Wall Street worries slow fourth-quarter deal making.

The brakes were placed on L.A.'s real estate market in the fourth quarter - just a bit.

Though the office vacancy rate ratcheted down in the final three months of 1998, commercial tenants and property buyers were noticeably more cautious when it came to cutting deals. Turmoil on Wall Street during the early fall, particularly in the commercial mortgage-backed securities market, seemed to be the major source of concern.

"We saw (the effects of) the CMBS market in a big way and the stock market in a temporary way," said Hayden Eaves, a downtown broker with Cushman & Wakefield Inc.

One positive effect of such turmoil, and the resultant wariness it produces, is that it acts as a deterrent to overbuilding. Developers, and especially lenders, have been reticent to proceed with major speculative projects. undoubtedly remembering the painful lessons of the early '90s.

That restraint on new development helps sustain the fundamentals of the current market - with rents rising and vacancies declining.

Also contributing to the lackluster activity: Real estate investment trusts remained on the sidelines, in stark contrast to their aggressive buying of a few years ago.

Four or five acquisition deals involving downtown properties were put on hold during ire quarter because of problems with the buyer's loan or equity partner. Some properties in the Tri-Cities area sold for a little less than they could have fetched otherwise, Eaves said.

"I think they dropped a little, but not as significantly as people were thinking. The volume or level of interest dropped. Instead of 20 buyers, you had 10," he said.

Micheal Geller, executive vice president of First Property Real Estate, said last summer's market turmoil "may have put cautions thinking in the minds of people who were leasing office space or developing an office building. They're slowing down and taking a look-see."

The capital crisis. which involved deals primarily in the $5 million to $40 million range, proved short-lived and activity began picking up again by the end of the quarter.

Overall, vacancies and rents were not adversely affected, although certain submarkets treaded water or softened a bit. For Los Angeles County as a whole, office tenants moved into 934,385 square feet more space than they vacated in the fourth quarter, bringing down the vacancy rate to 14.7 percent, from 14.9 percent in the third quarter, according to Cushman & Wakefield.

The Westside and Tri-Cities remained the hottest markets, while Hollywood/West Hollywood, Mid-Wilshire and parts of the South Bay remained mired with double-digit vacancy rates, in some cases north of 20 percent. Outdated properties have been a problem in Hollywood and Mid-Wilshire, while the South Bay continues to suffer from aerospace downsizing and mergers.

The Westside remained one of the tightest office markets, despite something of a lull in activity. The vacancy rate decreased to 9 percent for the Westside, which includes Beverly Hills, Brentwood, Century City, Culver City, Marina del Rey, Miracle Mile, Santa Monica, West L.A. and Westwood. And good luck finding big blocks of space in Century City and other desirable Westside markets. Direct asking monthly rental rates on the Westside were flat, at a still-hefty $2.39 per square foot.

Of all the Westside submarkets, West L.A. tightened the most, with vacancy falling to 7.6 percent from 12.7 percent in the third quarter as tenants absorbed more than 248,000 square feet of space. Santa Monica also tightened a few notches, to 9.2 percent from 11.4 percent in the third quarter.

The prospects are good for further tightening.

"You do have some large tenants in the marketplace seeking space that will continue to diminish space on the Westside," Geller said.

While some previously acquisitive REITs, such as Arden Realty, stayed on the sidelines or sought markets with higher yields. other buyers were busy snapping up prime L.A.-area real estate. Key among those was Douglas Emmett Real Estate Advisors.

"They were able to reel in a number of assets, and the competition was less," Geller said. "It caused maybe a plateauing of prices, from the rise over the last three years."

The Tri-Cities office market also stayed strong, with more than 363,000 square feet absorbed during the fourth quarter and average rental rates increasing to $2.04 per square foot per month. Vacancy remained at or near levels earlier in the year, despite the completion of two new buildings. Pasadena, which has been the sleeping giant, tightened to 7.9 percent for class-A space.

Still, Glendale and Pasadena have not caught up to Burbank's asking rents, which averaged $2.53, said Shaun Stiles of Cushman & Wakefield.

Outlying areas also saw strong fourth-quarter activity, capping off a busy year. In late December, Princess Cruises moved into its 106,000-square-foot headquarters facility in the Valencia Town Center II. Among the noteworthy lease deals, Boeing Co. signed a 170,000-square-foot lease in the West Hills Corporate Village.

The financial turmoil of early fall actually helped the Warner Center area by convincing some tenants to stay put, when they had been looking to move away, said Don Hudson, director of leasing for Warner Center Properties.

As a result, 91 percent of Warner Center Properties' 2.3 million square feet of space is occupied, up from 85 percent at the end of 1997.

"What are we hearing from tenants? Most are looking to renew and expand," Hudson said.

Downtown showed some signs of life. with office vacancy tightening slightly to 17.4 percent, from 17.7 percent. There was positive net absorption of more than 113,000 square feet, in contrast to the third quarter's negative net absorption of 41,000 square feet. Downtown's class-A direct vacancy rate remained flat, at 14.8 percent.

The average asking rent for direct-lease class-A space rose to $21.96 a square foot in the fourth quarter, an 8 percent jump from the year-earlier level. Tony Morales, senior vice president at Maguire Partners - a major downtown landlord - said net effective rents actually increased 25 percent in premier buildings over the course of the year.

"We've had some activity, some growth, obviously not a lot," broker Eaves said.

The outlook for downtown is mixed, with hundreds of thousands of square feet of sublease space expected to pour onto the market over the coming months. Several existing tenants, however. are looking to expand.

In the South Bay, El Segundo remains a strong submarket, although its office vacancy rate softened a bit in the fourth quarter to 13.4 percent, up from 10.8 percent in the previous three months. The South Bay's true soft spot, however, remains the Los Angeles International Airport area. With a vacancy rate of almost 30 percent, it retains its dubious distinctions as the county's softest submarket.

Elsewhere in the South Bay, downtown Long Beach finished the year with more than 18 percent of its office space vacant.

The key to future improvement in the South Bay office market hinges on how much owners are willing to invest in upgrading their buildings, said Grafton Tanquary, first vice president with CB Richard Ellis Inc.

"Buildings that invest in (renovation) projects gain market share. Those that aren't as proactive don't do as well. You need to strategically look at your building and make it competitive," he said.