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LOS ANGELES-Leasing activity continued to the tune of 210,000 sf in new deals, rents showed a year-over-year increase and vacancy continued to stabilize in Downtown Los Angeles during the first quarter. Market watchers are expecting a solid 2008 from this once-struggling market.

As managing director John McAniff of Jones Lang LaSalle tells GlobeSt.com, the 32-million-sf Downtown L.A. market is expected to post positive absorption for the year, with moderate rent increases and solid leasing activity throughout 2008. Although the Downtown market showed about 65,000 sf of negative net absorption in the first quarter when sublease space is taken into account, McAniff points out that the figure is relatively small considering the huge base of the Downtown market. And he expects absorption will turn positive for 2008 on leasing activity, estimating it will surpass one million sf for the year.

Reports from Grubb & Ellis Co. and Cushman & Wakefield Inc. already place the Downtown market in the positive column, at about 45,000 sf of net absorption for the first quarter. Downtown’s numbers look even better compared with the more than 426,000 sf of negative net absorption in L.A. County’s 118 million sf of suburban markets during the quarter.

JLL tracks the direct vacancy Downtown at just under 13% and the total availability at just under 14%, with vacancies a bit tighter in class A space. Average asking rents for all classes of Downtown space edged up to more than $35 per sf per year, with class A rates topping $38 per sf and building owners continuing to push rents higher.

McAniff points out that what’s more important than those first-quarter numbers alone is the turnaround trend of recent years is continuing in Downtown L.A.–the market fared so well during what everyone agrees are difficult economic times and that signs point to a positive long-term outlook for the market. He notes that Maguire Properties, the largest owner of Downtown space, bumped up asking rents $4 per sf per year on its Downtown portfolio as of April 1. Other building owners are holding the line on rents too, a result of “increasing discipline and consolidation within the ownerships,” McAniff says.

The JLL managing director points out that the Downtown numbers are even more significant when viewed from a historical perspective. At one point in the mid-1990s, consolidations in industries like banking, oil and gas, accounting and related services had dumped so much space onto the market that 28% of the Downtown’s inventory was vacant. About 12% to 15% of that 28% vacancy was sublease space, but today it represents probably less than 2% of the market. Viewed another way, the entire Downtown vacancy today is probably less than the amount of sublease space that was available when the market hit its nadir.

The factors that have brought the Downtown market along its slow road to recovery remain at work today, McAniff points out. Instead of a small number of large tenants like the banks and oil companies that once dominated, Downtown’s tenant base today is much broader and diversified.

In some of the industry consolidations, Downtown has actually fared relatively well. As the accounting industry consolidated from the Big Eight firms of yesteryear to today’s Big Four, McAniff says “L.A. did a lot better than a lot of other areas of the country because all of the Big Four are here with large spaces.”

Consolidation in the architectural and engineering industries also has brought more of those firms into centralized Downtown offices, including a number that have moved from Westside locations to less expensive CBD space, along with asset management and money management firms that now occupy large office blocks. McAniff and others in the industry expect Downtown to attract even more cost-conscious tenants in light of the current economic climate.

Yet another factor is the continuing redevelopment and revitalization of Downtown, where developers have built some 9,000 apartments and condominiums in recent years in conversions of office buildings to residential as well as ground-up construction. Retailers and restaurants are moving into the area, creating “more energy than we have had in many years” on the Downtown streets, he says. “People who make relocation decisions look at the amenities surrounding an office market.” And, it now has a steadily growing list of new amenities.

McAniff believes that the ripple effect from the credit crunch and the economy could slow the expansions of some Downtown tenants, but for the most part there will be no dramatic impact from the capital markets and economic slowing. Others who follow the market share his optimism. In its Q1 report, Grubb & Ellis’ team noted “tenants are being drawn to the market as Downtown starts to flourish with greater amenity and residential bases.”

C&W’s researchers say that “while early signs of an economic downturn negatively affected other areas of Southern California, real estate fundamentals in the Los Angeles Central office submarkets continued to strengthen during first quarter 2008.” The C&W report points out the CBD generally fares well in recessionary times and “showed surprising strength” in this latest quarter and “will likely continue to attract professional firms seeking refuge from the higher rents and commuting issues on the Westside.”

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