Prospect of vibrant city center brings big boost to rents, sales.

DOWNTOWN Los Angeles continued to show signs of an ongoing rebound, as second quarter deal velocity remained high and investors and tenants descended on the submarket.

Average asking rents for Class A properties kept rising, vacancy rates held steady and building sales remained brisk. Residential conversions buoyed hopes for a true 24-hour city center.

The vacancy rate was 20 percent in the second quarter, versus 19.8 percent in the previous three months, according to Grubb & Ellis Co. Average asking rates for Class A space rose to $2.58 per square foot from $2.56 in the preceding quarter. Rates rose 16 cents per foot from the same quarter a year earlier.

"Landlords are holding firm and trying to increase rates slightly," said Jonathan Larsen, a principal with Trammell Crow Co. "Noncredit tenants are paying what they're asking, and credit tenants are getting about a 10 percent discount for being a better risk."

Case in point: 444 South Flower Street, purchased last year by Beacon Properties for about $175 million from Grosvenor USA. "The asking rental rate [there] has increased approximately 25 percent in just the past two quarters," said Scot McBeath, office tenant representative for GVA DAUM. The building's sole reported transaction in the second quarter was the Cooper Phillips & Peterson LLP's 7,621-square-foot sublease for $2.5 million over nine years.

Several large tenants snapped up space from landlords offering concessions. SBC Communications Inc. relocated to Transamerica Center at 1150 S. Olive St., from 1010 Wilshire Blvd. The 10-year, 225,000-square-foot deal was valued at $50 million, and puts the building's occupancy at 90 percent.

Other large deals included Munger Tolles & Olson LLP's 161,000-square-foot renewal at 355 South Grand Ave. in a 15-year deal of undisclosed value; and the Musick Peeler & Garrett LLP renewal of 106,475 square feet at the One Wilshire Building for unreported terms.

Rental rate trends

At 626 Wilshire Blvd., competitive rental rates and extensive tenant improvements are the order of the day. Barker Pacific Group acquired the building in the fourth quarter from AEW Capital Management for an estimated $9 million. The 12-story, 149,000-square-foot building was 60 percent vacant. "Their occupancy rate, in the second quarter alone, increased from 40 percent to 62 percent," said Steve Bay, executive vice president with CB Richard Ellis.

The affordable rents lured 16 new tenants to the building in the first half of the year, including Consensus Planning Group, which took 5,859 square feet, the Central City Association (9,470 square feet) and Gianelli & Morris (5,125 square feet).

Other sizeable deals: Piper Rudnick LLP leased 27,310 square feet at 550 South Hope Street for undisclosed terms; and the City of Los Angeles Department of Recreation and Parks sublet 50,000 square feet in the Garland Building (1200 W. Seventh St.) from Aetna Inc. in a five-year deal for undisclosed terms.

Two deals were closed at 707 Wilshire Blvd. Judicial Arbitration & Mediation Service relocated from the World Trade Center, taking 21,846 square feet at an undisclosed rate; and Booth Mitchel & Strange LLP took 11,000 square feet $1.2 million.

Another factor affecting rents is shrinking inventory, "which means less supply and increasing demand," said Chris Runyen, rice president at Grubb & Ellis.

"(Residential) conversions allow Class B and C buildings to add value in another function, said John Battle, principal with Lee & Associates.

Two such deals neared completion at midyear. The conversion of 1100 Wilshire Blvd., a 330,000-square-foot building that has been dark for over a year; developer Robert D'Elia is in escrow to purchase the property for luxury condominiums. And Linear City LLC, developers of the Toy Factory Lofts, is in escrow to buy the Nabisco on Industrial Street. Terms were not disclosed, but the company plans to develop 200 condominium lofts.

The most aggressive landlord in the central business district was Thomas Properties Group, with Arco Plaza Towers at 515 and 555 South Flower St. "It had been somewhere around half full for a long time, and is now out actively competing for tenants to finish filling up the 2.3 million square foot complex," McBeath said.

The building, still smarting from Bank of America's relocation to 333 S. Hope St., continues to affect absorption rates (the amount of space newly occupied less the amount newly available) for downtown, which totaled negative 50,275 square feet in the second quarter.

Nevertheless, the limited land available and tight permitting make it harder for new space to be constructed.

Major Events:

* SBC Communications Inc. leased 225,000 square feet in the Transamerica Center at 1150 S. Olive St. for $50 million.

* Munger Tolles & Olson LLP renewed its 161,000 square feet at 355 S. Grand Ave. in a 15-year deal.

* Musick Peeler & Garrett LLP renewed 106,475 square feet at One Wilshire.

* Booth Mitchel & Strange LLP took 11,000 square feet for $1.2 million at 707 Wilshire Blvd.

* Jamison Properties purchased four properties: 1055 Wilshire Blvd. for $41 million, 1545 Wilshire Blvd. for $12.3 million, 1543 Shatto St. for $6.5 million and 1541 Wilshire Blvd. for $4.5 million.