Vacancies dive as large tenants move in, smaller firms follow.

THE Hollywood/West Hollywood submarket saw a sharp drop in vacancy rates during the July-September quarter as large tenants moved into space they had committed to earlier in the year and other, smaller users followed them in.

With 286,000 square feet taken off a market with a base of 3.7 million square feet, the vacancy rate plunged to 11.5 percent in the third quarter, from 20.8 percent in the prior three months and 19.7 percent the year earlier, according to Grubb & Ellis Co.

At the same time, rates for Class-A office space fell to $2.27 from $2.32 last quarter and $2.33 a year ago.

"Hollywood is just sort of chugging fight along," said Mark Robinson, corporate managing director for Studley. "There was a lot of leasing activity in the first and second quarter. Landlords started realizing that they needed to close all the deals that they were holding onto. (Now) the vacancy rate is affected by the people moving in."

That was the situation in West Hollywood, where Interpublic Group of Cos. took occupancy of its 50,000 square feet at the Pacific Design Center, Robinson said.

Such large movement also sparks other growth, he added, because "businesses want to be around other successful businesses."

In Hollywood, Nielson Entertainment moved into its 68,000 square feet at the 6255 Sunset Bird building and Gemstar-TV Guide International Inc. completed its move to 60,000 square feet at 6922 Hollywood Blvd.

That activity spurred other tenants to soak up some of the smaller spaces that had been available, said Brian Folb, a principal at Paramount Contractors and Developers Inc.

"It's a chain reaction," Folb said. "When a big company comes in they attract other businesses that want to be where those kind of companies are."

In the long run, that dynamic may prove to be a plus for Hollywood, a submarket that does not have large amounts of contiguous space available for big users. "If somebody leaves you don't have a big hole," Robinson said."

Paramount redeveloped the buildings at 6565 Hollywood Blvd. and 6464 Sunset Blvd. and has had success leasing the properties to smaller users.

Some of the deals at the Hollywood Bouleyard address, built in 1965, include a 10-year lease with the Sae Institute of Technology for 18,000 square feet, a five-year lease with Archetype Entertainment Group for a full 15,000-square-foot floor, and a 10-month lease with Fox Television for 6,000 square feet. The activity has bumped occupancy to about 80 percent. Occupancy at the 6464 Sunset Blvd is 90 percent.

At the same time, the CIM Group signed a deal with Longs Drugs for 11,000 square feet in their Galaxy building at 7021 Hollywood Blvd, said John Given, a CIM principal. The group also leased-out the Cherokee/Hollywood Building, signing deals with American Apparel for 2,800 square feet, Geisha for 8,000 square feet, Mood for 3,250 square feet and Lucky Devil, a fast food and health food retail store, for 2,000 square feet.

The tightening resulting from the pickup in leasing activity was supported by more office property coming off the market for conversion into residential uses.

"After downtown, Hollywood is the new adaptive reuse area," said LeRon Gubler, president and chief executive of the Hollywood Chamber of Commerce.

During the third quarter, CIM was set to convert two properties under the adaptive reuse ordinance, which gives developers a raft of incentives to develop housing in underused office properties. Together, the two CIM projects will create an additional 133 apartments.

Kor Group struck a deal to buy the Hollywood & Vine Plaza for an estimated $17 million and plans to convert the 180,000-square-foot building into about 100 condominiums.

While the trend to convert commercial buildings to residential has not only helped lower the vacancy rate, but has also sparked growth, as more people move into the area, said CIM's Given.

"There's a real resurgence and second wind that we feel we're seeing on retail side that's in part due to the residential submarket," he said.

Major Events:

* In a deal estimated at $17 million, Kor Group purchased an office building at Hollywood and Vine for condo conversions.

* Interpublic Group of Cos., Gemstar--TV Guide and Nielson Entertainment all took occupancy of previously leased space.

* CIM Group struck a number leases for its languishing Hollywood Galaxy retail property.

* Paramount Contractors and Developers Inc. signed deals with Sae Institute of Technology for 18,000 square feet and with Archetype Entertainment Group for 15,000 square feet at 6565 Hollywood Blvd.

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