Cause for Optimism Seen Despite Continued Weakness

By DEBORAH BELGUM
Staff Reporter

There's good news on the horizon for South Bay real estate. The horizon, however, always seems to be off in the distance.

While office vacancy rates notched upward for the fifth consecutive quarter, agents working the submarket said that defense-related deals could generate a turnaround in the coming months.

But through the first quarter of 2002, it was more of the same.

Office vacancies stood at 19.2 percent during the first quarter of 2002, compared with 16.9 percent for the fourth quarter of 2001 and 12.6 percent during the like period a year ago, according to Grubb & Ellis Co.

Industrial space fared better, as the vacancy rate in that market dipped to 4.3 percent for the first quarter of this year, compared to 4.5 percent during the fourth quarter of 2001.

Still, industrial vacancies are higher than a year ago, when they held at 4 percent.

Lewis Latimer, vice president at Trammell Crow Co., likened the South Bay industrial market to an old car trying to crank up on a cold morning. "Things are moving but there is not a lot of velocity behind it," he said, noting that everyone is waiting for lease rates to drop.

"There is a lot more activity now than six months ago," said Grafton Tanquary, senior vice president at CB Richard Ellis Inc. "Defense-related and government-related users are moving around looking for space."

And there's plenty of space for them to scout.

State regulators took control of financially troubled Tower Health, a Long Beach-based health maintenance organization, which closed its doors early this year, leaving 30,000 square feet of office space vacant in downtown Long Beach.

"Signs are that the market is still deteriorating," said Jim Jandro, senior managing director for Insignia/ISG Inc. "We aren't seeing a lot of demand."

More competitive leases

But others are seeing a lot of investors kicking tires, as companies are prospecting for office space and even considering buying their own buildings now that interest rates are at near record lows.

"Landlords are getting more showings, and we are pitching more," confirmed Bruce Schuman, senior vice president at Julien J. Studley Inc.

Lease rates that have remained at $2.31 a square foot for Class-A offices are highly negotiable right now, brokers said. "I think the trend is that landlords are going to be competitive in negotiating leases, and tenants are going to benefit," said Jim Biondi, senior vice president of Grubb & Ellis.

Among the office deals completed in the first quarter were All-State Insurance's renewal of a lease for 22,000 square feet at Gateway Towers on West 190th Street in Torrance. Landmark Education signed a $5.5 million, 10-year lease for 32,540 square feet at 5200 W. Century Blvd., and the UCLA Medical Center billing department signed a 10-year lease for 81,000 square feet at 5757 W. Century Blvd.

On the industrial front, brokers believe the market has bottomed out and that more activity is in the offing.

Some of that activity is among airfreight companies searching for warehouse space beyond Los Angeles International Airport, where industrial buildings have filled up rapidly. That has caused a bump in activity in less expensive markets like Torrance, Harbor City and Harbor Gateway.

"Rents at LAX are high, and supply is exhausted. People are finding that even if they move farther away from the airport, they can still operate efficiently," said Terry Reitz, senior vice president at Grubb & Ellis.

Most of the movement in South Bay industrial space has been in the Class-A market, with little movement seen in Class-B or Class-C industrial space.

The portents of a rebound in the coming months appear to be more than wishful thinking.

Aerospace activity

Northrop Grumman Corp., which has snagged a series of defense contracts for work on the F-35 (the ballyhooed Joint Strike Fighter) and enhancing the Global Hawk aerial drone's performance, among others, is in the market for a large portion of space. The Century City-based company has been shopping for 300,000 square feet of space in the South Bay.

Several brokers working the market said Northrop is zeroing in on a building owned by the Candle Corp. in El Segundo. Candle, a 25-year-old software company, is using only a portion of the four-story building at 201 N. Douglas St.

Another company looking for office space in the area is BAE Systems, an aerospace group that recently sold its complex of four buildings earlier this year to Santa Monica Community College. While BAE is leasing back about 150,000 square feet from the college over the next 18 months, it is searching the area for the same amount of office space. The aerospace group could end up in the South Bay.

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