Surging demand for warehouse space near the ports of Los Angeles and Long Beach has created an unusual situation for the South Bay: The industrial vacancy rate is so low that companies are having a tough time finding space.

At the same time, commercial activity has picked up in the South Bay's long-suffering office market. Herbalife Ltd. and Teledyne Technologies Inc. recently signed new leases that could spark a rebound in the 190th Street Corridor and El Segundo sub-markets.

Still, the South Bay's industrial market continues to be the main focus of developers' interest. With industrial vacancy rates of less than 3 percent, some real estate brokers say the vibrant economy and low interest rates are pushing industrial rental rates through the roof.

"It's great for the landlords, but it's sort of unhealthy for companies because there's nowhere else to go," said Craig Poropat, a principal at Lee & Associates, an independent commercial real estate brokerage.

The South Bay's industrial vacancy rate rose slightly in the fourth quarter to 2.8 percent, up from 2.6 percent a year ago, and 2.2 percent in the third quarter, according to Grubb & Ellis Co.

In the past year, industrial rents have jumped more than 20 percent to an average of 65 cents per square foot, up from 54 cents per square foot a year ago, according to Grubb & Ellis. Much of that increase is attributed to developers tearing down dilapidated properties and replacing them with new, cavernous warehouses that are leasing at much higher rates.

One of the largest leases of the year was Northrop Grumman Corp.'s five-year $23 million lease at 222 West Sixth Street in San Pedro from Tutor Saliba Corp.

CTSI Logistics, a unit of Saipan-based Tan Holdings Corp., signed a 10-year lease, worth an estimated $11.5 million, on a 152,000-square-foot building in the Harbor Gateway Center from Boeing Realty Corp.

And Noble Distribution Systems signed a nearly $10 million, six-year lease on a 250,000-square-foot former Big Lots store in Compton from A & B; Properties Inc.

Pods, a self-serve mini-storage firm, signed a five-year $3.5 million lease on 100,000 square feet in Compton from IDS Real Estate Group. And Aloha Freight Forwarders, which specializes in freight services between Hawaii and the U.S., signed a 10-year lease on 83,000 square feet in Compton from Oakmont Realty Co. for an estimated $5.5 million.

"We had a huge quarter," said Jeffrey S. Morgan, senior vice president at CB Richard Ellis, who cited the amount of container traffic coming into the ports as the primary driver of low industrial vacancy rates.

In addition, a new trend has emerged in which developers are turning former industrial sites into large retail centers.

Developers recently broke ground on Plaza El Segundo, a 425,000-square-foot converted site on Sepulveda Boulevard just north of Rosecrans Avenue that was formerly occupied by Honeywell International Inc.'s specialty chemicals division. The site's main anchors Borders, Cost Plus, Best Buy, Whole Foods and Linens 'n Things are expected to open by year-end.

In addition, Target Corp. has purchased the former DiCarlo Bakery property on Gaffey Street in San Pedro for $18.7 million.

"The redevelopment of all these industrial and commercial properties is because they hold much higher value being converted to retail," Morgan said, noting that retail leases are more lucrative than high-density industrial space.

The conversion of various industrial sites in the South Bay could help some submarkets rebound.

The South Bay's fourth quarter office vacancy rate fell to 18.2 percent, down from 20.6 percent a year ago, and 19 percent in the third quarter, according to Grubb & Ellis.

The vacancy rate in the LAX/Century Boulevard submarket fell dramatically in the fourth quarter to 30.5 percent, down from 36.7 percent a year ago. El Segundo's vacancy rate in the fourth quarter fell to 18.2 percent, down from 22.2 percent a year earlier, and Torrance's dipped to 10.3 percent, down from 16.5 percent in 2004.

Brokers said the area is getting noticed because tenants in West Los Angeles are being priced out of the market and are heading south, where leases are cheaper.

After nearly two years, Herbalife, the weight management and nutritional product company, finally signed a 10-year lease to take over the former Viking Office Products headquarters on 190th Street and Vermont Avenue. The lease on 185,000 square feet is worth an estimated $41 million.

Engineering and IT services firm Teledyne signed a 125,000-square-foot lease at 501 Continental Blvd. from Alliance Commercial Partners for an undisclosed sum.

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