Strong economy, rising rents keep investors enthusiastic.

A strong regional economy, rising rents and falling vacancy rates encouraged investors to continue digging into Los Angeles County's commercial real estate in the third quarter, with several landmark properties changing hands.

Meanwhile, the market took a break from the Class A office portfolio swaps that characterized the first half of the year, with the quarter featuring deals that often included a housing element.

At least two of July's most notable sales-Columbia Square in Hollywood for $66 million and the Press-Telegram building in Long Beach for $20 million--appear destined for a mixed-use second life with residential components. And the Moinian Group is considering a residential mixed-use project for a 4.6-acre lot near Staples Center that it purchased in August for a reported $78 million.

Even September's long-awaited $50 million sale of Hollywood's Capitol Records Tower, which preserves the iconic cylindrical structure as an office building, is likely to result in conversion of adjacent land to residential mixed use.

Real estate experts also say that ownership changes in the real estate investment trust sector are on course to resume in the fourth quarter, reflecting heightened investor demand for opportunities in premier markets such as Los Angeles.

Sale of a 10-property portfolio by Boston-based Beacon Capital Partners that includes three L.A. office towers is expected to be announced this month. That follows the acquisition of Los Angeles-based Arden Realty Inc. by Chicago-based real estate investment trust Trizec Properties Inc., which itself is about to go private following a buyout. Now speculation is mounting that yet another publicly traded Los Angeles-based REIT, Maguire Properties Inc., may soon accept a bid.

"There is a huge amount of capital chasing a limited amount of quality commercial office space and looking to invest in real estate as an asset class," said John McAniff, managing director of Jones Lang LaSalle's L.A. operations. "Los Angeles is a very attractive market for these very sophisticated investors."

Investor optimism has been fueled by the area's consistent, moderate job growth, Class A rent increases and limited land for new construction. Countywide. vacancy rates fell to 9.7 percent, a drop of 50 basis points from the second quarter and 250 points from a year ago.

And while downtown experienced negative absorption in the quarter and still boasts one of the county's highest vacancy rates, Class A rents have risen 7 percent over the past year as the area has become an attractive base for companies. (Much of the net absorption is considered an anomaly, blamed on downsizing at L.A. Unified School District facilities that resulted in 250,000 square feet of space being vacated.)

Some longtime downtown L.A. tenants are deciding to stay put. Transamerica Occidental Life Insurance Co. looked at several other parts of the county before signing a $74 million, 10-year lease last month for 260,000 square feet that will keep it at the AT&T Center, one of the year's largest lease deals.

Robert Maguire also showed faith in the area with his recently announced plan to build downtown's first office tower in 20 years. The veteran developer is apparently banking that the area's 14.3 percent vacancy rate will dissipate by the time his 50-story project is ready for occupancy.

The new tower also will take advantage of the fact that much of downtown's available space is in smaller chunks that leave few opportunities for corporate and regional headquarters. Eugene Page, senior managing director for the Los Angeles office of Charles Dunn Co., notes that there only around 20 locations that could be configured for a tenant needing 100,000 square feet and just couple of spaces that could provide 300,000 square feet.

"As you get to be a bigger tenant that can be a liability, and it's a problem for the city, too, in attracting new companies," Page said.

Meanwhile, an extremely tight industrial market--with a 1.6 percent countywide vacancy rate in the quarter--helped fuel the decision by owners of the former Atkinson Brickyard in Compton to put the strategically placed 59-acre property on the market in August.

"The kind of Class A big box industrial that these logistics firms are looking to occupy are in very short supply," said J.C. Casillas, regional research services manager for Grubh and Ellis Co. "Certainly if you can get a large chunk of land that could turn into 100-plus Class A warehouse distribution space, that's in very, very short supply right now."

The bottom line: While lack of affordability is causing the county's once white-hot single family market to sputter, underlying fundamentals point to an continued upward trajectory for the commercial market.

"L.A. is healthier and better now than I've seen it in the 30 years I've been in the market," Page said. "I've seen optimism in the market before, but this feels better, feels more measured."

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By DEBORAH CROWE

Staff Reporter