Rents rise amid space crunch with relief still years in future.

IT was a landlord's market in Hollywood and West Hollywood again last quarter as Class A office rents continued to climb with new product still years away.

Class A rents rose 8 cents to $3.07 a square foot, during the July-September period, up from $2.52 a year ago and up from $2.99 the previous quarter. Class B rents fell 10 cents from one year earlier to $2.13 and fell 20 cents from the previous quarter, according to figures from Grubb'& Ellis Co.

Of the 3.9 million square feet of rentable square footage in the Hollywood/West Hollywood market, just 216,012 square feet remain empty. That's a vacancy rate of 5.5 percent.

According to John Tronson, principal with Ramsey-Shilling Commercial Real Estate Services, the office-to-residential conversion trend, which has gobbled up 30 percent of the market's mid-rise and high-rise office space over the last two years, is slowing down. Though the third quarter ended with no office construction under way, that's finally about to change.

This month Sunset Gower Studios, an independent production facility, is set to break ground on a six-story, 97,000-square-foot building for Technicolor Inc. at Sunset Boulevard and North Crower Street.

And last quarter, Pacifica Ventures closed escrow on a parcel at 1601 N. Vine St. for $5.45 million. Pacifica, run by real estate and entertainment executives, plans to construct a Class A" commercial office building totaling approximately 120,000 square feet targeting entertainment industry tenants.

According to Hal Katersky, managing director with Pacifica, the firm expects to start construction during the third quarter of 2007 with the building ready for occupancy about a year later. The decision to build office space was an easy one for Pacifica.

"We don't want Hollywood to become a bedroom community," said Katersky.

No more conversions

One of the last Hollywood office buildings to be purchased for residential conversion was the 200,000-square-foot structure at 7060 Hollywood Blvd. Broadstone Hollywood LLC, a partnership of Prudential Real Estate Investors and Alliance Realty Partners purchased the high-rise for $29 million late last year and plans to start converting the space to 130 condos in February.

"Of the old office buildings left in Hollywood of the high-rise or mid-rise model, I don't think you're going see any conversions. 7060 Hollywood is going to be the last one," Tronson said.

Net absorption was down by nearly half from the previous quarter to 76,581 square feet. Vacancies fell more than two full points from 7.6 percent in the second quarter. Vacancies are down a whopping four points from 9.6 percent in the same quarter a year ago.

"The reality is, from the time you put a shovel in the ground to the time you turn the lights on, it's probably a good two-year process. So we'll certainly see a continuing trend of tightening in the market until this stuff gets delivered," said Tronson.

In a highly publicized deal last quarter, EMI Music North America sold the 92,339-square-foot Capitol Records Tower at 1750 Vine St. to New York-based Argent Ventures for $50 million. After some speculation that the building might be converted to residences, Argent announced that the building will remain office space. The adjacent properties acquired as part of the transaction include a parking lot on Argyle Avenue and another 14,000-square-foot building.

At 1800 N. Highland, a Fox/TV Guide joint venture signed a seven-year lease for 25,000 square feet of office space. In 2004 CIM Group acquired the then Class C building and has been upgrading it into Class A office space. Another 60,000 square foot lease will be signed at the property this month, Tronson said.

At El Capitan, special effects firm Look Effects Inc. doubled its space in the building with an additional 6,400 square feet, paying approximately $2.65 full-service gross per foot.

And though many deals were done in Hollywood last quarter, one very big potential deal was undone. After Combined Properties Inc. agreed to buy the historic Palladium concert hall for about $65 million, negotiations fell apart in August and the property is back on the market.

Pricey retail

In West Hollywood, retail was the name of the game as the market broke a record this year for the highest price-per-square-foot, with one buyer paying $1,725 per square foot last quarter at 8457 Melrose Place, according to Jonathan Ahron, director with the Retail Services Group at Charles Dunn Co.

"My average sale is exceeding $900 per square foot," said Ahron. "The high-end tenants that are coming into West Hollywood are already in Beverly Hills. They have stores on Rodeo Drive where they're paying way higher rents and they want a West Hollywood store. It's all about brand imaging."

Ahron said he also sold 3,300 square feet of retail space at 8441 Melrose Place for $4.1 million last quarter. Luxury fashion designer Carolina Herrera has signed a lease for the space.

Major Events:

* Pacifica Ventures closed escrow on a parcel at 1601 N. Vine St. for $5.45 million. Pacifica, run by real estate and entertainment executives, plans to construct a Class A commercial office building of about 120,000 square feet, aimed at entertainment industry tenants.

* EMI Music North America sold the Capitol Records Tower at 1750 Vine St. to New York-based Argent Ventures for $50 million. Adjacent properties acquired as part of the transaction include a parking lot on Argyle Ave.

* At 1800 N. Highland Ave., a Fox/TV Guide joint venture signed a seven-year lease for 25,000-square-feet of office space.

By LIZBETH SCORDO

Contributing Reporter