"Although market conditions are expected to soften over the next few quarters, when the economy slows, the demand for logistic space still tends to hold up well," says Bob Bach, the firm's senior vice president and chief economist. "Manufacturers need to store excess inventories while their sales slow, in turn boosting demand for warehouse space."
According to the report, the industrial market as a whole is faring better than the logistics subsector. Though the vacancy rate for overall industrial also rose last year, it jumped only 110 basis points and topped out at 8.8%, three points lower than the logistics market. Furthermore, with logistics properties factored out, industrial market vacancies would have risen only 40 basis points and ended the year at 7.6%.
In addition, the report notes, Class A logistics vacancies rose even more than the logistics sector in general, increasing 330 basis points to 15.6%. Grubb researchers attribute this to the impact of new construction, but with the logistics construction pipeline emptying rapidly, they say the variance between Class A and other logistics product will narrow. Some 98 million square feet of logistics space was delivered to the market in '08, nearly four times the 26 million square feet absorbed. By contrast, only 34 million was in construction at year end, and very little is scheduled to enter the pipeline for '09.
Despite the spike in vacancies, the report says asking rental rates have suffered only a modest decline. In fact, it says logistics rental rates have changed very little during the decade. The average asking rate in '00 was $4.21 a square foot compared with $4.19 a square foot in '08. But the apparent stasis masks a decline early in the decade following the dot-com crash, which was succeeded by a gradual recovery. In the opinion of the report's authors, part of the reason the recovery was not faster or greater than it was, was the gradual increase in the size of logistics properties. The average size rose from 221,657 square feet in '00 to 362,039 square feet in '05, before falling back slightly over the past three years. Another reason for the less than robust rise in rents is that new construction is taking place on cheaper land farther from major urban areas, enabling developers to lower rates to attract tenants.
In regard to the future, the report notes that demand for logistics space tends to hold up better than demand for other industrial space when the economy slows because manufacturers need to store excess inventories, boosting demand for warehouse space. In addition, Bach observes, businesses look at logistics space as a productivity enhancer, an integral part of their supply chain strategies, rather than a burden. Nevertheless, Bach admits market conditions will soften over the next few quarters. He says even Class A logistics space could see several quarters of negative net absorption for the first time this decade.
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