Downtown L.A.'s Traction In Question

But, the great year has arrived just in time for the economic slowdown. So, researchers at firms like Grubb & Ellis, CB Richard Ellis and Cushman & Wakefield are wondering just how the market will fare in a climate of slowing job growth and the general malaise that has crept into the economy.

C&W's researchers say L.A.'s CBD "made huge strides during 2007" as occupancies declined and healthy class A direct rental rates climbed to $36.37 per sf per year, which was up $4.72 per sf per year from 2006. Vacancy stood at 12.8%, its lowest point in two years in a market that has had to contend with huge consolidations in the banking and accounting industries, which have flooded the Downtown with immense amounts of space that's taking years to absorb.

On the investment side of the market, CB Richard Ellis points out that Downtown "still exhibits the market fundamentals of an attractive investment" despite the challenging capital markets conditions and the "upward pressure on cap rates of roughly 50-70 basis points."

Researchers point out that significant projects and buildings, like Union Bank Plaza in Downtown Los Angeles, have been taken off the market due to depreciating pricing. However, deals are still being done, like New York City-based Brickman Associates' recent $50-million acquisition of the 206,000-sf office portion of the 22-story 801 S. Grand Tower. Brickman bought the office portion of the 473,000-sf combination office and residential tower from the Hollywood-based CIM Group after CIM renovated and repositioned it by converting the top 11 floors to luxury loft-style condominiums--selling 100% of the units--while retaining the lower 10 floors as class A office space and enhancing the ground floor retail.

CBRE sees a distinct possibility that the declining values in office product this year could be met by an influx of foreign investment capital that continues to be fed by the low cost of the American dollar. In addition, CBRE expects that investment activity will pick up as buyers lose their timidity and start shopping for bargains.

One of the factors driving the upswing in the fortunes of the Downtown office market is the overall redevelopment of the central part of the city, Grubb & Ellis points out. The Santa Ana, CA-based firm cites a growing amenity base along with new residential developments that has boosted demand for office space.

Another factor favoring Downtown, C&W's team points out are the zooming rents on the Westside. "The CBD will likely be a shelter from skyrocketing rental rates on the Westside," according to the C&W report. Researchers cite a 39.2% gap between CBD and Westside class A direct rental rates, saying that as the gap continues to expand it could draw more law and design firms to Downtown L.A. "As the large blocks of space that previously plagued the CBD continue to dwindle, vacancy will continue to creep towards equilibrium and put further upward pressure on rental rates," the C&W report concludes.