US industrial market defies the odds with 3Q surge

Real Estate Weekly,  Nov 14, 2007  

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The industrial market performed surprisingly well in the third quarter, defying the housing slump, the credit squeeze and slower economic growth.

According to latest reports from Grubb & Ellis, net absorption totaling 45 million square feet was the strongest quarterly performance this year and well ahead of the 30 million square feet delivered to the market.

The vacancy rate was unchanged at 7.6%. It has been remarkably stable for five consecutive quarters, fluctuating by less than 10 basis points.

Third quarter vacancy was lowest in Los Angeles at a negligible 1.6% and highest in Memphis at 16.4%, among major U.S. markets.

Over the past four quarters, vacancy has plummeted by 410 basis points in Wichita, the beneficiary of robust global demand for aircraft. Austin and San Antonio tightened by more than 200 basis points, though neither is a major logistics hub. At the other extreme, vacancy rose by 280 basis points in Palm Beach County, Fla., followed by Seattle, Las Vegas and San Diego.

Construction activity set another new peak for this cycle, ending the quarter at 143 million square feet. Riverside--San Bernardino led all markets with just over 23 million square feet in the pipeline. Dallas-Fort Worth, with 18.5 million square feet underway, is mounting a challenge to the long-dominant Inland Empire.

The average asking rental rate for available warehouse/distribution space ended the quarter at $4.61 per square foot per year triple net, a gain of 3.6% from a year ago. Rent was highest in the Long Island, N.Y. market at $8.61, followed closely by the two South Florida markets of Palm Beach and Broward counties. Tenants in search of a bargain would do well to look in Columbus and Memphis, major logistics hubs with average rental rates of $2.66 and $2.69, respectively. Rental rates for available R&D/flex space continue to increase, ending the third quarter at $10.37 per square foot per year triple net. This is a gain of 8.2 percent over the past year. Credit the burgeoning tech sector and increasing office rents, which are pushing cost-sensitive office users into R&D/ flex space.

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While the office market is showing a few cracks from the housing slump and the credit squeeze, the industrial market seems none the worse for wear. The big question hanging over the market is whether this can last.

The possibility of slower retail sales growth and decelerating imports due to the falling dollar could weigh on demand for distribution space.

On the other hand, the weak dollar is supporting demand for manufacturing and general industrial space, while the booming tech sector is boosting demand for R&D/flex space. The big driver of future demand is whether or not the economy can avoid a recession, and at this writing, it looks like the chance of a recession is elevated but less than 50/50. Expect the industrial market to remain largely in balance over the next few quarters.

COPYRIGHT 2007 Hagedorn Publication
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