"We're sensing a palpable level of negative sentiment in the warehouse leasing market at the present moment," says Ross Moore, senior vice president and director of market & economic research at Colliers. "That said, many markets continue to post very strong fundamentals."
Of the 50 markets Grubb tracks in detail, 32 posted rising Q1 vacancy rates, while 18 posted declines. Among large US markets, vacancy was lowest in land-constrained and trade-fueled Los Angeles County at 1.6% and highest in Memphis at 16.1%. Markets posting vacancy increases over one percentage point during the quarter included California's Inland Empire, Nashville, Las Vegas, Oklahoma City and Phoenix. Only two markets, Sacramento and Northern Indiana, saw their vacancy rates decline by more than a percentage point.
But according to Colliers, despite the rival firm's finding of a decline in Northern Indiana, the Midwest markets in general were among the strongest in terms of healthy absorption levels thanks largely to growing export demand for US-made machinery and parts. "The export sector remains a bright spot, and going forward, we will keep vigilant watch on the housing market, retail sales and markets linked with the booming commodities sector," says Moore.
Grubb senior vice president and chief economist Robert Bach agrees the nation's export sector provide's the market's saving grace. According to Grubb, exports were up nearly 21% in dollar volume from February to February. "The economy appears to be poised on the cusp of a recession if not already in one," he says. "A recession certainly is not good news for commercial real estate, but thanks to global growth and the weak dollar, exports are booming... Exports help manufacturers in particular, while global trade in general creates demand for warehouse-distribution space."
Both brokerages attribute the increase in vacancies to the delivery of a large amount of new space. By Grubb's account, warehouse completions totaled 37.4 million sf, versus 21.1 million sf absorbed. Colliers calculates total industrial completions at 46.1 million sf. Though the figure was 17% below the 55.5 million sf completed in Q4, it was 25% above the 36.8 million sf total for Q1 '07.
Both firms also foresee the pattern continuing through the rest of the year. "The construction pipeline is set to deliver some 121 million sf of space over the next few quarters, a period during which demand for that space will be lack-luster," Bach observes, adding he expects the vacancy rate to end the year between 8.5% and 9%. According to Colliers, 36 warehouse markets saw vacancies go up in Q1, while 15 saw them decrease.
According to Grubb, while rental rates increased sporadically during the just-ended expansion cycle, overall gains were muted. The brokerage points out the average asking rate for warehouse and distribution space has risen only 10% since bottoming out in Q2 '04. It pegs asking rates for all types of industrial space at $5.87 per sf triple net, a 2.3% gain over the same period last year. Colliers pegs rents at $5.69 a sf.
"Soft market conditions will likely bring a period of flattening rental rates, where the average inches up one quarter and down the next," says Bach. "Overall, growing international trade is likely to rescue the industrial market from the worst effects of the economic downturn, be it a recession or just very slow growth that feels uncomfortably like one."
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