Rise in vacancies fails to Dampen Area's Optimism. (Real Estate Quarterly - Downtown).

THE buzz downtown continues to be upbeat -- Staples Center is a hit, restaurants and health clubs are opening up. office rents are nudging northwards, even housing is getting occupied. But the fourth quarter numbers tell a mixed story.

The vacancy rate in downtown's skyscrapers, which cumulatively account for more than 32 million square feet, inched up to 17.8 percent in the fourth quarter, from 16.3 percent in the year-earlier period and 17.5 percent in the third quarter. Even so, rents took a small step up, to an average asking rate of $2.33 per square foot per month, from $2.28 in the year-earlier period, according to Grubb & Ellis Co. Those numbers were slightly lower than the $2.41 reported in the third quarter of 2001.

Despite the bump in vacancies, the mood downtown remains upbeat, especially in face of the recession. While other business districts -- the Westside in particular -- are buffeted by an old-fashioned boom-and-bust cycle, downtown has managed to shrug off economic doldrums and terrorism.

Freeze in telecom market

"Downtown has always had a more traditional tenant base, not a lot of dot-coins," explained John Eichler, senior vice president with Cushman & Wakefield Inc. downtown. "That base has continued to expand, while we even see tenants move into downtown from suburban markets."

A freeze in the telecom market, whose equipment was the backbone of the Internet and once filled many downtown towers, is in part responsible for the increased vacancies.

Facing that reality, the 1.3 million-square-foot Transamerica Center downtown was repositioned to attract human tenants, after having it primed to be a telecom tower complex. Asking rents start at $1.50 a square foot, said Jeff Ingham, broker at Jones Lang LaSalle representing the building.

Improving amenities, led by Staples, are playing a role in keeping the skyscrapers occupied. The fourth quarter saw the opening of a new Gold's Gym in the Citicorp Plaza, the most expensive facility the nationwide chain ever built.

Also in the fourth quarter, the city gave tentative approval to Staples II, a complex slated to have retail, hotels and restaurants. It's the sort of project, said William Atha II, senior vice president at Grubb & Ellis, that could be L.A.'s answer to Times Square.

Among the biggest fourth quarter investments were the CIM Group's deal to acquire the 7.2-acre Gas Co. site on Eighth Street, which it plans to convert to a $40 million mixed-use project.

Downtown lure

In terms of leasing, the biggest deal of the year was Paul Hasting Janofsky & Walker's 15-year lease for 208,000 square feet -- and rooftop signage -- at Arco Plaza. This follows the third-quarter decision by architecture giant Daniel Mann Johnson Mendehall to take 125,000 square feet in the complex. Bank of New York signed a 5-year, $5.7 million lease for 65,000 square feet at 700 S. Flower downtown, while ClickAction relocated to 13,000 square feet in Library Tower, on a 5-year deal for 13,000 square feet. Old line Philadelphia law firm Drinker, Biddle & Reath signed a sublease for 13,700 square feet at 333 S. Grand Ave., valued at $1.8 million over six years.

The amenities, along with downtown's transportation infrastructure, have contributed to the lure.

As freeways become more clogged, downtown is emerging as perhaps the only office district that can draw employees from throughout the Los Angeles basin. In addition, all major public transportation lines go downtown. Offices in Pasadena, Santa Monica or Long Beach are too peripheral for many employers, said Eichler.

"The central location is a significant advantage for larger (companies) that need a large employee base," he said. "This is where the freeways, the subways and the rail lines all converge."

Among other developments in the fourth quarter were the decision to convert Taylor Yard on the Los Angeles River and the old "Cornfield" near Chinatown into parks abutting the river.

"Converting the river into a scenic park downtown will do more for development in the central core than almost anything else I can think of," said Dan Rosenfeld, principal at developer Urban Partners.

Some believe that downtown still provides a good deal. The area has abundant first-class space. The area has been wanting for tenants ever since a late 1980s building boom was followed by a wave of corporate defections, dislocations and downsizes.

The result is that downtown rents today are as low as the early 1970s, a bargain that is drawing businesses.

Some also believe that the central city is fitfully moving ahead with developers' goals -- in part, because downtown is about the only place left in Los Angeles that actually wants new and major construction.

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RELATED ARTICLE: Downtown

Major Events:

* Law firm Paul Hasting Janofsky & Walker signed 15-year lease for 208,000 square feet - and rooftop signage - at 515 S. Flower (Arco Plaza).

* The 190, 000 square foot bartlett Building at 215 W. Seventh St. was bought by Mini LLC for $5 million.

* Construction of the second stage of the Medici apartment complex began, considered strong evidence of demand for downtown housing.

* Bank of New York signed a 5-year, $5.7 million lease for 65,000 square feet at 700 S. Flower, while Click Action relocated to 13,000 square feet in Library Tower, on a 5-year deal for 13,000 square feet.