Land costs and improvements sending rents on upward spiral. (REAL ESTATE QUARTERLY--San Fernando Valley and North County.

GIVEN the rising costs for office acreage and what landlords were paying for tenant improvements, experts said it was "no surprise" North County rental rates stayed on a sharp upward spiral in the third quarter.

Grubb & Ellis Co. reported that Class A asking rents rose seven cents, to $2.48 per square foot, across north Los Angeles County, which includes the Conejo, North San Fernando, Santa Clarita and Antelope valleys.

David Solomon, first vice-president with CB Richard Ellis Group Inc., said he expects office rentals to keep rising in Santa Clarita, for example, because most of the space is in new Class A product, "where the developers knew 12 months ago where the rates had to be to make their (tenant improvements) and building costs pencil."

Rents in the Valencia submarket, which was once an industrial stronghold but has tilted toward commercial use, rose nine cents, to $2.82 per square foot. That's nearly 40 cents more than the same period in 2005 and shows how quickly the market has matured, given its 1.9 million-square-foot base. By comparison, the north San Fernando Valley, which has more than triple the rentable space, saw Class A rotes plateau 33 cents lower, at $2.49 per foot.

Leasing totals have been notoriously volatile in shallow markets such as Santa Clarita and the third quarter held form. Vacancies dropped to 8.3 percent from 9.1 percent, while net absorption climbed more than 14,000 square feet to bring year-to-date figures to 113,158 square feet. That's 128,000 more square feet than what the submarket was absorbing at the same time last year.

Brokers said nearly half of Santa Clarita's 155,409 square feet of unleased space is in the new Opus Corporate Center, where Hall & Foreman Inc., a civil engineering firm, signed for 6,833 square feet of space at $2.65 per square foot gross.

One trend that could slow down the north L.A. office market is the pullback in new home building and sales. The Valencia submarket has been a magnet for firms that service residential builders. "Office demand related to home building should flatten out in North County by next year," Solomon predicted. "But anyone buying or building up there has probably anticipated the slow-down. The general feeling is that there's enough demand from other sectors to keep the market buoyant."

Case in point is Valencia's single largest commercial tenant, Princess Cruises, which has filled more than 300,000 square feet in the submarket and has been aggressively looking to tie up even more space as the firm's 2003 merger with Carnival Corp. created the largest cruise company in the world.

In the sales market, sources said Opus Corporate Center and Valencia Town Center, two prime Class A properties, were on the block, and would most likely trade in the $400 per foot range before the end of the year.

But the only deals of note were at 27209-27225 Camp Plenty Road in Santa Clarita. Mission Towers LLC purchased the 20,035-square-foot building from Alan Z. & Rise L. Barbakow for $6.2 million, or roughly $309 per square foot. Two Two Nine Two Four Lyons LLP sold a 17,306-square-foot office building at 22916-22924 Lyons Ave for close to $3 million. The buyer was Santa Monica-based Xeon Investment Corp.

Meanwhile, vacancies on the industrial side ticked up one-tenth of 1 percent across all of North County, but at 2.2 percent were identical to the same period last year. Asking rents rose one cent to 68 cents per square foot, while year-to-date sales and lease activity checked in with more 6.2 million square feet.

Industrial space in the north San Fernando Valley is so tight, brokers said buildings are practically in escrow before listings are announced. Aviation parts provider Ontic Engineering & Manufacturing Inc. signed a 10-year deal with the Rabinovitz Family Trust for 100,000 square feet at 20400 Plummer St. in Chatsworth. Overall consideration was valued at $7.5 million.

John DeGrinis, senior vice president for Colliers International in Encino, said the lack of new industrial parcels has driven up land costs to nearly $60 per loot in the North San Fernando Valley, and to more than $150 per foot for newly built product, just a few miles north in Santa Clarita. What development has occurred has been mostly in the small-building-for-sale inventory due to the lack of large, industrial-zoned tracts.

"There's nowhere left for the big box user, 50,000 square feet and over, to go in north L.A.," said DeGrinis. "The only land left is in the Antelope Valley and Tejon Ranch. The scarcity of product has had a dramatic impact on value and price appreciation."

Deals in Valencia included Beverly Hills-based Felsenthal Property Management's acquisition of two buildings within the new six building LNR Commerce Center in the Valencia Commerce Center. The 87,000-square-foot complex of buildings was sold for about $9 million.

Branam Entertainment leased a 43,492-square-foot building on Industry Drive in Gateway VI of the Valencia Commerce Center from the Ward Trust. The consideration of the lease was approximately $1 million Geffner

Major Events:

* Civil engineers Hall & Foreman Inc. signed for 6,833 square feet of Class A office space at the Opus Corporate Center, 25152 Springfield Ct., Santa Clarita. Terms were for five years at $2.65 per square foot gross.

* Mission Towers LLC purchased a 20,035-square-foot office building at 27209-27225 Camp Plenty Road in Santa Clarita for $6.2 million. The seller was a group led by Alan Z. & Rise L. Barbakow.

* Ontic Engineering & Manufacturing Inc. signed a 10-year lease with the Rabinovitz Family Trust for 100,000 square feet of industrial space at 20400 Plummer St. in Chatsworth. Overall consideration was valued at $7.5 million.

By DAVID GEFFNER

Contributing Reporter