Vacancy Rates Climb Despite Lack of Any New Construction

Staff Reporter

Commercial and industrial vacancy rates in the South Bay just keep climbing. For the April-June period, vacancies rose to 19.1 percent from 18.3 percent in the first quarter, while remaining below the 19.4 percent rate in the year-ago period, according to Grubb & Ellis Co.

Even with no new construction in the area, five of the seven major submarkets Carson, El Segundo, the LAX area, and downtown and suburban Long Beach gave back office space in the second quarter.

Net absorption, or the amount of new space leased minus space vacated during the second quarter, was negative 239,433 square feet in the South Bay. Torrance and the 190th Street Corridor were the only two submarkets with positive absorption.

"We're at the bottom of the market and we'll be here for a while," said Jim Biondi, senior vice president at Grubb & Ellis.

Empty offices in El Segundo and downtown Long Beach contributed the most to the rise in vacancies. In El Segundo, vacancies jumped to 26.1 percent in the second quarter from 24.3 percent in the first. Downtown Long Beach saw a rise in vacancies over the same period to 14.7 percent from 12.1 percent.

Average rents for class A space have also slipped, to $2.13 a square foot in the second quarter versus $2.14 in the first and $2.31 in the year-ago period.

Companies that normally would have relocated to El Segundo or near LAX are instead finding cheaper rents on L.A.'s Westside.

"A lot of companies are moving from the LAX corridor," said Jim Jandro, senior managing director of Insignia/ESG. "There are places that are as cheap as the South Bay and have better quality."

In the industrial sector, the vacancy rate fell to 4 percent from 4.5 percent in the first quarter. Nevertheless, the South Bay has the highest industrial vacancy rate in L.A. County.

Sales and leasing activity in the industrial sector fell to 2.9 million square feet, compared with 3.9 million square feet in the first quarter. Asking rents fell to 49 cents a square foot from 51 cents in the first quarter.

A handful of deals kept the commercial market afloat.

Earlier this month, Continental Development Corp., which dominates the 190th Street Corridor, bought Skypark Center, a 22-acre office park in Torrance from WHC Six Real Estate LP for $42.5 million. The 376,685-square-foot building is 80 percent occupied.

Also, University of Phoenix signed two leases for a combined 60,000 square feet at South Bay Centre from Arden Realty Inc. for between $1.60 and $1.85 per square feet full-service gross. (In a full-service gross deal, the landlord covers taxes, insurance and utilities.)

In Torrance, Kaiser Permanente Health Plan Inc. signed a 10-year, 38,000-square-foot lease in the Madrona Building from Southwest Value Partners, a San Diego commercial real estate company. Lease terms were $2 a square foot modified gross. (In a modified gross deal, the lessee covers some amenities such as janitorial services and electricity.)

Also in Torrance, Navcom Technology Inc., a unit of John Deere Corp., signed a $10 million, seven-year lease for 53,000 square feet at the former Epson America headquarters. The company is expected to move in mid-August.

Stephen Cramer, senior vice president at Colliers Seeley International, said the South Bay office market is still working off excess leases from the dot-com expansion in the late 1990s, when El Segundo became a favorite spot for tech ventures. The submarket had an overhang of roughly 1 million square feet of sub-leases, of which about 500,000 square feet has been absorbed. El Segundo has about 10.5 million square feet of office space altogether.

"We have another 12 months of absorption before we'll get to a healthy market again," he said.

John Ayoob, senior vice president at CB Richard Ellis, said he doesn't expect rents to decline much further.

Hopes for improvement are muted.

"More people are out looking for space and contemplating expansion," said Cramer of Colliers Seeley. "But 40 percent are in the market to renegotiate their leases, so it's all relative."

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