Small deals shore up market as absorption rises, vacancy falls. (Real Estate Quarterly--South Bay).

SMALLER deals drove the South Bay office market in the fourth quarter, although vacancies remained high.

Net absorption improved to nearly 128,000 square feet from negative net absorption of 29,201 in the third quarter, according to Grubb & Ellis Co. Part of the activity came from one relatively large deal, Molina Healthcare Inc.'s 66,000-square-foot lease at downtown Long Beach's Arco Center for $17 million.

Office vacancy rates dipped to 19 percent during the quarter from 19.5 percent during the previous three months. "In general the market is very quiet," said Bill Bloodgate, senior vice president at CB Richard Ellis Inc.

Other brokers agreed. "The general consensus is that we are in store for a slow market for most of 2003, at least for the first two or three quarters," said Jim Biondi, senior vice president at Grubb & Ellis. "Some people would say they expect things to pick up in the last quarter."

Some of the highest office vacancy rates in Los Angeles County could be found in the South Bay.

The LAX/Century Boulevard corridor near Los Angeles International Airport has always had a reputation for being a hard-to-lease area. For the quarter, the office market registered a 27.4 percent vacancy rate, the highest in the county, down slightly from 28.6 percent in the third quarter.

The county's second highest office vacancy rate was in El Segundo, which in the late 1990s became a favorite spot for tech ventures. El Segundo's office vacancy rate during the fourth quarter was 23.7 percent, a slight improvement over third quarter's 24.3 percent rate.

"El Segundo was one of the hottest sectors before the downturn in the economy," Biondi said. "There were big repercussions on that area. There were major tenants who gave back space during the third quarter."

TRW Inc. finished moving out of 65,000 square feet of office space at the LAX Business Center in El Segundo in the fourth quarter to consolidate into its large office campus in Manhattan Beach.

New office buildings that came on line last year in El Segundo were still looking for tenants. CrossPointe, a 170,000-square-foot structure developed by Overton Moore Properties on La Cienega Boulevard, is empty.

Kilroy Realty Corp.'s remodeled ninestory structure at 999 Sepulveda Blvd. had a couple of leases in the works but no transactions to report.

Continental Development Corp. still had only about 25 percent of its new Atrium at Continental Park buildings leased, said Richard Lundquist, Continental's president.

Continental wants to snag a couple of tenants searching for at least 25,000 square feet or more to fill up part of the 288,421-square-foot Atrium structures.

Government lease

While many companies were moving slowly on the office front, the government and medical companies helped give a boost to the market.

The National Transportation Safety Board signed a 10-year lease for 27,000 square feet at 5757 W. Century Blvd. near LAX. Lease terms were $1.35 a square foot full-service gross. (In a full-service gross deal, the landlord covers taxes, insurance and utilities.) Advanced Medical Management signed a seven-year lease for 18,600 square feet of space at 5000 Airport Plaza Dr. in Long Beach.

With mortgage rates at historic lows, companies were still searching for property to buy, particularly industrial property.

Dynasty Footwear, which sells specialty footwear, bought two properties in El Segundo: a 58,800-square-foot building at 800 N. Sepulveda Blvd. for $3.6 million from the Arthur Gilbert Trust, and an 111,000-square-foot building at 202 N. Nash St. from ATC Partners for $8.2 million.

While industrial sales were doing well in the South Bay, the industrial vacancy rate remained almost unchanged at 4.5 percent, compared with 4.6 percent in the third quarter and 4.5 percent for the like period a year ago.

"We pretty much stood still in the fourth quarter," said Terry Reitz, senior vice president for Grubb & Ellis. "Leasing is quite slow."

Lease rates, however, were unchanged at 55 cents per square foot. "Tenants know they have an advantage now, although it may be slight," said Dave Drummond, senior vice president at Colliers Seeley International. "Today's rates are going to be as good as they get for a while."

Monogram Industries Inc., which makes toilets for airplanes and mobile homes, signed a 7 1/2-year lease for 177,000 square feet of industrial space at 1500 Glenn Curtiss St. in Carson.

Terms of the deal were not disclosed. Meanwhile, industrial property prices are rising. "The one thing that has changed recently is that there are fewer properties available and more buyers than sellers," Reitz said.

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RELATED ARTICLE: Major Events:

* Patterson Dental, which distributes dental supplies, signed a seven-year lease for 16,000 square feet of space at 185 Douglas St. in El Segundo,

* Vantage Oncology Inc. signed a five-year lease for 5,060 square feet of office space at Continental Park in El Segundo. Terms of the deal were not disclosed.

* Leggett & Platt Inc., a manufacturer of metal shelving for retail and other businesses, signed a 90-month lease for 219,000 square feet.