By SHELLY GARCIA Staff Reporter With demand for industrial space continuing and supply under tight control, land prices in Valencia are rising dramatically. Brokers and developers estimate the cost of land for industrial development has risen to $12.50 a square foot, a stunning 47 percent increase from prices of $8.50 only three years ago. So far at least, most developers remain bullish on the area, confident that the land crunch in the San Fernando Valley will continue to push companies northward. But some are scaling back development plans for the coming year, preferring to wait and see what effect the price increases have on lease rates. They worry that if prices continue to spiral, the migration of companies to Valencia could come to a standstill. “I think if land prices and rental rates get too exorbitant, people will look for alternatives other than the Santa Clarita Valley,” said David Mgrublian, managing director of Investment Development Services Inc., an L.A. developer that is completing a 40-acre project in Valencia. Last year alone, Newhall Land and Farming Co. sold 111 acres of land. The firm itself is developing the sprawling 3,100-acre Valencia Gateway industrial center, where the vacancy rate now stands at only 3.5 percent. That track record, along with the continued paucity of available land in the San Fernando Valley, is fueling expectations that higher prices will not slow demand for development. “(Developers) are running out of places in the San Fernando Valley, and basically that developer demand is going to the Santa Clarita Valley,” said Jim Linn, senior vice president with Grubb & Ellis. “So basically you can say that demand for the Santa Clarita Valley has increased due to the lack of supply in the San Fernando Valley.” With virtually no land available for development and a vacancy rate in existing buildings hovering at 5 percent in the San Fernando Valley, developers and tenants have flocked to Valencia. Some 2.4 million square feet of space has been developed in Valencia Gateway since 1992, with the activity picking up considerably in the past two years. Another 2 million square feet is currently in various stages of construction. In some cases, buildings are leasing faster than developers can construct them. Only one of the four buildings just leased by Pharmavite Corp. from developer IDS has actually been completed, and the last of the buildings will not be finished until next year. “The absorption rate (the amount of space occupied minus the amount vacated) year to date is over 1.1 million square feet,” said Craig Peters, senior vice president at CB Richard Ellis Inc., which has represented Newhall Land and Farming in many of its deals. “That compares to all of 1998 with 1.5 million square feet of space absorbed. And 1998 was a record year.” New development, which has brought the number of companies now situated in Valencia to 774, has also helped to bolster the market. Once a frontier on the outskirts of the San Fernando Valley, Valencia now has a community of businesses that are, in and of themselves, generating a need for additional goods and services. “I think that the area up there has reached a critical mass, so it’s self-sustaining,” said John Lewis, president of the Lewis Co., a Santa Monica-based developer. Lewis says he has been shopping for land in the area. “You’re not just pioneering. The population there is generating industry and commerce that needs to be supported.” The strong market has already pushed lease rates well above 1996 levels, when the Los Angeles real estate market started to rebound. Rents on larger buildings have jumped 30 percent since 1996 to about 56 cents a square foot, and rates on smaller buildings rose 24 percent to about 61 cents a square foot. “Lease rates started a recovery before land started to recover,” said Peters. “You’ve been seeing pretty good increases in lease rates and building sale prices, and that’s reflected in land values.” Officials at Newhall Land and Farming say market conditions, including demand, and the amenities available in Valencia have contributed to the price increases. “We tend to be very market driven in terms of our product, and Valencia is an extremely desirable place to do business,” said Marlee Lauffer, a spokeswoman for the company. “It’s conveniently located. There’s a great labor pool. When people look at relocating to Valencia, I think they look at the entire community.” But for all the amenities the abundance of housing, the community’s reputation for safe streets and good schools, and the modern conveniences of the industrial facilities the perception lingers that Valencia is the stepchild of the San Fernando Valley, a place outside the core of commerce in Los Angeles. There are many companies that would have forsaken the amenities in Valencia if they had been able to find space large enough in the San Fernando Valley. And many others that relocated did so mainly because of the economics of the area. Land and leases have been available at bargain prices. To some, that means growth in Valencia could hit a wall if prices continue to escalate. “Valencia has been a lower-cost alternative in a master-planned community for industrial space,” said Mark Leonard, a principal at Trammel Crow Co. “But it is somewhat removed from L.A. and has had some price sensitivity. At a certain price point, people are not going to pay more to be out at Valencia.” Leonard said no one knows what that point is. Right now, he and others still see room for additional development, largely because Valencia’s prices still fall well under those of the San Fernando Valley, where land when it is available is selling at $14 a square foot or more and where rents for all types of industrial buildings average 58 cents a square foot. Valencia’s newer industrial buildings also have amenities, like clearance height and greater electrical capacity, that are simply not available in the older properties that make up the majority of inventory in the San Fernando Valley. But at some level, additional price increases could drive development to other areas such as the Inland Empire or Simi Valley. “With the rise in land prices reaching thresholds where people would consider moving completely out of the area, there needs to be caution on the part of developers not to overbuild the area,” said Mgrublian at IDS. As a result, developers like Mgrublian said they will continue to seek deals in Valencia, although the next IDS project is likely to be smaller than its current development.