Falling Demand for Telecom Space Opens a Void in Downtown L.A.
Faced with scant demand, a growing number of downtown Los Angeles buildings that were converted or touted as telecommunications switching stations and data centers are seeking new roles to fill acres of empty space.
More than 700,000 square feet of existing and planned telecommunications space has been taken out of commission in the downtown area during the last half of the year as landlords try to change gears and convert their properties to hotels, apartments and traditional office uses, according to a recent report by real estate firm Colliers Seeley.
“We don’t have the demand for telecom space to fill them,” said Mark O’Brien, a broker and telecommunications space specialist at CB Richard Ellis. “Telecom has gone away.”
At Transamerica Center near Staples Center, leasing brokers are back to looking for traditional office tenants to fill one of the complex’s three buildings after the anticipated rush of telecommunications tenants failed to materialize. The facility landed only one major telecommunications tenant, MCI Worldcom Inc., which leased an entire floor. But that still left about 320,000 square feet of space to fill.
“As demand changed, we simply started marketing it to traditional [office] users,” said building leasing agent Jeffrey Ingham of Jones Lang LaSalle. Ingham said there are many prospective tenants interested in taking space.
“It’s definitely a better use for the building now,” Ingham said. “We went from having a little activity to 30 or 40 prospects.”
A few blocks north, on Wilshire Boulevard near 6th Street, real estate investment firm Menlo Equities sold two office buildings that were to be converted into a telecommunications center to a group that is considering alternative uses, including traditional office space, according to brokers familiar with the deal.
Officials from Hines, the buildings’ leasing company, were not available for comment.
Menlo was one of several downtown property owners that jumped on the telecommunications trend during the late 1990s. The deregulation of the telecommunications industry and soaring Internet usage prompted telephone companies, new fiber-optic carriers and upstart telecommunications and Internet firms to set up switching stations, data centers and other facilities.
The boom turned old and empty office and industrial buildings near downtown’s major fiber-optic transmission lines into gold mines for owners as tenants vied for space at rents that were far higher than at some prominent skyscrapers. At the peak of the boom, more than 3 million square feet of downtown space had been converted or marketed as telecommunications space.
In recent months, however, demand for such space in downtown Los Angeles and cities nationwide has shriveled under the weight of the weakening economy and the dot-com bust. Asking rents, which peaked at $40 a square foot, have plunged as low as $24, according to Colliers Seeley.
Buildings closest to the fiber-optic lines that were converted early in the boom are doing reasonably well. In downtown Los Angeles, the vacancy rate for the telecommunications space that remains in the market is 8.4%, Colliers Seeley said.
“The market is in equilibrium,” said Michael Weiner, a broker at Colliers Seeley and a member of its Global Telecommunications Group. “We anticipate that demand for space will actually rise by the third quarter of 2002.”
However, despite the low vacancy rate, few if any new buildings are expected to be converted to telecommunications use given the financial troubles facing many companies in the industry and the shaky economy. If anything, the pool of telecommunications space could continue to shrink in the short term, brokers say.
“It just doesn’t make a lot of sense” to convert to telecommunications space, said Ingham, the Transamerica leasing agent. “We are going to stick to typical office tenants.”
