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Industrial Market Vacancies Soar in Q2

Rise in availabilities is largest on record, but moderated level of new construction may prevent further dramatic sllippage.

By John McCloud | Updated on July 29, 2009

The US industrial market defied expectations in Q2, but not in a way most observers wanted to see. Where the sector has a reputation for relatively moderate shifts in the midst of both up and down cycles, in the April-June period this year industrial market fundamentals took an unprecedentedly sharp turn for the worse.

According to Grubb & Ellis, the vacancy rate soared by 120 basis points in the quarter to 10.7%. Not only was this by far the sector’s largest single-quarter change in the 22-year history of the survey, it was also the largest vacancy increase this quarter among all four core property types. Reports from other brokerages show similar results. While CB Richard Ellis and Marcus & Millichap both found the rise a little less steep, the vacancy rates they reported were slightly higher – 12.4% according to the former and nearly 12% according to the latter.

The rise was not totally out of the blue, given that the previous Grubb & Ellis record was set in Q1 with a 70-basis-point increase. However, analysts say the steepness of the decline does not mean the industrial market is in worse shape than other sectors. Rather it reflects the fact the economic crisis was late in catching up with industrial users, as it took time for warehouses and distribution centers to empty of the backlog of orders.

Moreover, even as they emptied, many logistics tenants held on to the space, hoping business would recover. “Many space users have been finding large pieces of their warehouses go empty over the last two years,” says Terry Reitz, senior vice president/global logistics in the Torrance, CA office of Grubb & Ellis. “This space has heretofore been unmeasured because until they bring it to market it doesn’t hit the statistics.”

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