While the South Bay real estate market softened in the first quarter, due to the economic slowdown, it remains healthier than it was a year ago.

The office vacancy rate climbed to 12.4 percent, up from 10.9 percent at year-end 2000 but still significantly below its year-earlier level of 15.3 percent, according to Grubb & Ellis Co.

Likewise, the South Bay industrial vacancy rate softened slightly, to 3.9 percent, in the first quarter, up from 3.6 percent at year-end 2000. One year ago, the industrial vacancy rate was 4 percent.

The first-quarter rise in vacancies was not unexpected.

"We are just now feeling the impact of the downturn in the economy," said Jim Biondi, senior vice president at the South Bay office of Grubb & Ellis.

For the first time in several quarters, South Bay office tenants vacated more space than they leased, resulting in a negative absorption of 243,399 square feet. Much of that was due to the dot-com shakeout, the stock market drop and consolidations in the telecommunications industry, observers said.

"Some of the New Economy companies are pulling back or moving out," Biondi said.

For example, Globix Corp., a telecommunications company, rented 176,000 square feet in El Segundo last year, but recently gave back approximately 100,000 square feet of that.

Also in El Segundo, Regus office suites vacated 32,000 square feet of its 80,000-square-foot space at 400 Continental Blvd., and Raytheon left a 125,000-square-foot office to consolidate into another facility that the company leases.

Consequently, the South Bay's average asking monthly lease rate for class-A space, which had been climbing, flattened out at $2.32 a square foot in the first quarter.

Gary Blau, a broker with the Goodglick Co., said that owners of buildings with large vacancies need to realize that market conditions have changed, and adjust their asking rents accordingly, if they hope to fill those spaces any time soon.

"With leases over 100,000 square feet, the lessors are like deer caught in the headlights. Demand has just evaported," Blau said. "In order for these owners to lease these buildings, they are going to have to drop their prices substantially, as much as 15 to 20 percent."

Meanwhile, the slight softening of the very tight industrial sector caused the average asking monthly lease rate to remain at 58 cents per square foot in the first quarter, unchanged from the prior quarter and up from 56 cents a year ago.

But brokers are expecting the action to slow in the industrial sector. "I think there is a sort of cautionary attitude out in the market among industrial space users, (who are) waiting to see how their business is being affected by the slowdown," said Pete Toughill, a vice president with Cushman & Wakefield Inc. "They are going to wait until they commit to space."

As a result, lease rates will likely remain flat for awhile, after having risen 15 to 20 percent last year, and they may even decline as more industrial space comes on line this year.

There is currently 3.3 million square feet of industrial space under construction in the South Bay, making it by far the most active industrial construction market in Los Angeles County.

Among the most active developers:

The Watson Land Co., which has been constructing a number of industrial buildings in Carson and Rancho Dominguez, has 11 buildings available.

Gary Hewson, the head of the Hewson Co., bought a 20-acre site in Carson last year and is developing the Hewson Alameda Corridor Distribution Center, a 258,000-square-foot structure that has been pre-leased to Nova Container of Compton.

Trammell Crow Co. in March acquired a 9.5-acre brownfield for $3.5 million on the corner of Rosecrans Avenue and Main Street in the unincorporated section of Los Angeles County slightly north of Gardena. The site still has one functioning oil well and 12 capped wells that must be cleaned up before development can be started.

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