An odd dichotomy is taking place in the Santa Clarita Valley: Even as its industrial market continues to tighten, its office market is having serious problems.

The vacancy rate for office space deteriorated 3 percentage points to 38.1 percent in the second quarter, a level that many industry insiders are calling the worst the area has seen. It's a dramatic downturn from just a year ago, when vacancies stood at 21.7 percent, according to Grubb & Ellis Co.

The considerable change has brokers such as Tom Boyd, a senior vice president with Grubb & Ellis, explaining that the figures have been distorted by an upsurge in construction of substandard projects coming into the market.

"This is the first experience this area has had with this kind of vacancy rate," said Boyd. "Far more capacity has been brought into the market than what it can possibly absorb."

Indeed, net absorption (the amount of space newly occupied minus the amount of space newly available) was a negative 56,746 square feet in the second quarter, after the submarket experienced negative absorption of 14 square feet during the first quarter. During the second quarter of 1999, net absorption was a positive 156,063 square feet.

Some of the recent negative absorption has been due to new projects hitting the market, and despite the glut of space, developers continue to build in the Santa Clarita Valley. Second-quarter figures show 380,000 square feet under construction in the area, almost one third of the currently available rental square footage.

Office lease rates, meanwhile, are on the decline, if only slightly. The average class-A asking rent in the Santa Clarita Valley dropped a penny below its level of the first quarter, to $2.20 per square foot.

The office market is very immature in the area right now, but there is still strong demand, said Boyd, who compares the current Santa Clarita Valley office market with that of Glendale during the 1970s at its initial stages.

Leasing deals were sparse. Explorer Insurance Corp. signed a lease for 50,000 square feet inside one of two 60,000-square-foot buildings erected on Avenue Stanford in Santa Clarita last year by American Assets. A much smaller deal for 5,000 square feet was signed in the twin building by engineering and architecture firm Psomas Corp.

Boyd predicts the vacancy rate will experience a considerable drop during the second half of the year, as demand catches up with all the new projects.

On the industrial front, the Santa Clarita Valley is maintaining a strong demand for space that is gradually reducing vacancies and encouraging a steady rise in asking rates.

The vacancy rate for the second quarter declined 2 percentage points to 4.5 percent, as sales and leasing activity almost tripled from the first-quarter level and reached 461,177 square feet, according to Grubb & Ellis.

The steady demand carried over from the first quarter pushed the monthly asking lease rate up a penny to 55 cents per square foot. Brokers expect to see a steady increase in prices during the second half of the year, as demand remains moderate to strong, said Senior Vice President Jim Linn with Grubb & Ellis.

"The market has improved a great deal since last quarter. There were more than 1 million vacant square feet then, and now we just have over 700,000 square feet," Linn said.

Among the major industrial deals of the second quarter was a lease signed by Trigg Laboratories for 52,260 square feet in the Valencia Commerce Center on Braxton Avenue. In addition, Valencia Entertainment International, a production company, leased 52,000 square feet in the Valencia Industrial Center on Avenue Crocker, according to Linn.

The demand has prompted a number of developers to start new industrial projects in the region. Saris Regis is building a 142,000-square-foot industrial project in the Valencia Commerce Center, scheduled for completion by the end of the third quarter. Also on the road toward completion are three buildings by IIC Financial totaling 136,000 square feet, also in the Valencia Commerce Center. None of these buildings has been leased yet.

The most significant building under construction is the Vista Business Park in the Valencia Commerce Center, with 206,930 square feet under development by Investment Development Services and Kennedy Associate Real Estate Counsel. The project is scheduled to reach completion by the end of the fourth quarter.

Meanwhile, in the Antelope Valley city of Palmdale, Architectural Lighting acquired 11 acres where it plans to erect two industrial buildings, one of 100,000 square feet and the other with 90,000. The two-year project has already begun. Completion of the first building is scheduled in nine to 12 months, according to Danny Roberts, director of economic development for the city of Palmdale.

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