The good news is that the 2Q saw the bottom of absorption and the country is seeing some growth in the existing industrial lease properties.
- Erik Johnson
Industrial Recovery Not Expected Till Late 2010
New reports from three leading real estate firms agree it will be several more quarters before US markets see a significant increase in demand for industrial property. At the same time, they also generally agree that the worst of the availability increases is over.
Both the 2010 National Economic and Property Market Forecast from Jones Lang LaSalle and Third Quarter Global Market Review from CB Richard Ellis report the availability rate for investor-owned industrial product rose about 50 basis points to 13.5% in Q3. Colliers International, which does not include properties with scheduled vacancies in its tabulations, calculates the actual vacancy rate at 10.53% in its Q3 report.
According to CBRE, this marks the eighth consecutive quarter of rising availability and the highest availability rate since the company began industrial market data. The brokerage says 56 of the 61 markets it tracks showed increases from the previous quarter. Despite the continued rise in availability, the rate of increase has moderated.
According to JLL, the rate of contraction in property market indicators will continue to moderate throughout next year, though the firm expects competition for active tenants to remain intense, with concessions offering a mix of free rent and tenant improvement packages. Despite the rise in vacancies, rents experienced a smaller decline than might have been predicted, with estimates ranging from Colliers' figure of 0.9% to JLL's 1.7%.
The three firms also report a continued pattern of negative absorption, with calculations ranging from 47.3 million square feet to 53.3 million square feet. This is approximately three times the level of negative absorption observed in Q2. But none of the firms anticipates a similar level in Q4. As Colliers points out, warehouse construction dipped to record low in the quarter, with completions totaling just 11.6 million square feet, about one fifth of the 55.5 million square feet recorded in Q4 '07. The firm expects next quarter's numbers to go even lower, with only 22.4 million square feet of new product under way as of Sept. 30.
Though the overall US economy appears to be picking up, the three real estate companies say the improvement will at best prevent the market from falling further. As Colliers observes, "[T]he business landscape remains somewhat fragile, limiting any sort of recovery." Consequently, the industrial market is expected to continue to deteriorate, though at a slower rate, into early next year. On the other hand, the brokerages anticipate stabilization around midyear, with very modest growth possible in the second half.
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