Downtown L.A. May See Office Glut : Construction Boom Hides Weak Demand, Some Observers Say

Times Staff Writer

Columns of steel and glass are slowly turning into new office buildings across the face of downtown Los Angeles, and an intense hunt is on for tenants to fill the more than 4 million square feet of premium office space expected to hit the market later this year and in 1986.

Although the "new" downtown is having luck attracting tenants from Century City, the mid-Wilshire area and the East Coast, the giant amount of space opening up in the next few years poses a real threat of a glut, leasing agents and developers say.

Traditionally, new downtown buildings have filled up by attracting tenants from older downtown buildings. That is expected to continue as the new space opens, leaving large chunks of empty space behind and creating vacancy problems in older buildings.

Although vacancy rates have been declining recently and the office market appears to be tight, demand doesn't seem to be building for the new space, as evidenced by declining rental rates in established buildings, leasing concessions offered by agents of new buildings and a lack of tenant announcements by buildings under construction.

'It's Scary'

Downtown Los Angeles thus appears to be facing an overbuilding crisis much like that experienced from 1974 to 1979, which followed a period of heavy building during the early 1970s.

"There is no question that we will have an oversupply of office space," said Howard Sadowsky, Los Angeles-based senior vice president of Julien J. Studley Inc., a New York-based real estate brokerage firm.

"It's scary," Sadowsky said. Developers "are planning so much that I'm wondering if they have really evaluated the demand."

"We have a relatively tight market, but there is very little pre-leasing in the buildings under construction," said David G. Shulman, vice president of TCW Realty Advisors. "That gives me a very eerie feeling about the next year, that demand may not be that strong."

The parade of buildings scheduled to open in 1985 includes the first office towers of the multiphase California Plaza and Citicorp Plaza projects, the second tower of Beaudry Center and International Tower at 9th and Figueroa streets.

The bulk of the construction activity is in the "new downtown" financial center clustered around Figueroa and Flower streets from 3rd to 8th streets. But recent projects have pushed the boundaries even farther south past 8th Street, west past the Harbor Freeway and north to 1st Street.

All these projects are being built to cash in on the tight downtown office market that developed in the late 1970s. Although several new buildings opened in 1982 and 1983, vacancy rates in downtown Los Angeles have remained low compared to downtowns in other major cities.

"We go through cycles of building and overbuilding," said Robert F. Maguire III, co-managing partner of Maguire/Thomas Partners, a Santa Monica-based developer whose projects include the two-tower Crocker Center and Library Square, the proposed office complex coupled with the renovation of the Central Library. "The news was out 2 1/2 years ago that downtown was a hot market--everybody jumps in, but by the time they get in it's not tight anymore."

And so the battle begins for tenants to fill the new office buildings.

Leasing agents for new buildings report that most of the inquiries are coming from companies already located downtown. They say that they are also having discussions with companies from outside of downtown.

"We have some concern because some of our major tenants are being waltzed and dined by other buildings," said Bill Schlock, assistant manager of Security Pacific National Bank's headquarters building.

Some leasing agents complain that the movement from one building to another adds nothing to the downtown area, but Gary Toeller, Coldwell Banker senior sales consultant, pointed out that companies move because they need to expand, "so that's a net gain" in terms of jobs. But to absorb the vast amount of new space, "companies have got to come in from outside downtown Los Angeles," he said.

Maguire said downtown has become more successful recently in pulling tenants from outside the area.

Crocker Center has attracted International Business Machines Corp., which consolidated its operations scattered around downtown and in the mid-Wilshire area, and the Cleveland-based Jones, Day, Reavis & Pogue law firm, which recently decided to open a downtown office in addition to its Century City office.

Library Square, which is scheduled to begin construction in June, already is drawing interest from downtown and other areas, he said.

Among other downtown relocations, the New York-based Skadden, Arps, Slate, Meagher & Flom law firm opened an office in Manulife Plaza in February, 1983.

"This is a really strong emerging trend that is exciting to see for downtown," Maguire said. "There is now a clear perception that if you want to be doing business and want to be a major force in the financial community, you have to have a downtown presence."

But so far, tenants haven't been beating down the doors of the new developments.

Of the buildings about to be completed, only Citicorp Plaza has announced major tenants: Citicorp, the accounting firm of Peat, Marwick, Mitchell & Co. and Lillick, McHose & Charles, a law firm.

New York-based Reliance Development Group's 1000 Wilshire building, which won't open until January, 1987, has signed Coast Federal Savings & Loan Assn. and the Loeb & Loeb law firm.

Reliance President Henry Lambert said he is "encouraged" by the response his building has already received. "There are a lot of tenants around, and we're looking forward to filling the building with tenants long before it's completed," he said.

Although California Plaza has announced no major tenants, the development is "weeks away" from some deals, said Ray Lepone of Grubb & Ellis Co., the Los Angeles-based commercial brokerage firm that is handling the leasing for California Plaza.

Those connected with some of the major developments--California Plaza, Citicorp Plaza and the Reliance Development building at 1000 Wilshire Blvd.--say they aren't worried about their ability to attract tenants. But the smaller buildings located on the edges of downtown will have problems, they say.

"The people who are going to get squashed are the people with the marginal products in the marginal locations," said Dennis Maloney, director of marketing for Oxford Properties Inc., which is building Citicorp Plaza.

Some landlords already are giving such concessions as six months free rent on a 10-year lease, healthy tenant-improvement allowances and higher commissions to brokers, said Kirby Greenlee, office properties specialist with Grubb & Ellis. "I don't think we're going to have a collapse of the downtown market by any means, although some of the properties will have problems," he said.

Times Staff Writer Heidi Evans contributed to this story.

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