Investors Still Seek Downtown L. A. Office Properties

Despite increasing vacancies and a scarcity of big tenants looking for space, real estate investors are lining up to buy high-rise office buildings in downtown Los Angeles. An estimated $1 billion worth of downtown high-rises have been sold or are expected to be put on the market this year, real estate observers said.

Trizec Properties recently bought out its partner at the 41-story Ernst & Young Plaza on Figueroa Street in a deal that valued the skyscraper at $149 million. This year, an Orange County investment firm agreed to pay more than $200 million for the landmark Arco Plaza, despite numerous vacancies in the Flower Street complex with twin 55-story towers.

The owners of BP Plaza, a 1.4-million-square-foot skyscraper on Bunker Hill, have received about 10 bids that exceed $250 million, said people familiar with the sale proceedings.

Many large institutional investors and their advisors are looking beyond current weakness in the downtown office market as they seek decent returns and an escape from Wall Street’s downward trend, real estate specialists said.

Downtown Los Angeles is viewed as an attractive option, a district with a growing list of amenities, such as concert halls, restaurants and loft-style apartments. No new office buildings are planned for the area, so there will be no additional competition for years.

“If you are looking for a safe institutional investment, these major institutional-quality trophy buildings are looking quite attractive,” real estate attorney Patrick Ramsey said. “There is more interest in buying these [downtown towers] than suburban office buildings in Encino.”

However, a few real estate brokers and players think investors may be underestimating how low the market could go in the next few months.

The downtown office vacancy rate, after edging down last year, recently climbed above 20% and probably will continue to rise, real estate brokers said.

“Any landlord looking over the next 24 months sees that it will only get worse,” said veteran real estate broker Whitley Collins at CB Richard Ellis.

Last year, it seemed as if downtown Los Angeles would escape the slowing economy and dot-com bust that sent rents and occupancy rates plunging in several once-hot markets, including the Westside. Downtown was one of the few major office districts in the country where rents rose and the amount of occupied space grew. Several architecture firms moved downtown, and many existing law, insurance and financial services firms added space.

It’s clear the market has lost momentum, however. Several companies have offered space for sublease recently, and few tenants seem willing to expand. During the second quarter of this year, the amount of occupied space fell by 240,000 square feet and wiped out about half of last year’s expansion, according to real estate services firm Insigna/ESG.

About 10 floors in Sanwa Bank Plaza at Figueroa Street and Wilshire Boulevard will be available after the merger of Los Angeles-based United California Bank and San Francisco-based Bank of the West.

Meanwhile, there is growing concern about what will become of more than 150,000 square feet of space troubled accounting firm Arthur Anderson has leased in the city’s tallest building, the 73-story Library Tower on 5th Street.

There is so much space available that a large tenant looking for 50,000 square feet would find more than 40 options downtown, according to Insignia/ESG. “We still have a ton of activity,” said broker Chris Runyen at Grubb & Ellis. But “when we lease a floor, we get a floor back [to sublease] from someone else.”

In a growing sign the market is under pressure, landlords and their leasing agents are dangling larger prizes and bonuses to get brokers to show and lease space. At 911 Wilshire, a 22-story office building, the broker who can fill two floors will walk away with four season tickets to Lakers and Kings games.

In addition to commissions, some landlords are offering brokers as much as $4 for every square foot they lease.

“There is not enough demand from large tenants to back-fill that [empty] space right now,” said brokerage manager Clay W. Hammerstein at Insignia/ESG. “I think [the market] is going to stay pretty static.”

Signs of softening in the market have not deterred the many pension funds and other institutional investors with an appetite for downtown Los Angeles real estate.

Final and pending sales of office buildings this year have totaled about $750 million, and an additional $270 million worth of property soon may change hands, according to Real Estate Alert, a real estate investment newsletter.

Some of downtown’s established landlords also have increased their investment in the central city office market.

This year, MaguirePartners, downtown’s largest landlord with about 5.5 million square feet of high-rise office space, bought out its partner in Library Tower and is one of the bidders for BP Plaza. Robert F. Maguire III, managing partner of MaguirePartners, said the numerous bids for BP Plaza reflect expectations for higher rents. The bidding for BP Plaza “is a real example of what a lot of investors see happening in downtown L.A.,” Maguire said. “We will act very aggressively if we like the property.”

For investors shopping for properties nationwide, downtown Los Angeles looks attractive in comparison with central business districts in San Francisco and Boston, which have been hit by the technology industry bust and a surge in construction.

In a forecast of the nation’s 10 largest office markets by Cushman & Wakefield, downtown Los Angeles emerged as No. 2, behind Washington, with the best prospects of rental growth through the end of 2003.

Much of the investor interest has focused on the area’s top-quality towers, which tend to attract tenants even during tough economic times.

Last year, the occupancy rate at the 41-story Ernst & Young Plaza at Figueroa and 7th streets rose to about 90% from about 65% and is continuing to rise, said Michael Escalante, senior vice president at building owner Trizec Properties. He said the firm has received multiple offers from tenants at “very exciting rates” for the building’s top floor.

“Our intention is to expand in downtown Los Angeles,” Escalante said.