Industrial demand heats while office space market stays cool.

INDUSTRIAL and warehouse properties in the South Bay were snapped up in a flurry of activity in the third quarter as businesses bid up prices to be near Los Angeles International Airport and the ports of Los Angeles and Long Beach.

By contrast, the overbuilt office market remained one of the weakest in Los Angeles County, failing to show any signs of recovery even as other areas improved.

The South Bay office vacancy rate remained flat at 19.3 percent in the third quarter. unchanged from the previous three months, according to Grubb & Ellis Co.

The South Bay had just 12,721 square feet of net absorption, or the amount of new space leased minus space vacated, during the quarter. That was an improvement over the negative net absorption of 252.858 square feet in the year-ago third quarter, but represents a falloff from the April-June period, when 184.088 square feet were absorbed.

"We're still a ways from being healthy," said John Ayoob, executive vice president with CB Richard Ellis. "But we definitely have more tenants out in the market today than we had six months ago."

In one of the few significant deals of the quarter, CarsDirect.com took over 45,000 square feel of office space at 9090 Sepulveda Blvd. in El Segundo.

Meanwhile, the action was in the industrial market. The vacancy rate in the South Bay, the second-largest industrial market in Los Angeles County, was 2.7 percent, down from 3.3 percent in the second quarter and 3.4 percent in the year-ago period, according to Grubb & Ellis.

Sales and lease activity in the industrial market totaled 5.5 million square feet, up from 3.9 million square feet in the year-earlier period. That's more activity than the central L.A. and San Gabriel Valley industrial markets combined, even though the South Bay has less than half the space.

Year-to-date, sales and lease activity in the South Bay industrial market has jumped 80 percent to 13.6 million square feet, versus 7.7 million square feet in the first nine months of 2003.

Asking rents rose to 53 cents a square foot from 49 cents in both the year-ago period and the second quarter.

Both sales and leasing activity stayed red-hot in Carson. Torrance and Hawthorne.

In Carson. the Dominguez Hills Industrial Park snagged two new lessees: retailer Z-Gallerie, which signed a two-year lease on 149,654 square feet of space: and direct marketer Advo Systems, which signed a four-year lease on 120,024 square feet. Both leases went for 37 cents per square foot. Also in Carson, retailer Sit 'n Sleep took a 10-year lease on 207,000 square feet of space in the Main Street Distribution Center, for roughly 52 cents per square foot with an enticement of three months' free rent.

In the largest deal in the third quarter, Sunrider International Inc., an importer of consumer products from China, bought the last phase of the 17(l-acre Harbor Gateway Industrial Center for $64 million from Knox Partners LLC, a joint venture of RREEF and Fremont Development.

And three buildings were sold in the Exchange, a 105-acre mixed-use redevelopment of Northrop Grumman Corp.'s long-vacant aerospace facility in Hawthorne.

Cargo Ventures, a real estate operating company, bought two of the buildings for $28 million, bringing along BAX Global Inc., an Irvine-based supply-chain management company, as a tenant on 220,000 square feet of space as part of the deal.

Another transaction in the third quarter was AMB Property Corp.'s $22 million purchase of a single-story furniture warehouse three miles from LAX. The warehouse is being converted into a logistics center that will be leased out and is set to open in early 2005. The 280,000-square-foot building, located at 4000 Redondo Beach Ave., was sold by Redondo Property Holdings LLC.

"They're putting it back on the market for lease and activity is strong without even doing construction yet," said Terry Reitz, a Grubb & Ellis broker. "We expect to see some handsome rents going forward because we've absorbed so much space."

Major Events:

* CarsDirect took over 45,000 square feet of office space at 9090 Sepulveda Blvd. in El Segundo.

* Retailer Z-Gallerie and direct marketer Advo Systems took a combined 270,000 square feet at the Dominguez Hills Industrial Park in Carson, each at 37 cents per square foot.

* Sit 'n Sleep took a 10-year lease on 207,000 square feet of space in the Main Street Distribution Center in Carson for roughly 52 cents per square foot.

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