Office vacancy rates dip throughout L.A. County.

The tightening Westside and Tri-Cities markets continued to pull the rest of the county's office markets out of their recessionary slump, as vacancy rates in almost all of Los Angeles dropped during the third quarter.

The county office market posted a 15.9 percent vacancy rate, down from 16.5 percent last quarter, according to Grubb & Ellis Co. commercial brokerage. The improvement is more dramatic when compared to the third quarter of last year, when the county had an 18.2 percent vacancy rate. That improvement keeps the county on pace with its two-year recovery from the recessionary slump that lasted through most of the first half of the '90s.

The Grubb & Ellis report averages the vacancy rates for all classes of office buildings, and it does not count offices that were build-to-suit projects for single tenants.

As the market firms and there's little new development slated, the L.A. office market has become the darling of real estate investors across the country.

"It's an exciting market - Wall Street has phenomenal interest in Southern California," said Rob Maguire, managing partner of the development firm Maguire Partners. He recently secured about $1.5 billion in refinancing for his properties, and said investment packages are "very competitive."

Last quarter, real estate investment trusts spent $602 million to purchase 20 properties in the county, compared with the $404 million they spent to buy 18 properties during the second quarter, according to CB Commercial's National Real Estate Index.

Many investors are scrambling to buy properties in Southern California, for fear that the market might soon get priced beyond their reach, said Michael Adler, a partner at the real estate appraisal firm Sommer Adler & Co.

He noted that investors "are no longer buying at discount prices" for L.A. offices. They're either paying market price, or sometimes bidding beyond the asking price in competitive markets.

All of the "competitive" markets are also enclaves of the entertainment industry, whose growth has powered the real estate market toward recovery.

The Tri-Cities - comprised of Burbank, Glendale and Pasadena - reported the lowest vacancy rate in the county at 7.4 percent. That's down from 7.7 percent for the second quarter and 8.7 percent from a year ago.

Burbank's Media District, which is home to NBC Studios, Wait Disney Co, and Warner Bros., has effectively no space available. Buildings larger than 100,000 square feet have a vacancy rate below 1 percent, according to Doug Marlow, first vice president at CB Commercial Real Estate Group in Glendale.

Conditions are prime for office development in the Tri-Cities, and two speculative projects (which means construction begins without prior tenant commitments) are already underway.

Crews are currently laying the foundation for PacTen Partners' 500,000-square-foot Glendale Plaza, and the development firm J.H. Snyder Co.'s 585,000-square-foot Burbank Media Center complex is slated to break ground next month.

Neither project is expected to open until 1999, so tenants in need of space right now must scour other cities.

In the San Fernando Valley, the Central Valley - comprised primarily of Encino and Sherman Oaks - is benefitting the most from the tight Tri-Cities market. The region posted a 13.7 percent vacancy rate, down from 15.2 percent last quarter.

Two of the Valley's larger investment transactions took place along Sherman Oaks' Ventura Boulevard office market last quarter as well. The Westwood-based investment firm Douglas Emmett purchased The Tower, a 161,000-square-foot office building, for almost $20 million. The Mani Brothers purchased the 62,000-square-foot Sanwa Bank building for $9 million.

Rents in the Central Valley haven't started to move yet, but there are several deals currently underway that could "dramatically change" the market by first quarter 1998, said Mark Perry, vice president of investment properties with CB Commercial in the Valley.

The Westside has had a similarly contagious effect on its neighboring submarkets. West L.A. continued to ratchet down its vacancy rate to 12.5 percent this quarter, compared to 13.4 percent for the second quarter and 14.3 percent for the same quarter last year, according to Grubb & Ellis.

Santa Monica is one of the strongest submarkets in West L.A., posting a 10.5 percent vacancy rate for all office buildings during the third quarter, although that's up slightly from last quarter's vacancy rate of 9.8 percent.

Bob Safai, a partner at Westside commercial real estate brokerage Madison Partners, said Santa Monica's premiere office market has a 4 percent vacancy rate, with rents jetting up almost 25 percent during the past 18 months.

That's made Santa Monica a lucrative site for speculative development, and the first of the projects - Loew Enterprise's and Spieker Properties' 130,000-square-foot Arboretum Courtyard building - is scheduled to break ground this month.

Two more office projects, Three Coast Ltd.'s and Apollo Pacifica's Arboretum Gateway project and phase II of J.H. Snyder's Water Garden project, are expected to break ground within the next few months as well.

Although premium office space is scarce, developers aren't guaranteed that tenants will keep coming, said fan Strano, a vice president at Beitler Commercial Realty Services on the Westside.

Several of his clients have "sticker shock" when presented with $3 per square-foot monthly rent rates, he said, and they're increasingly looking toward less expensive markets - such as Marina del Rey, Culver City and the South Bay - as possible locations.

The vacancy rate in the South Bay climbed slightly to 22 percent this quarter, compared to 21.1 percent last quarter, according to Grubb & Ellis.

The El Segundo/Manhattan Beach office market has benefited the most from the tightness on the Westside, because more companies are considering those cities farther south to be a less expensive option than West L.A.

Vacancies in the premiere office markets in El Segundo/Manhattan Beach are at 9 percent, compared with 25 percent two years ago, according to Grafton Tanquary, first vice president with CB Commercial in the South Bay.

Brokers have long predicted that the acceleration of rents in the Tri-Cities and on the Westside will eventually drive tenants downtown, but no entertainment company has yet to take the plunge.

Nonetheless, downtown continues to chug toward recovery through internal growth. The overall vacancy rate for downtown decreased to 17.1 percent for the third quarter, from 19.2 percent a year ago.

However, downtown posted a negative absorption rate, as blocks of space from corporate consolidations that took place several months ago are finally coming on the market.

"We'll be bumping along for a few more years," said Andy Ratner, executive vice president and national director of Cushman Realty. He noted that the underlying condition of downtown's economic engine continues to be healthy - law firms, accounting firms and insurance firms are all turning profits - but rental increases are still several years away.

There's ample slack in downtown's office market: According to a Cushman and Wakefield study, there are currently 20 options for a tenant looking for 50,000 square feet or more of contiguous space.

And downtown has to steel itself for a few more blows: The Metropolitan Water District will vacate about 500,000 square feet of space in 2 California Plaza when it moves into its new headquarters in 1999.

In addition, there are several other variables that could affect the market: a number of accounting firms are considering decentralizing their offices through "hotelling" and other space-saving concepts, and the accounting firms Coopers & Lybrand and Price Waterhouse LLP - which recently announced their merger - have yet to decide how they will re-organize the combined 275,000 square feet of space they currently lease downtown.

Nonetheless, several investors put their faith - and some of their fortunes - in the future of the downtown office market.

The real estate investment trust Equity Office Properties Trust purchased the 550 South Hope St. building for $175 per square foot and the Santa Monica-based investment group Kennedy-Wilson Inc. purchased the long-vacant 612 S. Flower St. property for about $22 per square foot, with the intention of renovating it.