Warehouses Filling Up, Brightening Industrial Space

CoStar Group

One often-overlooked corner of commercial real estate showed signs of stabilizing in the fourth quarter, as healthy demand for warehouse space helped push down the industrial vacancy rate.

The activity buoyed several major markets, such as the Inland Empire in Southern California, Phoenix and Dallas-Fort Worth, as owners slowly filled the glut of space left from the recession. Warehouse absorption was about 40 million square feet during the fourth quarter, a number “that looks like it comes from the 2005-‘07 expansion years and not the sluggish 2011,” says Rene Circ, director of research, industrial, at CoStar Group’s Property & Portfolio Research. About 50 million square feet remains to be absorbed to return to pre-recession levels.

With drab buildings in outlying areas, industrial real estate lacks pizzazz but is nonetheless a key indicator for the overall economy. So economists say it makes sense that tepid economic growth will be reflected in demand for industrial space. The vacancy rate in the fourth quarter was 9.5%, down a few ticks from the prior quarter and from 10% in the first quarter, according to CoStar.

The news was mixed for rental rates, according to data from Reis Inc., with the asking annual rent at $4.66, basically unchanged from the prior quarter but down from $4.72 in the fourth quarter of 2010. Rents are projected to rise slightly this year, and vacancy should continue its downward trend.

But new construction of industrial space remains way below historical averages, and outside of a few markets such as the Inland Empire, it seems unlikely that developers will start building again soon in big numbers. “The market is on the road to recovery,” says Ryan Severino, a senior economist at Reis. “I don’t think anyone expects it to be a particularly robust recovery.”

Manufacturing could be a bright spot for industrial leasing this year. Economic activity in the manufacturing sector expanded in December for the 29th consecutive month, according to a survey by the Institute for Supply Management. In fact, the rebound of the U.S. auto industry helped make Detroit the “comeback kid” in 2011 for industrial real estate. Detroit ranked either fifth or sixth in each quarter of 2011 in total space absorbed, according to Mr. Circ. But if there’s a boost from factories, the big deals are still likely to be distribution and logistics tenants signing hundreds of thousands of square feet to move consumer goods.

“I would say that the general consensus in the industry would be that we are past the bottom and we are going up from there,” said Mr. Circ. (credit to m, strozier, wsj)


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