52-Story Office Tower Going Up Downtown : Southern California Gas Center Already 70% Leased as Signs of Future Market Glut Appear
Construction will begin Wednesday on the 52-story Southern California Gas Center in downtown Los Angeles amid growing signs that the office market may be overbuilt within two or three years.
Developer Maguire Thomas Partners, which will build the $350-million building at 5th Street and Grand Avenue, probably doesn’t have to worry about a possible office glut; the building is already 70% leased, even though the first shovel of dirt at the site hasn’t been thrown.
Others developers may not be as lucky.
Little change is expected in vacancy rates next year, brokerage experts say. Two forces that help drive the downtown market--financial-services companies and law firms--are expected to grow at a moderate pace, keeping vacancy rates at the marginally healthy level of about 15%.
But that could change drastically in 1990 and beyond, as several large buildings that are currently under construction finally open and developers start competing against each other for tenants.
“I think we could see vacancy rates go up to 20% toward the end of 1990, and maybe even higher in ‘91,” said Maurice Robinson, senior manager of the real estate consulting group of Peat Marwick Main & Co. “And that’s assuming that there’s no recession in the foreseeable future.
“I personally don’t see a recession soon,” Robinson adds. “But if there is, things could be worse.”
Office vacancy rates in the 20%-range could have subtle but widespread affects on the local economy, experts say.
“When there’s an office glut, construction always slows down,” says Dennis Macheski, director of research services for Grubb & Ellis Commercial Brokerage Services. “That means fewer construction jobs, and fewer jobs in related industries.”
A construction downturn could also worsen the city’s financial condition, because the city depends on the fees it charges developers of new projects to fund a variety of spending programs. The city’s educational programs would be among the hardest hit, contends Macheski: For each square foot in an office project, developers can be charged $1.50 to help build new schools.
“If construction stops, the schools are going to get hurt,” Macheski says.
Ironically, said another broker, a halt in new construction wouldn’t help solve downtown’s growing problems with air quality, traffic and an outdated sewer system. “By the time construction stopped, the problems would be even worse,” he said.
“Only then, you wouldn’t have a bunch of money coming into the city treasury through development fees, because there’d be no new development.”
Although the looming office glut may have some developers worried, Maguire Thomas Partners isn’t one of them.
Southern California Gas Go. has already agreed to take nearly half of the building’s 1.2 million square feet of office space for use as its corporate headquarters. The utility will move 2,000 workers from five Southland locations into the new building when it is completed in spring, 1991.
Terms of the lease agreement call for the building to be named Southern California Gas Center, and reportedly gives the utility partial ownership of the structure.
Two large law firms--Morrison & Foerster and Jones, Day Reavis & Pogue--have also signed leases for a total of 252,000 square feet in the building.
Construction of the center is the second stage of an innovative agreement reached by the city, the Community Redevelopment Agency, the Library Commission and Maguire Thomas to save the 62-year-old Central Library at 5th and Hope Streets.
Under the agreement, Maguire Thomas will provide about $50 million of the estimated $141 million needed to renovate and expand the library, a facility that was already inadequate before two devastating fires forced its closure in 1986.
In return, Maguire Thomas was given city approval to build Library Square, an office complex that includes the new gas company building and the 73-story First Interstate World Center. The taller structure is already under construction on the north side of 5th Street, between Flower Street and Grand Avenue.
The gray-and-silver Southern California Gas Center will have a blue elliptical top made of reflective glass. It was designed by Richard Keating, partner and chief designer in the Los Angeles office of architects Skidmore Owings & Merrill.
Three of the building’s lower levels will be reserved for retail shops and restaurants.
Sumitomo Bank Ltd. is providing financing for the new building and Turner Construction is general contractor.
Maguire Thomas will handle its own leasing and marketing. Southern California Gas and Morrison & Foerster were represented in their lease negotiations by Cushman Realty Corp.
