Contributing Reporter

The South Bay played catch-up in the second quarter as vacancy rates fell and rental rates inched up.

The office vacancy rate was 17.3 percent in the April-June period, according to Cushman & Wakefield of California, compared with 18.5 percent during the previous three months.

The most significant drop in vacancy occurred in the 190th Street Corridor submarket, which tumbled to 16.9 percent in the second quarter from 24.1 percent, said Cushman & Wakefield Research Director Mike Rago. The drop was mainly due to Toyota Motors Sales USA's lease of 198,000 square feet of space at Hamilton Place, near the juncture of the Harbor (110) and San Diego (405) freeways. That space will serve as overflow for Toyota's U.S. corporate headquarters in Torrance.

News about the Toyota expansion has made most brokers enthusiastic about the South Bay, which stretches along the coast from Los Angeles International Airport to Long Beach.

The feared slowdown from the Asian financial crisis has yet to hit the South Bay, and some say the Asian situation is actually turning out to be a positive. While the volume of exports coming through local ports may be falling off, the South Bay economy is being buoyed by rising imports, said Mike Condon, senior vice president of Seeley Co.

Other brokers note that the area emerged from the recession later than other portions of Southern California. The South Bay market offers the lowest average asking office lease rate in the county, at $1.49 per square foot per month, a bargain compared with the county's overall asking rate of $1.69.

"Our recovery really hasn't matched other Los Angeles markets," Condon said. "Some of the better opportunities for tenants and investors lie here in the South Bay market. We are pretty confident that we have plenty of room for our recovery to continue."

On the industrial side, vacancy rates continue to fall. The shrinking pool of available space is expected to push up rental rates through the rest of the year. At just 5.6 percent at the end of June, the industrial vacancy rate is at an all-time low, said Jim Biondi, senior vice president at Grubb & Ellis Co. The second-quarter vacancy rate compares with 5.8 percent for the first quarter and is less than half the 13 percent rate of three years ago.

In especially tight submarkets, such as El Segundo and Long Beach, industrial vacancy rates continue to be well below the overall South Bay rate. What's more, Biondi pointed out that a number of deals currently in the works are expected to be completed in the third quarter, which would further drive vacancy rates downward and rental rates higher.

But even as the South Bay stages a comeback from the first quarter, the declining aerospace and defense sector keep tugging at its recovery.

The defense units of Hughes Electronics Corp., acquired by Raytheon Co. last year, continued to vacate space in the market. By giving up more than 100,000 square feet in the Long Beach Freeway Corridor submarket last quarter, the former Hughes units pushed the vacancy rate to 21.3 percent from 13.7 percent in the first quarter.

Meanwhile, the El Segundo and Manhattan Beach submarkets dominate the South Bay, accounting for roughly one-third of the total inventory. Direct vacancy rates dropped 4.6 percentage points in the submarkets over the past year, according to Cushman & Wakefield. More than 120,000 square feet were leased in El Segundo last quarter, as Ernst & Young leased 43,000 square feet in the Pacific Corporate Towers, Glovia International signed up for 42,650 square feet in the El Segundo Research Center, and Broad Casting Co. took an additional 40,000 square feet in the Interamerican Building.

That activity has sent rental rates soaring in the El Segundo/Manhattan Beach submarket, which has the highest asking lease rates in the South Bay. The average class-A monthly asking office rent jumped 25.8 percent over the past year and is currently at $2.05 per square foot, according to Cushman & Wakefield.

"El Segundo is just cruising along," said Cushman & Wakefield office broker Jim Jandro. "A number of bigger deals that are in the works right now will close in the next quarter and El Segundo will continue to be a strong market throughout the year."

There also is increased activity in downtown Long Beach. Arden Realty Inc. purchased Long Beach's Continental Grand Plaza for $47.5 million last quarter and Lowe Enterprises paid $19.7 million for the 180 Building. The downtown Long Beach vacancy rate fell only 0.1 percent last quarter, to 18.3 percent, which "creates a good opportunity for a tenant to come into that market," Jandro said.

Pointing to Long Beach's new Aquarium of the Pacific and the city's willingness to work with businesses to locate there, Jandro believes downtown Long Beach "is the next recovery market for sure."

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