Downtown L.A. Offices Filling Up

Steady demand for office space and a lack of new construction pushed the third-quarter vacancy rate in downtown Los Angeles to its lowest level in more than a decade, according to a real estate survey released Tuesday.

The gains downtown stand in contrast to the continued deterioration of other major office markets, including L.A.’s Westside, Orange County and San Francisco.

During the third quarter, the overall vacancy rate for downtown Los Angeles fell to 15.8% compared with 17% in the second quarter, according to Cushman & Wakefield. Meanwhile, on the Westside, which has been hit hard by the dot-com bust, the occupancy rate rose to 13.1% from 10.7%.

In Orange County, vacancies surged to 16.9%, up two percentage points from the second quarter.

“I have never seen the [downtown L.A.] market as fundamentally strong as it is now,” said John Eichler, director of real estate services for Cushman & Wakefield’s Los Angeles office. “Small and major tenants have continued to grow despite the overall [weak] economic environment.”

For Los Angeles County as a whole, the office market vacancy rate fell to 13.4% from 14.5%, according to Cushman & Wakefield.

In a separate report issued by Grubb & Ellis Co., the vacancy rate in downtown San Francisco shot up to 15.2% in the third quarter from below 10% in the previous quarter as dot-com tenants and other technology-related firms gave up space. Despite a dramatic drop in rents, San Francisco’s vacancy rate could reach 25% next year, according to Grubb & Ellis.

While the pool of empty space grew in San Francisco, downtown Los Angeles posted a gain of 300,000 square feet in occupied space during the third quarter as businesses expanded and some suburban tenants relocated to the central city at attractive leasing rates.

AON Insurance, for example, leased an additional 75,000-square-feet of space in a downtown skyscraper as it brought more employees downtown, Eichler said.

There have also been some newcomers, including DMJM, a giant architectural firm, that is moving its headquarters and several hundred employees from a mid-Wilshire office building to Arco Plaza. The international executive recruitment firm Korn Ferry International, now based in Century City, is expected to soon join the roster of downtown tenants by leasing about 70,000-square feet of space, according to Eichler.

Downtown has also benefited from the lack of new major construction, the legacy of the real estate bust of the early ‘90s. By contrast, the Westside has nearly 2 million square feet of office space under construction, according to Cushman & Wakefield.

Whether downtown L.A. will keep posting gains is in doubt given the weakening economy and uncertainty after the Sept. 11 attacks.

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Staff writer Daryl Strickland contributed to this report.