Market is flooded with space as tenants get break on rents. (Real Estate Quarterly Downtown).

DOWNTOWN had a tough fourth quarter with negative net absorption and vacancies increasing substantially while rents continued their decline.

Huge blocks of space came on the market despite the area also having the quarter's largest lease deal.

Negative net absorption increased to 171,600 square feet from negative 3,622 square feet in the third quarter. (Negative net absorption means that more space came on the market than was leased.) In the year-ago fourth quarter, downtown had positive absorption of 74,430 square feet.

"There are a lot of subleases -- full floors of 20,000 square feet -- and those add up," said Chris Runyen, vice president of Grubb & Ellis' Office Services Group.

Two law firms led the way in putting space back on the market. The closing of Lyon & Lyon LLP and Latham & Watkins' lease expiration at Arco Plaza unloaded 200,000 square feet of space -- despite law firm Quinn Emanuel Urquhart Oliver & Hedges LLP signing a 120,000-square-foot, 10-year sublease extension at 865 South Figueroa Street for $30 million. The deal increases the firm's space by 40,000 square feet.

Scot McBeath, marketing consultant for DAUM Commercial Real Estate Services, said companies deferred lease decisions as much as possible because of the uncertain economy.

Average asking rents for Class-A buildings continued to slide, ending the year at $2.27 per square foot, down from $2.29 in the third quarter and $2.33 at the end of 2001. The decline is due in part to landlords making concessions to retain current tenants and attract new ones.

Rents for second-tier Class B buildings, including MCI Center, 611 Wilshire, 818 West Seventh Street and AT&T Center, held steady at $1.89 per square foot, down from $1.98 in the fourth quarter of 2001. These buildings remain the domain of mostly telecom and technology companies, which care less about amenities and more about access to 24-hour cooling and power redundancies that are not readily available in the premier buildings.

Overall vacancies rose throughout the year, to 19.6 percent in the fourth quarter from 17.8 percent at the start of 2002. The decline continues to be driven by corporate consolidations, layoffs and weakness in the telecom market.

McBeath said subleasing as a percentage of total transactions steadily increased to 56 percent in the fourth quarter from 18 percent in the first three months of the year.

In notable deals, consulting firm KPMG took two more floors (50,000 square feet) of former L.A. Unified School District space at 355 South Grand Ave., while the LAUSD leased an additional 27,000 square feet at Adams Plaza (1545 Wilshire Blvd.). Terms were not available.

Most deals in early 2003 will be renewals, predicted Steve Bay, executive managing director at Insignia/ESG. "With most of downtown's large tenants facing lease expirations in 2005 through 2008, we're seeing a lot of landlords redoing leases now," he said.

Landlords are locking in renewals with tenants in financial services, real estate and business services that are in an expansion mode, according to Raphael Bostic, director of the Casden Real Estate Economic Forecast at USC's Lusk Center.

Still, downtown remains a good market for tenants," Bay said. "And I don't see that changing in the foreseeable future."

Major developments in the fourth quarter included MaguirePartners' filing of an $890 million initial public offering to create a real estate investment trust. "This REIT is creating a good amount of activity to lease up several thousand square feet before the deal goes," Bay said. Doing business as Maguire Properties Inc., the REIT would boast a $2 billion portfolio with Library Tower, Gas Co. Tower and Wells Fargo tower included.

The other major news was Walton Street Capital's acquisition of 646,000-square-foot Union Bank Plaza, Bunker Hill's first high-rise, from Hertz Investment Co. and Dallas-based Skyrise Properties LLC for $110 million. Hertz and Skyrise originally paid $90 million for the property, located at 4455. Figueroa Street.

Bright spots for the coming quarter include the LAPD's search for 300,000 square feet of temporary space to occupy during the renovation/rebuilding of aging Parker Center. Runyen said there are only three projects that could provide that kind of space: Arco Plaza, Transamerica Center or BP Plaza.

Additionally, the 1100 Wilshire Building, offline for years, began marketing 330,000 square feet available in the first quarter of 2003.

"Downtown continues to evolve as far as cultural offerings, amenities and residential development are concerned," Bay said.

The Cathedral is open and the Disney Center will go online soon. Several housing and mixed-use developments, like MJW Investment's Santee Court, plus the planned Ralph's a store at 9th and Flower Streets, are in the works.

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RELATED ARTICLE: Major Events:

* MaguirePartners filed for an $890 million public offering to create a real estate investment trust (REIT)

* Walton Street Capital acquired the Union Bank Plaza for $110 million.

* Law firm Quinn Emanuel Urquhart Oliver & Hedges LLP leased 120,000 square feet at 865 South Figueroa Street for $15 million in a 10-year sublease.

* Consulting firm KPMG took about 50000 square feet at 355 South Grand Avenue for an undisclosed sum.

* The LAUSD took an additional 27,000 square feet at Adams Plaza (1545 Wilshire Blvd.).