South Bay market shows signs of life in 2nd quarter; Watson Land plans 'spec' industrial project for Carson.

Despite widespread gloom over continuing aerospace and defense layoffs, the South Bay industrial real estate market displayed unexpected strength during th second quarter.

One landowner is even designing a speculative industrial building. Watson Land Co. has plans for a 170,000-square-foot building on an eight-acre site in the Watson Industrial Center South in Carson.

"We've really looked at the market in segments, in terms of quality and space," said Anthony Manos, vice president of marketing and leasing for Watson Land. "We've found there's a real (shortage of) larger industrial buildings with larger yard capability."

Watson hopes to start construction of the building in 1995.

The South Bay market encompasses the Los Angeles International Airport submarket, El Segundo, Hawthorne, Torrance, Carson and along the coast to Long Beach.

The market's industrial vacancy rate at the end of the second quarter had dropped to 11.9 percent, down from 13 percent at the end of the first quarter. More than 4.4 million square feet of industrial space was "absorbed" during the quarter, double the prior quarter's absorption rate. Absorption refers to the net change in occupied space during a given time period.

Brokers said the firming of the industrial market was due to landlords dropping their lease rates and to a major lease inked in Torrance. That deal -- the largest South Bay industrial lease of the second quarter -- involved furniture manufacturer Virco Manufacturing Corp. signing a 10-year lease for 560,000 square feet of space.

One of the largest South Bay industrial sales in the second quarter involved Microtek Lab Inc., a scanner manufacturer, buying a 99,000-square-foot, two-story research-and-development building in the Redondo Beach Business Court for under $30 a square foot, one broker reported. Microtek bought that foreclosed building from Massachusetts Mutual Life Insurance Co., which had taken the building back from OMA Redondo Beach Associates. Last year, Microtek acquired a 126,000-square-foot building in that same complex from the same lender.

As of the end of the second quarter, monthly lease rates for Class A industrial space in the South Bay ranged from 29 to 32 cents per square foot. Class B rate are in the 25-cents range and older manufacturing buildings are leasing in the high teens, brokers said.

"The pricing structure on Class A product has been at its cheapest level since the recession (began)," said Kirk Johnson, vice president and industrial broker with the South Bay office of CB Commercial Real Estate Group Inc.

While the South Bay's industrial market performed strongly during the second quarter, its office market continued to be weak.

The weakness seems especially acute in El Segundo, where Rockwell International Corp., Hughes Aircraft Co. and Northrop-Grumman Corp. all have had planned layoffs.

"They're vacating space faster than we're able to fill it up right now," conceded Grafton Tanquary, a broker at the Torrance office of CB Commercial. "Literally, every quarter we see a continued vacating of buildings and leases are expiring. That trend is going to continue for the next few years."

On June 20, Hughes Aerospace & Electronics said it plans to cut about 3,400 job over the next two years, many of which are at its military electronics plant in El Segundo.

On the horizon, brokers said they see new, non-aerospace tenants increasing their amount of space ever so slightly, as the surrounding markets in downtown and west Los Angeles tighten.

The South Bay office vacancy rate at the end of the second quarter stood at 24. percent, a slight improvement from 24.4 percent at the end of the first quarter according to CB Commercial.

Net absorption, the amount of space moved into during the quarter minus the space vacated, plummeted from a positive 241,320 square feet during the first quarter to a negative 160,241 square feet during the second quarter. That was due mainly to tenants vacating more than 374,000 square feet of space in El Segundo, brokers said.

The average monthly asking rate for Class A office space during the second quarter was $1.42 a square foot, according to CB Commercial's report.

The rates ranged from $1.25 to $1.95 per square foot in greater Long Beach, and $1.65 to $1.95 in prime areas of Long Beach, such as the World Trade Center and Kilroy Airport Center, brokers said.

The greater Torrance area is commanding monthly office lease rates of $1.25 to $1.50 per square foot. El Segundo space is a bit higher, starting around $1.50 per foot. Rates around the Los Angeles International Airport area and along Century Boulevard are much lower, often under $1 a square foot for Class A space, according to brokers.

Kim Landis, director of leasing for R&B Commercial Management Co. Inc., which manages 488,000 square feet of office space on West Century Boulevard, called that submarket "very volatile" and said tenants still call the shots.

Tenants are shopping the landlords and asking for "incredible" concessions, she said. Many are receiving monthly rents as low as 85 cents per square foot, with free parking and tenant improvements thrown in. The space should be leasing for closer to $1.10 to $1.15, with paid parking, Landis said.

"These tenants are asking for the moon and the stars," she said. "They know tha this is a very aggressive market, and they are expecting very aggressive deals and opportunities. If they can't get it from one landlord, they're going to go down the street and get it from another."

But at least one landlord isn't willing to deal anymore.

Hapsmith Praxis Ltd., owner of Union Bank Center at 5200 W. Century Blvd., has stopped marketing the 227,000 square feet of available space it has in its 330,000-square-foot building. It terminated its contract with Seeley Co. for leasing representation earlier this month, said Craig Meyer, vice president and manager of Seeley's Culver City office.

"They said Seeley gets an 'A,' but their decision is that the market has gotten so ugly, mostly subleases under a dollar a foot, that they were non-economic transactions," Meyer said. "They're taking the semi-mothball approach to marketing. If a transaction comes their way, they'll consider it."

One of that area's biggest office deals this year could be the yet-to-be-inked deal by Chicago-based DeVry Institute. DeVry apparently is close to signing a lease for 98,000 square feet in a two-story building at Kilroy Airport Center i Long Beach. The building formerly was occupied by McDonnell Douglas Corp. The value and term of the pending lease were not available by press time.

Kimball Wasick and Bob Alperin, principals at Matlow-Kennedy Commercial Real Estate Services in Los Angeles, said they saw two trends developing in the second quarter: a re-allocation of space from aerospace to general office uses and a restructuring of equity in the market.

"A lot of the buildings have gone back to lenders, and large buyers of pools of debt are spinning those (individual properties) into new investments," Alperin said. "But there's still a lot of bad activity. The market in Torrance and LAX is still very soft."

Some significant office deals in South Bay during the second quarter included:

Hawthorne Savings & Loan Association leased 42,000 square feet at Continental Terrace on Rosecrans Avenue in El Segundo. The six-year lease is valued at $5 million.

Pyramid Information Services Inc., a computer networking and data processing company, signed a three-year lease for 30,000 square feet at 6171 Century Blvd. Total consideration: $500,000.

CB Commercial's Information Technology Group moved from El Segundo to 190th Street in Torrance, signing a 10-year lease for 25,000 square feet in Gateway Towers. The lease is valued at more than $4 million.

The City of Los Angeles' construction engineering division leased another 18,00 square feet on the 14th floor of Pacific Corporate Towers in El Segundo. The city already has 65,000 square feet there. The five-year lease is valued at $1. million.