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.

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