The San Fernando Valley's office and industrial real estate market showed steady improvement in the third quarter, as demand for space accelerated with the improving economy.

The industrial vacancy rate dropped to 5.6 percent down from 7.1 percent a year ago and is now below the countywide average of 6.5 percent, according to Grubb & Ellis Co.

That low vacancy rate is fueling development, with 462,312 square feet of industrial space now under construction in the Valley. By comparison, the San Gabriel Valley has just 112,558 square feet of industrial space under construction.

"We're heading into a construction boom. I expect construction to quadruple in the next year," said Mike Davin, an industrial sales specialist for Grubb & Ellis. "You're looking at about a million feet to be built next year in industrial."

Indeed, the Lewis Co. expects to break ground this month on 16.2 acres in Van Nuys that was formerly occupied by Litton Industries Inc. on Strathern Street near Woodley Avenue. The company plans to build three industrial buildings ranging from 110,000 to 122,000 square feet.

Lewis paid just over $7 million for the land, according to Will Adams, an assistant director in the downtown L.A. office of Julien J. Studley Inc., who represented both parties in the sale.

The site formerly housed a number of Litton operations, including defense systems manufacturing, engineering and its credit union.

In Sylmar, a partnership between Adom Ratner Stauber and World Oil Co. is also planning to develop up to 200,000 square feet of industrial property on spec near Roxford Street and San Fernando Road, on a site formerly owned by the Church of Latter Day Saints. Construction is expected to begin by the first quarter of 1998.

The market for office space continues to be hurt by surplus space in Warner Center, which pushed the West Valley vacancy rate to 15.8 percent up from 14.9 percent in the second quarter.

Ron Wade, a broker with Cushman & Wakefield, said there are hopes that 70,000 square feet of space vacated by AmWest Insurance Group earlier this year will be filled.

Still, trouble looms on the horizon CareAmerica Health Plans Inc. has announced plans to vacate its 250,000 square feet of space in Warner Center in the third quarter next year.

On the plus side, Warner Center Plaza III at 21650 Oxnard St. "has been pretty active" in the third quarter, according to Wade. The non-profit California Endowment leased 40,000 square feet, CNA Insurance Co. leased 36,000 square feet and SunAmerica Inc. expanded by 24,000 square feet.

The East Valley market remains tight, although its 7.6 percent vacancy rate is higher than the 5.7 percent rate posted in the second quarter.

The Central Valley showed improvement down to 13.7 percent, from 15.1 percent in the second quarter.

Lindvall characterized the fluctuations as relatively small.

"There don't seem to be any major new trends," Lindvall said. "The market is healthy, vacancy continues to decline. There are no pending major relocations nothing that would appear to derail the healthy market."

While the office market is mixed, the retail market is strong, according to Allen Young, senior vice president of CB Commercial Real Estate Group. That's because there hasn't been a lot of new development in 1990s, resulting in a pent-up demand from retailers.

"The area continues to be very much in demand. We see it going on for a long time because of the strong population base. It has definitely pulled out of the recession that was so long-lasting," Young said.

The biggest news of the third quarter was the sale of the Sherman Oaks Galleria to Douglas, Emmett Realty Advisers for $55 million. It was sold by a partnership of Prudential Real Estate Investors and Dai-Ichi Insurance Co.

One major new project is the approximately 200,000-square-foot Granada Hills Town Center at 18000 Chatsworth St., according to Young. The J.H. Snyder Co. project is more than 90 percent leased and tenants began opening stores at the center this month.

Another project due to open soon is L'Plaza de Northridge, across from the Northridge Fashion Center. The 175,000-square-foot shopping center being developed by American Diversified Properties will include a Gelson's Market and Linens N' Things.

"Activity there is brisk. It's a high-quality center; it should be 100 percent leased soon," said Young. "It's been in the planning stage for a number of years. As we pull out of the recession and get beyond the earthquake, this has taken off."

The Northridge Fashion Center is the hub of much retail development. The center has signed a deal with Pacific Theaters for a 10-plex theater on a site that was once occupied by Robinson's-May. And space is being leased in a three-story building that formerly housed The Broadway, where "complementary retailers will create an entertainment component to the mall. It will have restaurants and book stores," Young said.

The 200,000-square foot-project is currently under construction and is being developed by MEPC American Properties.

The apartment real estate market is cooking, according to Katherine Bergh, an investment specialist with Grubb & Ellis. The market hit bottom in 1995 and edged back up in 1996 and 1997. In the last six months it has really taken off.

"A lot of people feel they didn't jump on the bandwagon in time," Bergh said. "It takes awhile for people to come to the conclusion that the market isn't going to drop any more. They realize it's on rise and that they'd better buy now before prices become ridiculous."

Potential buyers are finding that there aren't many available REOs (properties taken back by lenders through foreclosure).

"People who have been buying the last seven years have been spoiled. Right now there are more buyers than product in the market," said Bergh. "People are bidding up prices; they're getting out of the stock market and back into real estate. They're surprised that all the prices have gone up."

Major Events:

- The California Endowment, CNA Insurance Co. and SunAmerica Inc. leased new space at the Warner Center Plaza III in Woodland Hills.

- A partnership of Prudential Real Estate Investors and Dai-Ichi Insurance Co. sold the Sherman Oaks Galleria for $55 million to Douglas, Emmett Realty Advisers for $55 million.

- The 200,000-square-foot Granada Hills Town Center retail development at Chatsworth Street and Zelzah Avenue opened, with tenants including Ralphs Market, Office Max and Michael's Crafts among the tenants.

- The Lewis Co. was scheduled to break ground on three industrial buildings on 16.2 acres in Van Nuys formerly occupied by Litton Industries Inc.

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