Historically, the researcher says, economic downturns have a much greater impact on larger assets as businesses scale back in the face of falling consumer demand, and the current period is no exception. She notes the availability rate for assets larger than 350,000 sf slowly began climbing in Q2 2007, rising to rise to a near record 12.7%. By comparison, she continues, mid-sized buildings have experienced continued declines in availability, while availability levels for small assets under 100,000 sf have remained stable.
According to Stone Mortimer, the difference is just becoming apparent but will widen over time. As she points out, the majority of new completions in the past few years has involved large buildings, and the number of such completions continues to rise even as demand for this type of space has flattened. Furthermore, she adds, some 70% of new buildings at the larger end are leased rather than corporate owned, with the overall availability currently at about 17%.
"While a large portion of industrial space is typically owner-occupied, this trend has changed for the large warehouse sector, which remains particularly vulnerable to economic slowdown and weakening demand," observes Stone Mortimer. At the same time, she emphasizes, net absorption remains relatively evenly distributed among the different asset classes and the large rental warehouse sector has yet to experience weaker demand on an annualized basis. Nonetheless, she maintains the large warehouse sector remains the most vulnerable to weaker demand.
If there is a positive in the situation, she remarks, it's that new supply remains contained relative to historic levels. Consequently, despite rising availability rates and slowing absorption, rents are holding steady in the majority of markets. In addition, Torto Wheaton does not foresee a prolonged or deep recession, limiting potential damage to the large-warehouse sector.
"The largest institutional investors typically seek the Class A, or large, new distribution or logistics parks, viewing this asset class as a long-term play, and they are still investing despite possible tighter lending standards and a weakening economy," she comments. "We feel confident...that the industrial market will not suffer the same fate it did in 2001. Our view is that, although demand is weakening, absorption will remain positive but below historic trends, through 2009."
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