Industrial lease rates drop as Rent Concessions Made. (Real Estate Quarterly - Mid-Cities).

INDUSTRIAL real estate in the Mid-Cities has become a tricky business. In the fourth quarter, the vacancy rate fell to 5.3 percent from 7.6 percent in the third quarter, while prices dropped a penny to 50 cents a square foot, according to Grubb & Ellis Co.

"Activity has decreased and we're seeing the lease rates decrease due to a lack of demand," Jim McFadden, a vice president with Grubb & Ellis. "And we're seeing more sublease space coming one the market, which has an impact on (the price of) vacant space."

Many brokers classified it as a rough period, with rent concessions as well as lower lease rates by some landlords.

McFadden also said his fax machine continues to spew out notices from building owners advertising lower prices. With interest rates at record breaking lows, all parties seem to agree that much of the activity in the future will consist of sales. Why would anyone pay rent when they could pay a comparable rate for a mortgage?

"(People) are taking advantage of low interest rates because it makes sense economically," said Sam Chu, an associate at CB Richard Ellis.

McFadden agreed, adding sales are particularly attractive for tenants looking for a large amount of space.

"The overall demand, especially for leased product, has decreased," he said. "And the biggest drop-off in demand has occurred with tenants looking for more than 100,000 square feet."

One significant fourth quarter sale was at 10506 Shoemaker Ave. in Santa Fe Springs. HomeAmerica Distribution bought the 101,000 square foot building for just over $6.6 million from the Zucherman Family Trust.

With regards to industrial leases, much of the action in the fourth quarter took place in Cerritos.

Spectrum Plastics signed a four-year lease for 113,000 square feet at 12850 Midway Place in Cerritos for just over $2.4 million. Also, Seegott Inc. signed a seven-year lease for 66,000 square feet at 14104 Arbor Place for just under $2.6 million. And Triple A Container signed a $5.6 million 10-year lease for 109,000 square feet at 16069 Shoemaker Ave.

In Buena Park, American Bedding signed a three-year lease for 53,360 square feet at 6725 Eighth St. for just under $790,000.

Softening market

Looking to the future, McFadden expects the market to keep softening, though he doesn't expect dramatic changes. "It's becoming a market more favorable to tenants," he said.

Meanwhile, the Mid-Cities office market rebounded from the third quarter, when deal flow slowed considerably. "A lot of it has been smaller, but it's consistent," said David Giglio, an associate vice president at Grubb & Ellis.

Avenue Mortgage leased 5,766 square feet at 14241 E. Firestone Blvd. in La Mirada at a cost of $522,000 for five years. Auto Club Credit Union signed a 10-year, $590,000 lease for 3,280 square feet at 18327 Gridley Road in Cerritos.

Trader Publishing Co. signed two leases in Santa Fe Springs, both at 10100 Pioneer Blvd. The deals, both for three years, were for $79,000 and $69,000 for 1,244 square feet and 1,094 square feet, respectively.

Giglio said the resumed leasing activity was the result of an end of the year scramble by tenants who had been leaving decisions for the last minute.

He also said he expects to see conditions improve in the office market in the second half of 2002. "You started to see (at the end of last year) a lot of decisions being tabled," Giglio said. "We're starting to see activity and I think you'll start to see more deals happening."

While activity is picking up, Giglio holds that it may take a while for the market to reach pre-recession levels. "I expect the first quarter not to be as strong as last year, but then for it to pick up," he said.

Since it's a predominantly industrial market, the typical Mid-Cities office tenant is usually a locally driven business that conducts business within the industrial market, with significant interest in both L.A. and Orange Counties. Much of the office space is for back-office dealings -- sales and support activities. Office leases tend to be on the smaller size, between 5,000 square feet and 10,000 square feet, according to Giglio.

"It's always been a good area," said Giglio. "But it's not a downtown market -- you're not going to see high-end law firms or companies trying to project a high-end image. Those types of tenants are not what the Mid-Cities are all about."

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RELATED ARTICLE: Mid-Cities

Major Events:

* HomeAmerica Distribution bought a 101,000 square foot building at 10506 Shoemaker Ave. in Santa Fe Springs for just over $6.6 million

* Spectrum Plastics signed a four-year lease for 113,000 square feet at 12850 Midway Place in Cerritos for just over $2.4 million.

* Trader Publishing Co. signed two three-year leases for $79,000 and $69,000, both at 10100 Pioneer Blvd. in Santa Fe Springs.

* Triple A Container signed a $5.6 million, 10-year lease for 109,000 square feet at 16069 Shoemaker Ave. in Cerritos.