Already-High Office Vacancies Get Worse as Tenants Reshuffle

Staff Reporter

A weak leasing market in El Segundo, downtown Long Beach and central Torrance cast a pall on the South Bay's third quarter commercial and industrial vacancy rates.

Vacancies rose to 19.4 percent in the July-September period, compared with 19.1 percent in the previous three months and 19.5 percent for the third quarter in 2002, according to Grubb & Ellis Co.

The LAX/Century Boulevard corridor turned in the worst performance of any submarket in the Los Angeles region, with a 28.2 vacancy rate, up from 27.2 percent in the prior quarter, due to two major events.

First, Computer Associates left the Herbalife building, vacating 60,000 square feet, and moved into 160,000 square feet in the nearby Howard Hughes Center, part of the Marina/Culver City submarket. Second, an owner-occupied building at 9800 Sepulveda Blvd. came on the market with 101,000 square feet of vacant space.

"The third quarter definitely took a hit," said Dave Coe, a senior vice president at Grubb & Ellis.

El Segundo, with 10.5 million square feet of commercial space, improved slightly but still logged a 25.8 percent vacancy rate, while Carson had the best showing in the South Bay market, with an 8.5 percent vacancy rate.

"Until the general economy picks up we're just going to slowly chip away at vacancy rates," said Alex Rose, director of development for Continental Development Corp., which manages Continental Park, a series of commercial buildings along the South Bay's Rosecrans Avenue corridor.

Negative net absorption hit 576,205 square feet year-to-date, with 252,858 more square feet being vacated in the third quarter than newly occupied. Net absorption is the amount of new space leased minus space vacated.

The biggest property sale in the third quarter went to Colton Co., which paid $12.2 million for a 104,000 square foot building at 11 Golden Shore St. in Long Beach.

On the leasing front, 24-Hour Fitness signed a 15-year, 21,500-square-foot deal near LAX, and Vineyard Bank of Rancho Cucamonga signed two 10-year leases for a combined 16,000 square feet of space in Manhattan Beach. In addition, Specialty Coffee Association of America moved into 10,500 square feet of space in Long Beach.

Steve Solomon, a senior vice president at CB Richard Ellis, said he expects a lack of momentum to continue through the first half of 2004.

Some brokers said rental rates have not fallen enough in the South Bay to attract tenants from other submarkets, although there appears to be some movement for lower-rent Class-B space.

Average asking rents for Class-A space remained flat in the third quarter, at $2.13 a square foot. The market has also been hurt by 10-year leases signed in the early 1990s coming up for renewal in an equally soft market.

"There's been a lot of attrition with companies giving back space," said Jim Jandro, another senior vice president at CB Richard Ellis. He said the market has become a "landlord war zone," because owners are offering free rent and incentives to close deals.

The industrial sector fared much better in the third quarter with the vacancy rate falling to 3.4 percent, compared with 3.9 percent in the second quarter and 4.6 percent in the like period a year earlier.

One of the largest industrial leases involved FMI International, an apparel logistics company, which signed a seven-year deal with SSR Realty Advisors to take on an additional 513,108 square feet at the Port Los Angeles Distribution Center in San Pedro.

FMI already occupied 411,699 square feet at the master-planned 87.5-acre business center at 400 Westmont Drive, which is now fully occupied.

Two big sales were completed in the third quarter, including the $9.4 million purchase by Cosway Corp., a skin care company, of a 177,000-square-foot building in Carson.

ZNet Shipper, a warehouse management firm, spent $5.6 million for a 114,000-square foot building in Carson.

Overall, sales and leasing activity in the industrial sector rose to 4.3 million square feet, compared with 2.9 million square feet in the second quarter. Asking rents fell to 46 cents a square foot from 49 cents in the second quarter.

Major Events:

- Team One signed a 10-year, 64,242-square-foot lease at 1960 E. Grand Ave. in El Segundo with landlord Lowe Enterprises in a deal valued at $17.5 million.

- Colton Cos. purchased a 103,634 square feet building at 11 Golden Shore St. in Long Beach as an investment for $12.2 million.

- FMI International signed a seven-year lease with SSR Realty Advisors for an additional 513,108 square feet at the Port Los Angeles Distribution Center in San Pedro.

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