According to the report, widespread rent rollbacks in Los Angeles have yet to be felt because transaction volume is low. But landlords are cutting rates to fill newly constructed buildings, which will put pressure on rents in older buildings.
The report went on to say overall, conditions deteriorated in 2001, but the industrial market held up better than the office market. The construction pipeline will be substantially depleted by mid-year, setting the stage for a market turnaround in the second half of 2002.
An economic recovery appears imminent, led by improving conditions for manufacturers and retailers. Expect the vacancy rate to peak around 9% by mid-year, well below the 13.7% peak during the last recession. The pace of the economic recovery is likely to be muted, however, extending the favorable climate for tenants through the end of 2002.
In the Riverside and San Bernardino markets, sale and leasing activity and construction are all strong, and rents have dropped only slightly. Development is migrating eastward to Riverside, Moreno Valley and Perris.
Nationwide, R&D-flex vacancy rose from 7.18% in the yearend 2000 to 11.54% at the yearend 2001. The market suffers from a combination of the tech wreck and the fact that it is a low-cost alternative to the office market, which itself saw rents slide in 2001. The increase of 436 bps is almost twice as steep as the overall industrial market increase of 233 bps but not as steep as the office market, where vacancy rose by 563 bps during the year.
Construction is declining rapidly thanks to the short lead-time required to develop industrial projects. Last year saw the completion of 122 million sf. Much of the 70 million sf still under construction should be completed by mid-2002. The office market, by contrast, still has 89 million sf in the construction pipeline, which will not empty out until yearend.
With the industrial construction pipeline largely depleted by midyear the market should be poised to enter the recovery phase of the real estate cycle when leasing and sales activity begins to chip away at the supply overhang.
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