There are still two markets in the South Bay.

Warehouse and industrial space is in high demand, while vast expanses of office buildings sit empty.

The area remains one of the hottest markets for industrial and warehouse space, with rental rates surging 13.2 percent from a year earlier, according to Grubb & Ellis Co. Meanwhile, brokers say that smaller industrial properties are changing hands at historically high prices.

The office market, which never recovered from the aviation bust and dot-com crash, showed signs of improvement. Vacancy rates fell measurably, and the market as a whole absorbed nearly a half-million square feet of space. Yet rents were stagnant, and the submarket still has the highest vacancy rate of any in L.A. County.

Most of the action was on the industrial side, where the South Bay's vacancy rate fell to 2.2 percent in the third quarter from 2.7 percent for the like period a year earlier, according to Grubb & Ellis.

Asking rents on industrial properties rose to 60 cents per square foot from 53 cents a year ago, and purchase prices rose even more. "We're virtually running out of small buildings for sale," said Jerry Evans, president of Lee & Associates in Gardena.

One of the largest deals in the third quarter was Vought Aircraft Industries Inc.'s sale of the 2.7 million-square-foot former Northrop site south of the Hawthorne Municipal Airport to MS Kearney Northrop Avenue LLC for $65 million. Vought, which will lease back 1.4 million square feet of space, is consolidating operations at the site.

Other transactions included Susa Partnership LP, principal operating subsidiary of Storage USA Inc., selling two buildings to a partnership controlled by Extra Space Storage Inc. of Salt Lake City. Extra Space bought a 140,000-square-foot building at 2101 E. Carson St. in Long Beach for $11.6 million and a building at 219 W. Alondra Blvd. in Gardena for $10.4 million.

Jesse Laikin, a principal at Lee & Associates, said that in the last 18 months, sales prices have jumped 40 percent to 50 percent, and nearly everything that gets listed sells within a week.

"The sale market is hot and on the leasing side, you have to scramble for product," Laikin said. "We look at the overall business climate and we just don't see any fundamental chinks in the market."

The overwhelming majority of transactions involve third-party logistics or distribution companies that are storing and shipping retail product going through the ports of Los Angeles and Long Beach, said Greg Dyer, who specializes in industrial projects in the South Bay for CB Richard Ellis Group Inc.

"The third quarter was another strong quarter of activity," he said, noting that 3.2 million square feet of industrial space was sold, putting the South Bay on track toward 9.2 million square feet of space for the year. "We haven't seen it this tight since 1999."

One of the largest industrial leases in the quarter was a five-year, $6.5 million lease signed by South Bay Logistics for 177,000 square feet in the Dominguez Technology Center in Carson. The facility is owned by Watson Land Co.

Broker Shan Lee of GVA Daum, who represented South Bay Logistics, said Watson agreed to build a second-story office and granted two months of free rent.

In another large lease, Chilean shipping company Agunsa Logistics & Distribution Inc. signed a five-year, $6 million lease to occupy a 150,350-square-foot building on the Alameda Corridor in Rancho Dominguez.

In the South Bay office market, vacancies fell to 18.5 percent in the third quarter from 20.1 percent in the previous three months and 19.3 percent for the like period a year earlier.

By far, the biggest improvement was in the El Segundo submarket, where net absorption totaled 315,837 square feet. Vacancies there fell to 18.7 percent from 23.1 percent a year earlier, getting a big boost from defense contractor Northrop Grumman Corp.

Northrop signed a four-year $20 million lease of 216,000-square-feet of space from Overton Moore Properties in the Douglas Technology Center, across the street from facilities Northrop already occupies.

Several submarkets in the South Bay keep lagging.

The two toughest areas for leasing activity continue to be office properties near Los Angeles International Airport and along Century Boulevard, where the vacancy rate hit 32.8 percent in the third quarter, up from 32.4 percent in the second quarter and 29.5 percent in the third quarter of 2004.

The 190th Street Corridor also remains dormant, with a vacancy rate of 24 percent, compared with 23.7 percent in the second quarter and 21.8 percent in the third quarter a year ago.

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