Vacancies Continue to Rise as Professional Trades Downsize

Staff Reporter

Job growth in financial services and aerospace spurred some sales and leasing activity in the South Bay office market, but not enough to turn the tide against rising vacancies as lawyers, consultants and accountants continue downsizing.

"It just seems as though several tenants have more space than they need," said Bob Morris, executive vice president at NAI Capital Commercial. "There are companies that had 15 people, and now they have five or six people. They expanded and now they're trying to downsize."

Overall, South Bay office vacancies rose to 20 percent in the first quarter from 19.7 percent in the October-December period. In the year-ago first quarter, the vacancy rate was 18.3 percent.

During the first quarter, 96,722 square feet of space was put back on the market, roughly equal to the negative net absorption of 94,041 logged during the fourth quarter.

"The problem is we don't have enough demand and there's just too much supply. It sounds very basic, but it's the reality of the office market," said Jim Biondi, senior vice president at Grubb & Ellis Co.

The LAX/Century Boulevard corridor remains the worst office submarket by far in Los Angeles County, and its vacancy rate rose further, to 31.6 percent from 29.9 percent the previous three months and 27.2 percent in the first quarter of 2003.

One constant throughout the South Bay has been the growing strength of sales and the continued weakness of leasing, as investors are still turning to real estate as an alternative placement.

"The office leasing activity has been at an average pace, not a fast pace," said Morris. "But there's a lot of activity with sales."

Many of the big deals involved purchases of buildings.

Atlanta-based Wells Real Estate Investment Trust II Inc. bought the Manhattan Towers in Manhattan Beach for about $90 million, said Ben Johnson, a spokesman for Wells. The two Class-A office buildings have a combined space of 310,000 square feet. Younan Properties Inc. purchased the 257,000-square-foot Pacific Pointe building on 190th Street for $35.5 million.

In Hawthorne, Lithographix Inc. paid more than $12 million for a 249,000-square-foot building that was formerly used by Northrop Grumman Corp. for production. Lithographix will move its Gardena headquarters there.

Industrial building

Biondi said industrial activity in the quarter fared much better than office. Although the area had the highest amount of vacant space with 9.1 million square feet available, sale and lease activity shot up during the first quarter.

About 4.3 million square feet of industrial space was sold or leased in the January-March period, up 61.4 percent from the 2.6 million square feet that changed hands in the fourth quarter. In the year-ago first quarter, 3.9 million square feet changed hands.

The industrial vacancy rate, however, increased slightly to 4.1 percent in the first quarter from 4 percent in the fourth quarter of 2003. "There's been quite a bit of new construction," Biondi said.

One of the biggest industrial deals in the quarter was USC Intermodal Services' five-year contract for more than 136,000 square feet of space in the Watson Industrial Center South in Carson. The contract is worth more than $4 million.

Stephen Cramer, senior vice president at Colliers Seeley, said the industrial side of the real estate market far outshone the office side in the South Bay.

"The industrial market is actually in very good condition," Cramer said. "Rates have been at a bargain this year."

Even so, he said, negotiations that took place during the first quarter will lead to second-quarter office deals. There are a number of transactions with aerospace and financial services companies that are pending, as companies are looking for more space for their expanding businesses, he said.

"There appears to be job expansion, and typically you don't lease office space unless you're hiring people or relocating," he said.

Major Events:

-Wells Real Estate Investment Trust II Inc. bought the Manhattan Towers, totaling about 310,000 square feet, for about $90 million.

-Younan Properties Inc. bought Pacific Pointe on 190th Street for $35.5 million. The building was the company's second large office purchase along the San Diego Freeway in three months.

-Lithographix Inc. bought the 249,000-square-foot former Northrop Grumman production building in Hawthorne for more than $12 million.

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