Finding space is a challenge in tightest market in L.A. county.

WITH the economy continuing to expand, vacancy rates for the Santa Clarita Valley's small but desirable office market plummeted during the second quarter, while the industrial sector continued to tighten.

Vacancy rates in the valley's 1.6 million-square-foot office market fell to 3.4 percent from 7.2 percent, the lowest of any submarket in the county, according to Grubb & Ellis Co.

Brokers said a variety of firms in the insurance, health care, mortgage, savings and loan and other service sectors, buoyed by the economy, renewed and expanded leases.

The positive market conditions have prompted construction of 228,000 square feet of new office product, but brokers say it could absorb a lot more.

The culprits are lack of space--and the greater financial gain that residential developers can realize in the growing area by building homes and condominiums.

"Land prices are so costly that if someone is able to acquire land, it won't give a developer the required return," said David Solomon, first vice president for office properties at CB Richard Ellis Group Inc. "Therefore, other uses such as multi-family and in some cases retail make more sense."

Asking prices for office space dropped to an average of $2.32 per square foot in the second quarter, from $2.43 during the January-March period. That's because most of the higher quality space in this small market--buildings that are centrally located, with good views and a lot of amenities nearby--have long been absorbed, leaving only the least desired and lower cost space on the market.

"The better space is more likely to disappear from the market and the lesser space is staying," said Solomon. "The population becomes so small that one or two (vacant buildings) can skew it heavily."

Insurance, health care, mortgage, savings and loan and other service sector companies continue to be the growth leaders in the office market. Among the standout deals, Opus West Corp. leased 10,720 square feet at 25152 Springfield Court in Valencia. The five-year deal with Progressive Insurance Co. was valued at more than $1.7 million.

Meanwhile, the far larger North County industrial market continued to see tightening, though at a more modest pace.

The vacancy rate fell to 3.2 percent from 3.5 percent as sales and lease activity hit nearly 2 million square feet, still off the torrid 3.1 million pace of the first quarter.

Developers respond

Industrial construction, where there is less of a conflict with residential development, continued with 1.8 million square feet under development. Brokers also note that tilt-up warehouse buildings can often be built in as little as eight months, which provides more of a comfort zone.

"It's tough to have that crystal ball and know how much supply will be needed in the future," said Gary Cohen, managing director in L.A. for Grubb & Ellis. "(But) we're aware of some projects that are breaking ground in the third and fourth quarters that are ideally positioned for immediate lease up."

Landlords are asking for 54 cents per square foot on industrial leasing deals, up just a cent from the previous quarter. But that could rise far more as available land gets scarcer.

And while industrial-zoned land is not under the same pressure, residential developers are seeking to tear down older warehouse and distribution space and replace it with retail and multi-family residential.

"Overall, you are continuing to see downward pressure on industrial vacancies," said Craig Peters, senior vice president of the industrial sector for CB Richard Ellis.

As a result, developers are taking risks.

Last month, LNR Property Corp. broke ground on a six-building project totaling 236,000 square feet on Industrial Drive in Valencia Commerce Center. The $20 million investment, which is slated for completion in December, will be for sale or lease.

And J.S.B. Development Inc. started construction on a $15 million, three-building project on Tourney Road in the Valencia Corporate Center. The space will be available in October.

"Most interest is people wanting to buy buildings," said Peters. "They are trying to take advantage of the low interest rates that are out there right now. In a lot of instances, the mortgage payments are actually less then what the lease rate is."

Among the major industrial deals, personal care products maker Levlad Inc. leased a 117,000-square-foot building at the Valencia Commerce Center for five years at $2.2 million.

Bel-Air Lighting Inc. signed a five-year lease for 189,250 square feet at the Valencia Commerce Center for $5.5 million.

Westbrass Co., which makes and distributes plumbing products, paid $2 million for 3.2 acres of land on Industry Drive in the Valencia Commerce Center. The North Hollywood firm plans to break ground by the end of the year on a $5 million, 70,000-square-foot manufacturing and distribution facility.

Global Motorsports Inc., which sells used motorcycles and accessories, leased 64,607 square feet for four years at the Valencia Commerce Center for $1.5 million.

Major Events:

* Opus West Corp. leased 10,720 square feet at 25152 Springfield Court in Valencia. The five-year deal with Progressive Insurance Co. was valued at more than $1.7 million.

* Levlad Inc. leased a 117,000-square-foot building at the Valencia Commerce Center for five years at $2.2 million.

* Bel-Air Lighting Inc. signed a five-year lease for 189,250 square feet at the Valencia Commerce Center for $5.5 million.

* Westbrass Co., which makes and distributes plumbing products, paid $2 million for 3.2 acres at the Valencia Commerce Center. The firm plans to build a $5 million, manufacturing and distribution facility.