Strong Quarter Gives Way to Concern as Economy Fades.

THE San Gabriel Valley industrial market remained resilient in the third quarter despite the accelerating economic downturn. But few think it will hold up as well in the fourth quarter, and already the smaller office market is showing signs of strain.

The 156 million square foot industrial market had the distinction of being the only sub-market in the county to see its vacancy rate dip for the quarter, to 3.6 percent from 3.8 percent. And while that's off from the historic low of 2.8 percent recorded in 2000, it's the lowest it's been for the year, according to Grubb & Ellis Co.

But the trend is not expected to continue.

That rate was achieved despite a slowdown in gross sales and leasing activity that has steadily dropped to 2.1 million square feet in the third quarter, from 2.2 million square feet last quarter and 3.8 million square feet in the fourth quarter of 2000.

What's kept the vacancy rate down has been the lack of open space for new projects and, thus, the dearth of new construction -- quite the opposite of the boom that has been going on next door in the in land Empire.

"We don't have an overbuilding situation, and we have really good healthy demand," said Jim Center, senior vice president at Grubb & Ellis.

At the same time, the submarket has remained the cheapest in Los Angeles County. Through the year, rents have held steady at 42 cents per square foot.

Among the reasons perennially cited by the broker community for the industrial market's resiliency is its diversity, with a broad base of small to mid-size companies involved in everything from distribution to assembly in both high-tech and traditional industries.

But it also suffered last quarter for not having plentiful space.

Best Buy Co. Inc. was looking for 360,000 square feet of space for a distribution and services center and was unable to find it, so it decided to take it in Chino, said Phil Lombardo, senior vice president at Trammell Crow Co.

Even so, Lombardo said the economic downturn, along with the double whammy of the terrorist attacks and ensuing war, have created a nervousness among brokers fearing a slackening of demand. Sublease space is coming on the market faster, and users are starting to expect that they should get more concessions and get better deals than in past years.

"Everybody is a little bit nervous. They are not quite as bullish," he said. "They're putting off buying that new car until they see what next week, or next will bring."

In the biggest deal of the quarter, California Community News, a subsidiary of Tribune Co., leased 325,000 square feet at the Irwindale Business Center, one of the few new industrial parks in the San Gabriel Valley, for 10 years at 38 cents triple net The company, plans to establish a sorting, inserting g and printing operation there.

Intercon merchandising Source Inc., a gift importer leased 2 87,000 square feet of space on Seventh Avenue in Industry, backfilling a warehouse that was vacated. The 71/2 year lease is at 32 cents triple net.

Hydra Warehousing & Consolidating, a third-party I logistics company, leased a new 156,000-squa e-foot spec building on Lomitas Avenue in L Puente for 10 years at 44 cents triple net.

And Fresh point of California, a distributor of perishable food products and a unit of Sysco Corp., lease 98,000 square feet of the former Hughes Family Markets distribution facility in Irwindale.

The five-year lease at 66 cents triple, net means that the 650,000 square foot center Hughes vacated in 1997 after it was bought by Ralphs Grocery Co. is now 90 percent leased. It is now called the Los Angeles Regional Distribution Center.

In the far smaller 9 million square foot office market, the slackening economy was partly responsible for a vacancy rate that shot up to 14.8 percent from 13.2 percent.

There was a negative net absorption rate, as the market gave back 141,000 feet with 122,000 square feet under construction. At the same time, Class-A asking rents inched up to $2.03 from $2.02.

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San Gabriel Valley

Major Events:

* Tribune Co. subsidiary California Community News leased 325,000 square feet at the Irwindale Business Center, one of the few new industrial parks in the San Gabriel Valley, for 10 years at 38 cents triple net.

* Intercon Merchandising Source Inc., a gift importer, leased 287,000 square feet on Seventh Avenue in Industry for 7 1/2 years at 32 cents triple net.

* Hydra Warehousing & Consolidating, a third-party logistics company, leased a new 156,000-square-foot spec building on Lomitas Avenue in La Puente for 10 years at 44 cents triple net.