Three engines are driving the South Bay real estate market: Booming business at the Long Beach and L.A. seaports, growing air cargo traffic at Los Angeles International Airport, and rapid movement of Internet companies into the area.

Available office space became scarcer as the vacancy rate in the first quarter reached 14.5 percent, down from 18.4 percent in the prior quarter, according to Grubb & Ellis Co. The average monthly asking rent during the same period increased to $2.02 a square foot, up from $1.92.

Brokers said a surging wave of dot-coms is searching for suitable office space in the South Bay, now that the Westside is nearly saturated.

In particular, Manhattan Beach and El Segundo are proving popular spots for e-companies that want to be near the ocean and close to upscale retail areas with attractive amenities such as gourmet grocery stores, cinemas, cafes and bookstores.

"I think you're going to see a trend that was pushing the Westside last year really hitting the South Bay this year," said Grafton Tanquary, senior vice president with CB Richard Ellis. "New Economy companies and Internet companies are looking for 400,000 to 600,000 square feet in office space. When those companies land, we're going to see the pushing up of rental rates by at least 10 percent and the dropping of the vacancy rate."

In the first quarter of 2000, six dot-com deals were completed encompassing 335,000 square feet in the South Bay.

The granddaddy was in Torrance, where InternetConnect, a broadband solutions provider for businesses, leased a 240,000-square-foot, four-building campus at 20770 Madrona Ave. It used to house the Epson America Inc. headquarters.

Meanwhile, Yahoo Inc. leased 9,000 square feet in the Media Center at Raleigh Studios Manhattan Beach at 1600 Rosecrans Ave. Foodserviceone.com leased 13,121 square feet in Continental Grand Plaza at 300 Continental Blvd., and Isuppli.com leased 41,158 square feet in the E-Tech Center at 1700 Walnut in El Segundo.

The other two deals were a lease by Entcomm.com for 18,253 square feet at 879 W. 190th St. near Carson, and a lease by Epolicy.com for 13,753 square feet at 19191 Vermont Ave. in the same neighborhood.

"Manhattan Beach and the Rosecrans Corridor is the hottest place to be in the South Bay," said Kevin A. Shannon, senior vice president at Grubb & Ellis. "The vacancy rate in the beach cities and Rosecrans is less than 3 percent."

Clearly, the arrival of Raleigh Studios Manhattan Beach, a complex of sound stages where TV shows "Ally McBeal" and "The Practice" are filmed, hasn't hurt the area's image. Neither has the Manhattan Gateway retail complex, brimming with hip customers who shop at Trader Joe's, Barnes & Noble, Old Navy and REI.

"The South Bay has the tightening vacancy rates and the rising rents the Westside experienced," Shannon noted. "(Car) traffic is getting bad."

In response, Continental Development, the area's largest landlord, is planning to build a 300,000-square-foot speculative building with a 1,100-car garage at the corner of Rosecrans Avenue and Douglas Street. It is expected to be ready for occupancy in about 18 months, said Alex Rose, director of development for Continental.

More office space will be available as projects are completed in El Segundo near LAX. A partnership that includes developer Ron Flesch plans to construct a $180 million office and studio project on a 46-acre site south of LAX. Flesch's El Segundo Media Center LLC is in escrow to purchase the 45-acre property from Federal Express.

Industrial space in the South Bay is also seeing strong demand. The vacancy rate in the first quarter hit 3.8 percent, down from 4.1 percent at year-end 1999. Developers are responding by planning new state-of-the-art industrial buildings.

"Right now we have 4.5 million square feet of industrial space planned or under construction in the South Bay," said John Schumacher, a first vice president at CB Richard Ellis. "The vacancy rate for class-A product is virtually zero."

One of the biggest projects to get underway this quarter is in Rancho Dominguez, an unincorporated area adjacent to Carson. Carson Cos. broke ground this month on a 3.1 million-square-foot industrial park project that is part of the Dominguez Technology Center.

Already, HomeGrocer.com has signed a 10-year prelease to occupy a 116,000-square-foot warehouse and distribution center in the industrial park.

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