Mid-Wilshire keeps losing tenants to downtown; but Miracle Mile district is poised for rebound in 1993.

Office tenants continued to drain out of Mid-Wilshire in 1992, creating what many brokers consider one of the bleakest office markets in Los Angeles County.

At the same time, Mid-Wilshire's neighbor to the west, the Miracle Mile district, continued to gain favor with entertainment industry tenants and others who have filled projects like Wilshire Courtyard and the refurbished former CalFed Inc. headquarters tower.

Two big questions facing Mid-Wilshire are the fate of the Ambassador Hotel property and the fate of the market itself.

The Ambassador question is slated to begin being answered in Los Angeles County Superior Court next month in a trial pitting Trump Wilshire Associates against the Los Angeles Unified School District. The two sides are locking horns over the property's value.

Trump's group bought the site for $63 million in 1989, but the school district wants to acquire a major portion of it. And the two sides are nearly $48 million apart in their appraisals of what that portion of the property is worth.

The question of the Mid-Wilshire market's overall fate will be answered by the actions of tenants and landlords over the next few years. Brokers say Mid-Wilshire is suffering from its own specific set of problems, above and beyond the problems being suffered by other commercial real estate markets in L.A. County.

Mid-Wilshire's vacancy rate stood at 21 percent at the end of the year, up from 16.6 percent at the end of 1991, according to commercial brokerage firm Grubb & Ellis Co. The brokerage reported Mid-Wilshire suffered a "negative net absorption" for the year of 218,000 square feet, meaning that 218,000 square feet more space stood empty at the end of the year than at the end of 1991. The 1992 figure compared with a negative net absorption of 425,000 square feet in 1991.

David Kim, managing director at Julien J. Studley Inc., said that continued loss of big corporate tenants makes commenting on Mid-Wilshire a tough challenge for office brokers, who ordinarily don't like to malign any market.

"I don't want to paint a total doom-and-gloom picture, but it does look bad when you have groups like Pierce (National Life Insurance Co.) moving out," Kim said.

Kim said the exodus in 1992 of companies like Pierce, which occupied 80,000 square feet at 3807 Wilshire Blvd., exacerbated the situation in Mid-Wilshire. Pierce was bought out by Liberty Mutual Life Insurance Co., which moved virtually its entire operation to South Carolina, he explained.

Downtown Los Angeles is looking especially attractive to Mid-Wilshire tenants now, brokers say, explaining that downtown was for years considered a too-expensive alternative for many Mid-Wilshire businesses.

Steve Bay, corporate vice president and co-branch manager of Studley's downtown L.A. office, said government agencies and major law and insurance-related firms relocating from Mid-Wilshire continue to fuel much of downtown's leasing activity.

Bay said these include American International Group, which is negotiating for 100,000 square feet in downtown L.A., and Marsh & McLennan Inc. insurance brokerage, which is negotiating for 155,000 square feet.

According to Kim, the declining downtown lease rates and the requirement many tenants have for an "up-to-code, asbestos-free building" make downtown look good despite its traffic congestion and expensive parking. "Up-to-code" is a reference to the numerous state and federal construction codes that buildings must meet, including the recently enacted Americans with Disabilities Act.

Newer buildings typically have been constructed to meet these codes. But older structures, such as those prevalent in Mid-Wilshire, must often undergo expensive retrofitting programs and tenants are sometimes hesitant to lease space in buildings where the retrofitting hasn't been completed. Kim said this is especially true of large corporate tenants and government agencies.

Is there any hope for Mid-Wilshire?

Kim said the "flip side" is that some companies are buying Mid-Wilshire properties and "trying to make a go of it." Among them is Surachi Management Co., which acquired the 3325 Wilshire Blvd. building about six to eight months after Great Western Savings & Loan Association foreclosed on the building, Kim said.

Korean investors are often referred to as one of the groups most likely to fill Mid-Wilshire's growing empty spaces, but Kim said the Koreans alone won't be enough.

"The Koreans continue to make their plays, but as far as leasing is concerned, there hasn't been anything of major consequence that has occurred in Mid-Wilshire recently," Kim said.

He said the completion of Metro Rail construction later this year will help, as will "the smaller investor groups that are trying to make a go of it."

But overall, he said, "It's going to be a tough slide for at least a year before it starts to come back -- if it does come back -- because we'll have to have a depletion of the class A office space in outlying areas before tenants start deciding they have to stay in Mid-Wilshire for economic reasons."

Meanwhile, farther west, in the Miracle Mile district, conditions appear relatively sunny. Although the Miracle Mile's 24.2 percent vacancy rate is actually more than 3 percent higher than Mid-Wilshire's, Grubb & Ellis predicts a tightening market there.

The Miracle Mile vacancy rate has remained in the low 20-percent range for the past several years, Grubb & Ellis reported. But the brokerage's 1993 forecast predicts that situation will improve because much of the vacant space for the past few years has been in buildings that were emptied of tenants to undergo renovations.

"As this space is re-introduced to the market, it will be absorbed, lowering vacancy rates back to their historical levels of 10 percent to 13 percent," the report states.

Among the fourth-quarter deals in Miracle Mile was the Screen Actors Guild's lease of 80,000 square feet at Museum Square, the latest in a series of entertainment industry tenants to choose the Miracle Mile.

According to Rosey T. Miller, a senior marketing consultant with Grubb & Ellis, the Miracle Mile district is proof that office neighborhoods almost have to have new construction or building rehabilitation projects from time to time if they are to remain "in vogue" with tenants.

He cited Wilshire Courtyard and renovations at the former CalFed Inc. headquarters, the 6300 Wilshire Building and 6100 Wilshire Blvd. These upgrades have breathed new life into Miracle Mile, which was a lackluster market only five years ago, he said.

Also, Miller continued, similar types of businesses tend to congregate in the same office neighborhood, as L.A.'s big advertising agencies and insurance firms once did in the Mid-Wilshire district before their exodus to Miracle Mile and the Westside.

Another example is the flight of entertainment companies from Hollywood to Burbank, the Miracle Mile and other markets. Miller said this herd mentality won't make or break a market and is only one of many factors involved in a company's leasing decision. But he said it can be a strong influence if a market gains a reputation as "the place to be" or "the place not to be."

Debra L. Mautner, director of marketing for Lowe Enterprises Realty Services Inc., said distinctions about which markets are "in" and which are "out" can become very significant to landlords in their marketing efforts.

She said landlords today make much sharper distinctions between the Miracle Mile and Mid-Wilshire, for example, whereas a few years ago they tended to lump everything under the Mid-Wilshire heading.

Landlords now are trying to make the case that the Miracle Mile is actually part of the Westside. And big brokerage houses like Grubb & Ellis and CB Commercial Real Estate Group Inc. now include the Miracle Mile in their Westside office space surveys.

But Mautner, who markets the 9100 Wilshire Blvd. Building in Beverly Hills, said that whether Miracle Mile is or isn't considered "the Westside" is something of a moot point. Regardless of what larger market it is a part of, she said, the Miracle Mile does compete directly against Westside space because it is one of the places that businesses are likely to consider when they are looking at space in Beverly Hills or other Westside neighborhoods.