The downward trend will give flex building owners the opportunity to show how flexible their space is by changing from office use to warehouse use, Grubb & Ellis says.
During the tech boom, many companies took flex space because it was cheaper than regular office space. With the bust, much of that space has come back to the market, the Grubb & Ellis report says. "From its peak occupancy of 82.8% in the first quarter of 1999, flex occupancy has fallen 20% in three years to a record low of 66.2%," the report says. Flex space vacancies account for more than half of the total vacancy rate even though it is less than a quarter of the total market's industrial space.
The tech slowdown also hurt other parts of the industrial market. Companies, crippled by sagging computer and semiconductor sales, cut jobs and gave up space.
The warehouse/distribution market had a negative absorption of 361,407 sf in the first quarter while general industrial space did a 97,154-sf backslide. The overall industrial vacancy rate was 14.9% at the end of the quarter. General industrial space, the market's biggest sector with 24.4 million sf, had the lowest vacancy rate at 5.6%. The warehouse/distribution market, which has 23.6 million sf, had a 13.3% vacancy rate. R&D/flex, with 13.9 million sf, had a 33.8% vacancy rate.
Grubb & Ellis expects flex rents to continue in a free fall while bulk and general warehouse rates will soften slightly. Flex rates average $7.80 per sf, just $1.68 per sf higher than bulk space rates.
That narrowing of rents may nudge flex owners to refit their space to accommodate bulk users, Grubb & Ellis says, "while accepting deals for bulk rates in order to fill their vacancies. As a result, vacancy will level by the close of 2002--at the earliest--for the entire industrial market."
The Grubb & Ellis report says that changes in flex space will open opportunities for warehouse/distribution building owners. "As tenant demand recovers and the tight bulk market becomes even tighter, lease rates have room to grow since area tenants' only other option is to move to flex space where local landlords are accustomed to certain price levels," researchers conclude.
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