Staff Reporter

With continuing demand for industrial space and supply under tight control, Valencia land prices are rising dramatically.

Brokers and developers estimate that the cost of land for industrial development has risen to $12.50 a square foot, a 47 percent increase from only three years ago.

A few developers are scaling back plans for the coming year, preferring to see what effect the price increases have on lease rates. They worry that if prices continue to spiral, the migration of companies to Valencia could slow down.

"If rental rates get too exorbitant, people will look for alternatives other than the Santa Clarita Valley," said David Mgrublian, managing director of Investment Development Services Inc., an L.A. developer that is completing a 40-acre project in Valencia.

But most remain confident that the land crunch in the San Fernando Valley will continue to push companies northward.

Last year alone, Newhall Land and Farming Co. sold 111 acres of land, and the firm itself is developing the 3,100-acre Valencia Gateway industrial center, where the vacancy rate now stands at only 3.5 percent.

"(Developers) are running out of places in the San Fernando Valley, and basically that developer demand is going to the Santa Clarita Valley," said Jim Linn, senior vice president with Grubb & Ellis. "Demand for the Santa Clarita Valley has increased due to the lack of supply in the San Fernando Valley."

Some 2.4 million square feet of space has been developed in Valencia Gateway since 1992, with the activity picking up in the past two years. Another 2 million square feet is currently in various stages of construction.

In some cases, properties are leasing faster than they can be developed. Only one of the four buildings just leased by Pharmavite Corp. from developer IDS has been completed, and the last of the projects will not be finished until next year.

"The absorption rate (the amount of space occupied minus the amount vacated) year to date is over 1.1 million square feet," said Craig Peters, senior vice president at CB Richard Ellis Inc., which has represented Newhall Land and Farming in many of its deals. "That compares to all of 1998 with 1.5 million square feet of space absorbed. And 1998 was a record year."

New development, which has brought the number of companies now situated in Valencia to 774, has helped bolster the market. Once a frontier on the outskirts of the San Fernando Valley, Valencia now has a community of businesses that are, in and of themselves, generating a need for additional goods and services.

"I think that the area up there has reached a critical mass, so it's self-sustaining," said John Lewis, president of Lewis Co., a Santa Monica-based developer. Lewis, who has been shopping for land, says, "You're not just pioneering. The population there is generating industry and commerce that needs to be supported."

The strong market has pushed lease rates well above 1996 levels, when the Los Angeles real estate market started to rebound. Rents on larger buildings have jumped 30 percent since 1996 to about 56 cents a square foot, and rates on smaller buildings rose 24 percent to about 61 cents a square foot.

"Lease rates started a recovery before land started to recover," said Peters. "You've been seeing pretty good increases in lease rates and building sale prices, and that's reflected in land values."

Officials at Newhall Land and Farming say that market conditions and the amenities available in Valencia have contributed to the price increases. "Valencia is an extremely desirable place to do business," said Marlee Lauffer, a Newhall Land spokeswoman. "It's conveniently located. There's a great labor pool. When people look at relocating to Valencia, I think they look at the entire community."

But for all the amenities the abundance of housing, the community's reputation for safe streets and the modern conveniences of the industrial facilities the perception lingers that Valencia is a stepchild of the San Fernando Valley.

There are many companies that would have forsaken the amenities in Valencia if they had been able to find space large enough in the Valley. And many others that relocated did so mainly because of the economics of the area. Land and leases have been available at bargain prices.

To some, that means growth could hit a wall if prices keep escalating. "Valencia has been a lower-cost alternative in a master-planned community for industrial space," said Mark Leonard, a principal at Trammel Crow Co. "But it is somewhat removed from L.A. and has had some price sensitivity. At a certain price point, people are not going to pay more to be out at Valencia."

No one knows what that point is. Leonard and others still see room for additional development, largely because Valencia's prices still fall well under those of the San Fernando Valley, where land when it is available is selling at $14 a square foot or more.

Valencia's newer industrial buildings also have amenities, like clearance height and greater electrical capacity, that are not available in the older properties that make up the majority of inventory in the San Fernando Valley.

But at some level, additional price increases could drive development to other areas such as the Inland Empire or Simi Valley. "With the rise in land prices reaching thresholds where people would consider moving completely out of the area, there needs to be caution on the part of developers not to overbuild the area," said Mgrublian at IDS.

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