San Fernando Valley's industrial sector firms, office sector softens.

Despite a growing trend by large companies to flee to more-modern buildings in developing areas such as the Santa Clarita Valley, the older, earthquake-battered industrial structures in the San Fernando Valley continued to sell and lease in the first quarter.

The industrial vacancy rate in the San Fernando Valley went down to 10.3 percent, from 11.5 percent at the end of last year, according to CB Commercial Real Estate Group Inc. The office market, on the other hand, took a beating this quarter.

On the industrial front, the East Valley submarket is seeing heavy expansion by companies serving the film industry, while the West Valley is experiencing growth by electronics firms, said Lew Horne, who heads the industrial properties division at CB Commercial.

"For the first time in four years, we've seen some price-increasing," Horne said. "It's the best market activity we've seen in probably three years."

The biggest sale of an industrial property in the San Fernando Valley during the first quarter took place in Sylmar, where the 175,000-square-foot Rowe Furniture plant at 15860 Olden St. was purchased by Spears Manufacturing, which makes PVC piping. Another big deal in Sylmar involved Ansett Industries, which plans to relocate from its current Sun Valley plant into a 50,000-square-foot building at 12675 Encinitas Ave.

In Chatsworth, the MCRB Service Bureau, previously located in two 20,000-square-foot buildings, consolidated into a single 70,000-square-foot structure at 9171 Oso Ave. The lease was signed in record time thanks to cooperation from Los Angeles city officials, who expedited the normally glacial approval process, said broker Mike Woods with Grubb & Ellis Co.

Toxic hurdle

Environmental contamination remains one of the biggest deterrents to further industrial development in the San Fernando Valley, industry sources said. Many large sites are virtually impossible to market because cleanup issues have yet to be resolved, said Mike Howard with Grubb & Ellis. And potential buyers often seek huge indemnifications from sellers, guaranteeing against loss if operations should be shut down in the future for environmental cleanups.

"We've had some big deals fall apart recently over indemnification," Howard said.

Still, because there has been virtually no new industrial construction in the San Fernando Valley for at least three years, existing buildings are filling fast, and some companies have been willing to risk taking over contaminated properties. The few newer structures, especially in the Conejo Valley, tend to go quickly when they come on the market.

A good example might be the Volkswagen of America building at 5388 Sterling Center Drive in Westlake Village. Although Volkswagen fully renovated the 53,000-square-foot industrial structure just three years ago to house an emissions-testing facility and its regional headquarters, the company announced recently that it plans to vacate most of the building and seeks a tenant to sublease about 35,000 square feet.

"I've had as much activity on that one in the last two weeks as any new site I've had for years," Howard said.

Office market softens

The office market doesn't look quite as promising. The office vacancy rate in the San Fernando Valley went from 15 percent at the end of 1994 to 16 percent at the end of the first quarter of this year. Net absorption - the net change in occupied space - went from a positive 258,963 square feet in the fourth quarter to a negative 90,444 square feet in the first quarter. That means office tenants vacated 90,444 more square feet of San Fernando Valley space than they moved into during the quarter.

Vice President Nancy Stark with CB Commercial said that much of the vacant space that showed up on the market in the early months of 1995 consisted of buildings that were taken off-line in the aftermath of the Northridge earthquake in January 1994. Repairs put some of those empty buildings back on the market early this year.

The office market, like the industrial market, is seeing heavy demand for scarce Class A space coupled with increasing vacancies at smaller, older buildings, brokers said. The East Valley and Conejo Valley continue to be hot office submarkets, while Sherman Oaks and Encino, which contain several newly reconstructed office buildings that had been damaged in the earthquake, still have plenty of vacancies.

"Space availabilities in the East Valley submarket are so limited that entertainment and communication companies wanting to be in the market cannot find space," reported researcher Madalyn Seyer with Grubb & Ellis. "Nearby Glendale has benefited from the overflow - during the last year the vacancy rate has plummeted."

When real estate brokers talk about the East Valley, they're often referring to Burbank and Glendale, which the Business Journal categorizes as the Tri-Cities market, along with Pasadena. Nonetheless, genuine East Valley communities such as North Hollywood saw some big deals in the first quarter, including a lease for 30,000 square feet at 4123 Lankershim Blvd. signed by Amblimation, a joint venture between MCA Inc. and Amblin Entertainment.

Retail sector perking

Retail activity was also brisk in the first quarter. In Woodland Hills, AMC Entertainment Corp. bought the long-vacant I. Magnin building in the Promenade Mall on Topanga Canyon Boulevard and plans to completely redevelop the property into 108,000-square-foot, 16-screen movie theatre, according to retail consultant Nancy Williams with Grubb & Ellis.

In the Fallbrook Mall at the corner of Victory Boulevard and Fallbrook Avenue in Canoga Park, the former Sears store is to be split by three new tenants that signed leases in the first quarter, K-Mart, Ralph's and Burlington Coat Factory.

In Northridge, where dozens of stores were devastated by last year's earthquake, reconstruction began early this year on the Levitz Furniture store at 19350 Nordhoff St. and the adjacent Best Products store, Williams said. And construction recently began on a 16,000-square-foot Supercrown store at the corner of Tampa Avenue and Nordhoff Street.

"The economy is getting better, and nobody is moving out right now except for Sears (in the Fallbrook Mall in Woodland Hills)," Williams said.

In North Hollywood, Home Depot began construction in April on a 100,000-sqaure-foot warehouse store at 11600 Sherman Way, which is to be its fifth outlet in the San Fernando Valley.