Developers Zero In on an Evolving South Bay

Commercial real estate service firms and developers are sharpening their focus on the Los Angeles South Bay, where two companies have opened commercial brokerage offices in recent weeks, a real estate investment trust has announced one of the region’s most extensive office renovation projects and some of L.A. County’s largest industrial building projects are underway.

The South Bay is a series of office and industrial neighborhoods stretching from Century Boulevard near Los Angeles International Airport through El Segundo and Torrance and south to Long Beach. Once known for an abundance of empty buildings abandoned by the aerospace industry, it has evolved in recent years into a popular destination for companies squeezed out of the Westside by high rents and a lack of space.

Brokerages Insignia/ESG and Newmark of California both launched new South Bay branches in the last month, citing the increased pace of activity there as the impetus for their expansions.

The renovation project by El Segundo-based Kilroy Realty Corp., a $35-million remodeling of 999 N. Sepulveda Blvd. in El Segundo, is one of a number of office construction projects undertaken in the South Bay in recent years, including such new developments as Arden Realty’s Howard Hughes Center in Westchester.

Phoenix-based Opus West Corp. recently began construction on a four-story, 126,000-square-foot speculative office building at Grand Avenue and Nash Street in El Segundo. Called Grand Avenue Corporate Center, the development is scheduled to be completed in the third quarter of this year.

Other office projects are planned in the South Bay, among them buildings of 170,000 square feet and 217,000 square feet to be developed by Overton Moore Properties, which also is building a 1.9-million-square-foot industrial center in San Pedro called Port Los Angeles Distribution Center. Other large industrial projects in the market include Dominguez Technology Center in Carson, where Carson Cos. last year began the first phases of construction on more than 3 million square feet of buildings.

Developers say they are responding to the influx of new businesses into the South Bay, where the amount of occupied office space grew by a near-record 1.7 million square feet last year, according to a report from Colliers Seeley International.

About 10% of the South Bay’s 31 million square feet of office space is vacant, a rate that’s considered healthy, according to reports from commercial real estate brokerages.

“The South Bay has benefited for some time because of the tight market and high rents on the Westside,” said office broker Bruce Schuman of Julien J. Studley Inc. “But the market has changed a bit in the past few months. There is more space available on the Westside, so that might soften the South Bay a little.”

Over the long term, Schuman said, the South Bay has the potential for considerable growth because, unlike the Westside, it has land available for new office buildings.

The South Bay industrial market is one of Los Angeles County’s largest, accounting for more than 200 million square feet of the county’s 1 billion square feet of industrial space, according to broker John Schumacher of CB Richard Ellis.

About 6% of the South Bay industrial space is vacant, Schumacher said, an indication of a healthy market in which demand remains strong despite changes in the economy.

“We’ve got good activity, but the number of active prospects in the market is less than it was at this time last year,” Schumacher said. “A year ago, if there was a building available, there might have been three or four offers on it, so tenants had to react quickly. Right now, tenants know there is less competition so they are not feeling as much urgency to sign deals.”

Also, Schumacher said, many tenants “are being more cautious in their approach to expansion.”

The slowing rate of growth is a “natural cooling,” not a downturn, Schumacher said. “It would be unrealistic to expect that lease rates and sales prices were going to increase 20% per year the way they did the past two years,” he said.