Deals rare as market owns area's highest vacancy rate. (Real Estate Quarterly--South Bay).

ONCE one of the county's hottest office markets, the South Bay now has the unenviable status of having the area's highest vacancy rate.

During the technology boom, developers capitalized on the demand for more office space by quickly putting up buildings, primarily in El Segundo. Most of those came on line this year, but the boom is over and many of the potential tenants have since folded. Others had to downsize, and some left in search of lower rents. Several of the new buildings are completely empty or barely occupied.

The result is that during the second quarter the South Bay office vacancy rate mushroomed to 19.4 percent, compared with 14.2 percent for the like period a year ago, according to Grubb & Ellis Co.

"It is one of the highest vacancy levels we have seen in many, many years," said Jim Biondi, senior vice president for Grubb & Ellis. "El Segundo has been the hardest hit."

For example, Continental Development Corp. finished constructing the five-story Atrium building in February at the company's Continental Park along Rosecrans Avenue in El Segundo.

The 288,000-square-foot building is only 20 percent occupied.

"The top two floors are off the market waiting for that big tenant out there somewhere," said Robert Inch, vice president of marketing for Continental, whose park encompasses 3 million square feet of office and commercial space.

Other projects facing similar fates are Douglas Technology Centre and CrossPointe Centre, projects recently built by Overton Moore Properties of Gardena. The two El Segundo structures together total 386,000 square feet and remain empty. Likewise, the nine-story, 135,000-square-fot Kilroy Building built by Kilroy Realty Corp. in El Segundo is still vacant.

Consequently, the office vacancy rate in El Segundo area reached 23.1 percent in the second quarter, compared with 12.5 percent for the like period a year ago.

Secret is out

"There's no more hiding it," said Grafton Tanquary, senior vice president at CB Richard Ellis. "We are in a challenging time."

Deals have been rare. Those few tenants in the market tend to be companies with a lot of economic muscle, such as mortgage and financial companies and aerospace and defense firms.

Northrop Grumman Corp. took the 335,000 square feet of office space at 201 N Douglas St. in El Segundo that software company Candle Corp. left. Candle downsized and moved to a new location, signing a lease for 100,000 square feet at Pacific Corporate Towers in El Segundo.

Another hard-hit area is the LAX/Century Boulevard corridor, which long has proven to be a tough office market to fill. Twenty-eight percent of the offices are now vacant along the strip bordering Los Angeles International Airport.

The wide open market means companies looking for new space, particularly ones whose leases are up within the next year, are shopping around for bargains.

Others are waiting for the economy to turn around before they venture to increase their staff and their space.

"We are entering a period of what I call rental rate erosion," said Stephen Cramer, senior vice president with Colliers Seeley International. "When we see vacancy rates in the 14 percent to 16 percent range, the rates begin to soften."

While the average lease rate in the South Bay is $2.23 a square foot for Class-A office space, many new tenants are able to negotiate rents that hover around $2 a square foot, commercial brokers said.

While the office market languishes, the industrial market is doing nicely. Second quarter vacancy rates for the popular South Bay industrial market dipped to 4.1 percent, from 4.5 percent for the like period one year ago.

But it has been a constant churn. "As fast as we are leasing space, there are people leaving space behind," said Terry Reitz, senior vice president at Grubb & Ellis.

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RELATED ARTICLE: South Bay

Major Events:

* NYK Logistics signed a lease for 425,000 square feet at the ProLogis Park in Torrance.

* Candle Corp. signed a tease for 100,000 square feet for four years at Pacific Corporate Towers at 100 N. Sepulveda Blvd. in El Segundo.

* Northrop Grumman Corp. signed a lease to occupy 335,000 square feet of space at 201 N. Douglas St. in El Segundo.