a better illustration than Arco Plaza. When the twin 52-story towers opened in 197 1, they were at the vanguard of a wave of downtown high-rises that changed the city's profile. Corporate headquarters nestled into gleaming towers, and Los Angeles took its place as one of the West's most dynamic corporate markets.

Twenty years later, the big corporations were gone and the 2.2 million-square-foot project sat more than half empty, its towers two black marks-literally--on the downtown office market.

Just recently, Arco Plaza also faced the threat of losing one of its original tenants: law firm Paul Hastings Janofsky & Walker LLP, whose most recent lease was up in 2003. A charter tenant in Arco Plaza's south tower, the firm, which originally occupied 30,000 square-feet, had grown to take 225,000 square feet by 1999, the year it started looking around for alternative sites.

But Paul Hastings wound up staying, and its deal, coupled with architecture firm DMJMH+N's 125,000 square foot lease, is seen as a major turnaround for Arco Plaza--and the basis for the Business Journal selecting it as having the two most important lease deals of the year.

The two deals--with an aggregate 334,000 square feet valued in excess of $120 million--were also the latest indicators that downtown Los Angeles, long plagued with double-digit vacancy rates that are only now falling, has regained some of the luster it had lost with the defection of corporate headquarters and the rise of the Westside office market.

"We had five serious buildings we considered' said Lynn Williams, executive director at Cushman & Wakefield Inc. who represents Paul Hastings in its leasing activity nationwide.

In the end, drawn by rent rates at slightly below the market and the chance to be the first law firm downtown to land building-top signage, Paul Hastings signed a 15-year deal for 209,000 square feet worth between $80 million and $90 million in the north tower.

"The Paul Hastings transaction was really unique because it was the biggest institutional lease signed in downtown in many years," said Williams. "What this opportunity gave to us was excellent economics and an opportunity to redefine their ability to use their space, as well as building-top signage."

The lease, the largest in any of L.A.'s office submarkets in 2001, was Arco Plaza's second coup of 2001.

Earlier, landlord Shuwa Investment Corp. lured architecture firm DMJMH+N (formerly Daniel Mann Johnson & Mendenhall) downtown in a 15-year lease for three separate blocks of space totaling 125,000 square feet.

That deal, in which the L.A.'s largest architecture firm took 110,000 square feet in the north tower while DMJM parent company Aecom Technology Corp. took an additional 15,000 in the south tower, was worth more than $40 million. DMJM had made the move from its 100,000-square-foot offices at 3250 Wilshire Blvd.

"The decision was based on what was best for the employees," said Cushman & Wakefield Inc. Senior Director Brian Ulf, who, with Ted Simpson and Andrew Goodman, represented DMJM on the deal. "Between the restaurants, Staples Center and the vivaciousness of downtown, that's where they decided to go."

The firm had looked downtown before, kicking the tires of a Catellus Development Corp.-developed site near Union Station in 1999, but ultimately wanted to be closer to the center of downtown.

Polishing an old gem

"It speaks well of the project, its longevity and future' said Thomas Kibler, president of Shuwa Leasing Co. and landlord representative on both deals. "It's an institutional quality project that will be here for many years to come."

The deals have also boosted the profile of a property whose future appears to be brighter than its recent past.

When Shuwa bought the property in 1986 for $650 million, Arco Plaza, with anchor tenants Atlantic Richfield Co. and Bank of America, had maintained its status as a premier downtown address since its completion in 1971.

Built by the Atlantic Richfield Co., the project was designed by A.C. Martin Partners. That firm also designed the Security Pacific World Headquarters building (known as Arco Center but now BP Amoco Plaza) atop Bunker Hill.

When Arco Plaza came on line in 1971, it represented the largest delivery of office space at one time in the world.

"Without Arco Plaza, nothing (in downtown) would have had much meaning," said J. Edward Martin, partner emeritus at AC. Martin, in a 1998 interview. "All other buildings tended to take their cue from Arco."

But Arco, which once leased 900,000 square feet of the project, has since pulled out completely. In 2000, the company was bought by BP Amoco. Meanwhile, Bank of America, whose signage remains on the south tower, has reduced its occupancy to about 350,000 square feet from 600,000 square feet.

Other notable defections in recent years included consulting firms Ernst & Young and Deloitte & Touche, which combined for 300,000 square feet. As a result, the 2.2 million square foot property was 55 percent vacant at the beginning of 2000.

The losses came as Shuwa had been divesting in its Southern California real estate investments, having sold Century City properties 1900 and 1901 Avenue of the Stars, as well as Glendale's 505 N. Brand Blvd., over the past few years.

It didn't help retention efforts at Arco Plaza that Shuwa had deferred maintenance at the site that could cost more than $100 million.

More changes coming?

With the two big long-term deals, however, massive upgrades could be in the offing, whether under Shuwa's ownership or another investor's.

"It's clear that the ownership of Arco Plaza decided to (sign the leases) purely because they were looking to put it up for sale," said Tony Morales, partner at downtown institutional landlord and developer MaguirePartners. "From an owner's standpoint, they did the best they could do with the conditions at the time."

Specifically, Paul Hastings was able to get upgraded space and building top signage for what pencils out at $2.25 a foot, while DMJMH+N's deal works out to about $1.77 a foot. By comparison, average asking rents for Class-A space in downtown during the fourth quarter of 2001 was $2.33 a foot, according to Grubb & Ellis Co.

With Paul Hastings and DMJMH+N in tow, Arco Plaza is now about 70 percent leased, positioning it as a classic turnaround opportunity for an institutional investor.

"New ownership could make that building on par with anything considered class-A in downtown," said Ulf, who has been leasing space in the area for about 20 years.

"Arco Plaza is going to be a great building for the next owner after they reposition it," added Morales, whose own company looked at doing just that last year.

In October, Robert Maguire proposed to buy Arco Plaza for $330 million in a deal that would have involved spending $130 million on upgrades and selling back the south tower to the Los Angeles Unified School District for its consolidated headquarters for $230 million. While LAUSD went through with its plans to buy the 928,000-square-foot Beaudry Building, nixing the plan in the process, the proposal further illustrated Arco Plaza's place as a turnaround in the making.

"It could be one of the most opportunistic buys in the nation' said Simpson.

RELATED ARTICLE: Biggest Lease Impact

Project: Arco Plaza

Players: Andrew Goodman, Ted Simpson, Brian Ulf and Lynn Williams at Gush man & Wakefield Inc., Tom Kibler at Shuwa Leasing Co.

The Deals: Two leases signed at downtown's 2.2-million-square-toot Arco Plaza. Law firm Paul Hastings Janofsky & Walker LLP signed a 15-year deal for 209,000 square feet worth over $80 million, getting building-top signage rights in the process. Architecture firm DMJMH+N signed a 15-year lease for 125,000 square feet at Arco Plaza in a deal valued at over $40 million.