Several big tenants inspecting downtown L.A. space; deal could partially offset Arco's pending downsizing.

Downtown Los Angeles' office market has hit bottom and is going to rebound in coming quarters, according to real estate sources.

Sure, they have said that before, but this time they say they mean it. Only a handful of large office lease deals were signed during the second quarter, but brokers insisted there are signs that activity is going to pick up soon. That would likely be welcome news in this long-soft market, especially after Atlanti Richfield Co.'s announcement earlier this month that it will lay off hundreds o employees downtown and downsize its office space requirements accordingly.

One of most important new developments during the second quarter was that several tenants, particularly from outside the downtown L.A. area, started to look for space in office buildings downtown, said Stephen Bay, manager of the downtown Los Angeles office of commercial brokerage firm Julien J. Studley Inc.

"We can count between 600,000 and 700,000 square feet of likely deals in downtown," said Bay.

Bob Caudill, managing director of commercial brokerage Caudill & Co., echoed Bay. "Before you start doing deals, people start looking," he said. "Their need may be some time down the road, but they are at least out looking at available space."

And there are definitely shoppers out there, according to Caudill, whose outfit is in charge of leasing the 1100 Wilshire office tower. He said numerous large tenants have come by to look at the empty tower.

Caudill added that there are now more prospective tenants looking at space, and they are interested in leasing larger blocks than in past years.

Additionally, he said he is showing space elsewhere in the Central Business District to tenants from outside downtown.

Yet, there was more than just looking going on during the second quarter. Some leasing did occur, according to statistics provided by CB Commercial Real Estat Group Inc.

Tenants leased 256,976 more square feet of downtown office space than they vacated during the second quarter, CB Commercial reported. That brought downtown's direct office vacancy rate to 16.7 percent, down from 17.5 percent a the end of the first quarter.

The 801 Tower was the big office leasing champion of the second quarter, having inked two large tenants that are relocating from other parts of town.

San Francisco-based Sedgwick Detert Moran & Arnold signed a 15-year lease for 50,000 square feet at the 801 Tower. Like so many before them, Sedgwick Detert Moran & Arnold is moving out of the Mid-Wilshire district, where it has occupie space at the Wilshire Colonnade at 3701 Wilshire Blvd.

The 801 Tower also scored a tenant relocating from the Westside. Jardine Insurance Brokers Los Angeles Inc. signed on for 42,000 square feet for 10 year at the 801 Tower. It is leaving the Westside Towers project in West Los Angeles 

Also coming into the Central Business District of downtown from a peripheral area adjacent to downtown is Marshall & Swift, a construction data publisher. That firm is leaving a company-owned facility just outside downtown at 1617 Beverly Blvd. for 19,000 square feet on the 16th floor of the 911 Wilshire building.

Brokers expect to see much of the same type of activity in the future, as downtown remains an economical alternative.

"Every quarter for the past nine quarters, the effective rental rate has gone down," said Caudill. Rental rates are competitive with rents in other parts of town and the buildings are of higher quality, which should keep the prospective tenants nosing around for space, downtown brokers said.

Another factor which should keep tenants interested in looking around downtown, according to Bay, is that other nearby office markets are filling up, and space is getting harder to find.

"There is very little availability throughout several submarkets," he said. "Mid-Wilshire tenants can't find big spaces in Glendale anymore. Pasadena, as w track it, has a vacancy rate of less than 10 percent." Rents are soft and concessions are high, and landlords are still aggressively battling for tenants added Bay.

Another occurrence that surfaced during the second quarter was that a number of tenants expanded their pre-existing spaces downtown. That marks a break from th recent past when downsizing tenants were consolidating. "Tenants are taking the same amount of space or more now -- in a better building," said Hayden Eaves IV a broker with Cushman & Wakefield of California Inc.

Several such deals signed in the second quarter included:

* Law firm Allen Matkins Leck Gamble & Mallory renewed its lease and expanded slightly to 40,000 square feet at 515 S. Figueroa St.

* US Trust of California renewed and expanded at Arco Plaza for another 15 years. That company expanded its presence at 555 S. Flower St. from 35,000 square feet to 47,600 square feet.

* National Westminster Bank PLC, a United Kingdom-based financial institution expanded and relocated from 400 S. Hope St. to about 20,000 square feet at Two California Plaza.

In spite of the good news about downtown, real estate sources pointed out that times are still tough for that market's landlords. And the future health of the market will not be known until the big deals looming on the horizon are resolved.

"Overall vacancy is still around 25 percent," said Caudill, pointing out that large amounts of sublease space are still available. So, the market still has a way to go before it reaches recovery.

Furthermore, the vacancy rate, though on the upswing in the last few months, could improve in the future if a few large tenants now scouring the downtown market sign leases.

Caudill pointed out that, if the Metropolitan Water District moves to a build-to-suit, it will leave behind a 350,000-square-foot hole at California Plaza.

Likewise, when the Metropolitan Transportation Authority relocates to its new headquarters near Union Station, the buildings at 818 W. Seventh St. and 707 Wilshire Blvd. will be left substantially vacant. Caudill explained that severa of the MTA's major subcontractors are housed at 707 Wilshire Blvd., and many of them are expected to take up space at the new MTA headquarters. Meanwhile, Time Mirror Co. has been expected to make a decision on moving out of Times Mirror Square since April. No announcement has been made about where Times Mirror will relocate, but one is expected within the next three months.