Despite a turbulent real estate market, Equity Office is building a $200 million office development at the Howard Hughes Center.

The company, an affiliate of New York-based private equity firm Blackstone Group LP, has announced that it will break ground on a 250,000-square-foot office building next month.

That project along with another 250,000-square-foot office building and two residential buildings will be the final phase of development at the Howard Hughes Center, a 70-acre mixed-use campus off of the San Diego (405) Freeway that includes the Promenade shopping center.

But the subprime meltdown and resulting credit crunch that have been weighing on the real estate industry in the last few months could have an effect on the office market in the area.

“The office momentum has slowed due to the interest rates and the capital markets,” said Steve Solomon, managing director at Jones Lang LaSalle Inc. “I think for the long term we are going to see not a recession but a pull back. Interest rates need to go up and things will balance out.”

Those affiliated with the office development say that the credit crunch hasn’t impacted Equity’s plans.

“The Westside is probably as insulated as any market in the country,” said Hunt Barnett, a principal at Madison Partners, which will handle the leasing for the two new office buildings. “It doesn’t have companies that are going to shrink dramatically and give space back like in Orange County.”

Groundbreaking ahead

The first building, at 5901 Center Drive, should be completed 18 months after groundbreaking. The second building, at 5900 Center Drive, should break ground early next year. Both are five-story projects. The residential component is still in the planning phase but will likely include for-rent and for-sale plays, said Keith Anderson of Equity, which owns five buildings at Howard Hughes Center.

Despite concern in some circles for the real estate market at large, there is no doubt that Marina del Rey, Playa Vista and Westchester are experiencing an office boom. In addition to Equity’s project, Lincoln Property Co. broke ground in March on a 15-acre creative office campus at Playa Vista, the large mixed-use community. The 950,000-square-foot project will be built in phases, with the first portion slated to open late 2008. Also, Tishman Speyer Properties LP is developing an office complex on 64 acres in Playa Vista. Construction will begin next year with a total of about 1.6 million square feet of space delivered by 2012.

There appears to be sufficient demand. The vacancy rate for Class A space in West L.A. was 5.7 percent in the third quarter, down from 7.6 percent a year earlier. The average asking rent for that market was $3.57 per square foot per month, according to Grubb & Ellis Co. data.

“I’m bullish on the market, I think that we are supply constrained,” said Stan Gerlach of CB Richard Ellis Group Inc. “I think they will be successful down there.”

With low vacancy rates and escalating rents across West L.A., experts said they expect all of the forthcoming large office projects in the area to rent in the high $4 to low $5 range.

The first developer to complete its project will be able to sign better tenants, Solomon said.

Development at Playa Vista took a hit in September when a state appeals court blocked construction at phase two of Playa Vista over a “deficient” environmental review. While the Lincoln and Tishman projects aren’t impacted by the ruling, it is a blow to those projects. That’s because Caruso Affiliated Holdings LLC’s retail center, which was expected to break ground at the end of this year, is on hold. Without the amenities of the Caruso project, the two office developments could become less attractive to potential tenants.

“We are working with the city and ultimately the court to remedy the issues identified by the appellate court,” said Steve Sugerman, spokesman for Playa Vista. He said it is unclear how the ruling will delay the Caruso project.

David Binswanger, executive vice president of Lincoln, said that his project as well as the Tishman complex would include its own amenities, such as restaurants and shops.

“Playa Vista office development is competition because we are in the same submarket and we all have new product,” said Brendan McCracken of Equity.