DOWNTOWN L.A.: Asking Rents Decline as New Property Owners Pursue Tenants

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For years, it’s been the biggest anomaly in the downtown L.A. office market: Despite soaring vacancy rates and much more space being put on the market than absorbed in new deals, Class A monthly asking rents stayed stuck at nearly $3.20 a square foot. But last quarter, the asking rents finally started reflecting these trends, sliding to $3.01, according to figures from Jones Lang LaSalle. More declines are likely on the way, promising to turn downtown into more of a tenants’ market.

The reason for the break in the logjam? Properties long held by landlord MPG Office Trust Inc. have been sold and the new owners are lowering prices to attract tenants. These new players are finally breaking the hold of the three megalandlords in the downtown office market: MPG, Brookfield Office Properties and Thomas Properties.

“Landlords are now competing with more owners for the tenants that are out there, so the prices are coming down,” said Tony Morales, managing director for the L.A. region with Jones Lang LaSalle. “Virtually every other metric in the downtown office market reflects a tenants’ market; finally, prices are moving to reflect this.”

Indeed, Jones Lang LaSalle’s first quarter figures show more than 35,000 square feet were put on the market than were absorbed. That in turn nudged the vacancy rate up to 17.9 percent from 17.8 percent in the fourth quarter.

The reason for the negative net absorption continued to be downsizing: The law and accounting firms, and other professional tenants that dominate the downtown office market have fewer people and are making more efficient use of space.

In addition to competing for shrinking tenants, Class A landlords face downward pressure from technology and design firms looking for nontraditional office space, often found in Class B or even C buildings that are on the fringes of the core office market.

“The new activity is being driven by tenants looking for older Class B and Class C buildings, not necessarily Class A space,” said Arty Maharajh, vice president of research in Cassidy Turley Inc.’s downtown L.A. office.

– Howard Fine

Main Events

*In the largest building sale downtown in years, MPG Office Trust Inc. announced the sale of the landmark U.S. Bank Tower, the tallest building west of Chicago, to Overseas Union Enterprise Ltd. of Singapore for $367.5 million. The 1,018-foot, 72-story tower, at 633 W. Fifth St., has roughly 1.4 million square feet of space and is about 44 percent vacant.

*Lincoln Property Co. purchased the long-vacant Desmond’s Building at 11th and Hope streets for $16.3 million from Evoq Properties. The five-story, 79,000-square foot building, at 425 W. 11th St., was built in 1916 as an auto showroom and service facility and long housed the Desmond’s department store. Lincoln intends to spend $9 million to convert it into offices, a nightclub and restaurant.

*CIM Group Inc. sold the 60,000-square-foot retail portion of the Market Lofts at Flower and Ninth streets to MDC Realty Advisors for nearly $19 million. The main retail tenant on the site, at 645 W. Ninth St., is a Kroger Co. Ralphs Fresh Fare.

*Gibson Dunn & Crutcher LLP agreed to renew and slightly expand its lease at 333 S. Grand Ave. The law firm had been leasing 261,000 square feet from landlord MPG Office Trust Inc.; the new lease calls for 268,000 square feet and includes 7,000 square feet previously held by the City Club, which is moving to the 555 S. Flower St. tower at City National Plaza. Terms of the Gibson renewal were not disclosed.

*Williams/Dame and Associates announced plans to build a $200 million, 450-room Marriott Renaissance Hotel of at least 20 stories across Olympic Boulevard from the L.A. Live complex. The hotel is slated to open in 2016; it would adjoin a Courtyard by Marriott Hotel already under construction and set to open in 2014 and would be across the street from the existing JW Marriott Hotel at L.A. Live.

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Howard Fine
Howard Fine is a 23-year veteran of the Los Angeles Business Journal. He covers stories pertaining to healthcare, biomedicine, energy, engineering, construction, and infrastructure. He has won several awards, including Best Body of Work for a single reporter from the Alliance of Area Business Publishers and Distinguished Journalist of the Year from the Society of Professional Journalists.

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