Market finally notices effects of economic downturn. (Real Estate Quarterly -- San Gabriel Valley).

THE one-two punch of Sept. 11 and the economic slowdown has proven too much for San Gabriel Valley real estate.

The overall market, which had been resilient last year despite the tech bust, finally saw both its industrial and office markets go south during the first quarter of 2002.

The vacancy rate in the 157.9 million-square-foot industrial market rose to 3.8 percent from 3.5 percent in the prior quarter, the first uptick since the first quarter of 2001, according to Grubb & Ellis Co. A vacancy rate of less than 4 percent is nevertheless quite healthy.

Matters were more dire for the 9.2 million-square-foot office market. The vacancy rate jumped to 14.2 percent from 12.4 percent. The rate had been in decline throughout 2000 and 2001, with the exception of one quarter.

"The first quarter was not a good quarter," said John Minervini, a senior director at Cushman & Wakefield Inc. "Demand has slowed down. It's very simple."

Because it is dominated by a variety of smaller businesses-- often Asian-owned and involved in import/export or tech -- the area had been viewed as largely immune from the greater economy's troubles.

Still, the San Gabriel Valley is not an economic island. Gross industrial leasing activity fell to 1.4 million square feet from 1.7 million in the prior quarter. The office market gave back 98,000 square feet of space, after absorbing 257,000 in the prior quarter.

Even so, brokers said they saw activity pick up in the last few weeks of the quarter. Also holding up were sales of properties, spurred by relatively low interest rates. "People seem to be adjusting. The world has not come to an end," said Hank Darnell, a vice president with Majestic Realty.

Coming onto the industrial market in the first quarter were the first buildings of Majestic's Grand Crossing Business Center (formerly called Industry East), near the intersection of the Pomona (60) and Orange (57) freeways.

The 400-acre park, sitting on the largest remaining undeveloped parcel of land in the City of Industry, will total more than 6.5 million square feet of manufacturing, warehouse and distribution space.

The initial three buildings are 775,000 square feet, 100,000 square feet and 70,000 feet. Darnell said Majestic has entered into negotiations for a large portion of the 775,000-square-foot building.

And in the Valley's largest industrial lease for the quarter, Majestic cut a deal to build 170,000 square feet of space at the park for Kelly Paper, which is moving its corporate offices from Los Angeles. The 10-year lease was for 42.1 cents triple net, which requires the tenant to pay maintenance, taxes and insurance.

In other large industrial lease deals, Western Pacific Storage Systems took 165,000 square feet at 300 East Arrow Highway for 72 months at 36 cents triple net; Dura Freight Lines leased 100,000 square feet from Majestic on East Business Parkway at the Fairway Business Park in Industry for three years at 36 cents triple net; and Hearthstone Properties Pomona, LLC leased 70,000 square feet on Telstar Avenue in El Monte at the Flair Business Park.

On the sale side, Strouds Acquisition Group purchased a 159,000 square-foot-building at the Plantation Business Park in the City of Industry for $9 million, where it will be consolidating its headquarters and distribution operations.

Also, VDAP Properties, LLC bought a 152,000 square foot building in the Industry Business Center on Valley Boulevard from for $10.5 million from Voit Cal Partners I & II LLC in an investment deal.

East end activity

In the office market, which was soft overall, the most activity occurred on the east end of the valley, where the office developments are newer -- and centrally located for some businesses.

"There is a lot of consolidation of businesses between Orange and Los Angeles County," said Ron Heim, a broker with Trammell Crow Co., who noted the Orange (57) Freeway on the Valley's east end offers a direct link to Orange County.

In that area, Dacor Corp. took 42,000 square feet of space on Bridge Gate Drive at the Trenton Corporate Center in Diamond Bar for seven years at $2.17 full service gross, which requires that the landlord to pick up utilities, insurance and other major expenses.

And in a large sale deal, the Downtown Exchange Corp. bought a 45,000 square foot building at the Cameron Office Park in West Covina for $4.3 million from the Silagi Family Trust.

[GRAPH OMITTED]

RELATED ARTICLE: San Gabriel Valley

Major Events:

* Majestic Realty Co.'s Grand Crossing Business Center came on line in the City of Industry with the construction of three buildings. The 400-acre park, located near the intersection of the Pomona (60) and Orange (57) freeways, will total 6.5 million square feet when built out.

* Kelly Paper, which is moving its corporate office from Los Angeles and consolidating operations, leased 170,000 square feet of space at Grand Crossing.

* Dacor Corp. leased 42,000 square feet of office space at the Trenton Corporate Center in Diamond Bar for 84 months at $2.17 full service gross.