Some areas of the country are clearly worse off than others. In Central and Northern New Jersey, for instance, the market has benefited from restructured rents and competitive incentive packages, but the current lag in demand will make it difficult to offset additional negative net absorption.

This year, JLL predicts that rents will continue to drop in the submarkets exposed to over-construction, which has led to around one million square feet of un-leased spec product. Meanwhile, other port-centric submarkets are now emerging as distribution hubs, competing with the traditional centers of activity.

"From a fundamental standpoint, the market is excellent due to its close proximity to Manhattan, the port in Elizabeth and a strong regional distribution market, but I have never seen such a precipitous drop in rental rates or landlords taking such an aggressive position relative to incentives and free rent," says Hasbrouck Heights, NJ-based Jones Lang LaSalle managing director Rob Kossar.

"We've seen a lot of tenants in the market recognizing that this is the time to try and lock in a low rate for an extended period of time. And while some landlords have pushed back, maybe offering a three-year deal at $2.50 net in a $4 building, many tenants have been consistent in trying to get a long-term solution at a reduced rate," he says.

There is also a large amount of vacant first generation space in the Garden State. "Although we've seen downward pressure to reduce those rents, the worst is still ahead for some of these property owners that have had vacancies for a year or two," says NAI James E. Hanson vice president Barry Cohorsky, based in Hackensack, NJ, who believes we won't see a bottoming on the industrial side until later in 2010.

The main driver behind declining industrial rents: competition from out of state and within. "Everyone thinks of the competition as being Pennsylvania's Lehigh Valley, but that's just one piece," Kossar says. "There's also an entire market down by Exit 7A, which is actually doing even worse than Exit 8A, with the former posting a 23% vacancy and the latter around 14%, if you discount owner-occupied buildings." However, the 7A assets are newer and landlords there are being extremely aggressive, which is causing 8A owners to respond in kind.

To the north, meanwhile, there is a spate of new industrial buildings at Exit 12. According to Kossar, tenants who might have taken space at 8A or Heller's Park in Edison are looking at buildings closer to the port at Exit 12. "It used to be that if somebody needed a new, modern distribution center they had to be in Central New Jersey, but now there are some options."

One of the broader challenges for the region, from a distribution standpoint, is accessibility to good labor. "Right now, we're jitneying in labor from Perth Amboy or Brooklyn," Kossar explains. "A mass transit solution here needs to happen. Even if the government were to subsidize busing into these areas, the payback would be obvious and easy in terms of payroll tax."

Despite current conditions, Kossar is bullish on Central New Jersey. "It's all about location and Central New Jersey has it. At the end of the day, the Exit 8A market will continue to be the preeminent regional distribution market in the Northeast." But others aren't quite as optimistic. "We're not seeing many bright spots," Cohorsky says. "Exit 8A is a bloodbath. If you're looking for a couple hundred thousand square feet, there are close to 50 properties between Exits 10 and 7A. Anyone with a heartbeat can lease space at 7A or 8A where rents are in the $2 range."

The 8A market is swimming in space, agrees Marcus & Millichap Real Estate Investment Services' senior associate Jeff Oran, who has seen 200,000-square-foot tenants take space here starting at less than $1. "To fill these big chunks of space, landlords are offering average rent deals in the $3s over a five to 10 year period, which is a significant drop from just one year ago."

Part of the problem is that New Jersey is a notoriously expensive state in which to operate. "Because of its location, the area is still viable, but when the market changes and puts pressure on rates, warehouse tenants flee to Pennsylvania where it's much easier to do business," Cohorsky says. "A developer can go there and most likely have a three to six month approval process, as opposed to 18 months to three years in New Jersey."

And Pennsylvania is not the only state snapping up Garden State transplants. Both North and South Carolina have become attractive options. "Those states and their respective Governors have assembled teams to attract tenants by offering tax incentives and abatements," Cohorsky says. "The reality is that if you're a manufacturer and you have a couple hundred jobs, you can make a much better deal elsewhere. New Jersey has lost a lot of business to the Carolinas because of those states' ability to make an attractive deal."

Speaking of the Keystone State, competitive deal structures in many class A industrial buildings here are presenting tenants with value opportunities. "There are a few major tenants in the market with sizable space requirements, each within the Central Pennsylvania region," JLL's Meyer notes. "If these potential transactions take place by year-end, it is possible for the region to absorb up to two million square feet of class A space."Further south, Dallas/Fort Worth will also continue to be a competitive location of choice for organizations seeking to relocate.

According to Meyer, the region is a focal point for expansions and consolidations as companies shorten their supply chains to be closer to major consumer populations. "Companies currently in the market are seizing opportunities to rework logistics networks and capitalize on reduced rents in up-to-date facilities," he relates. In fact, leasing activity and the number of mid-sized to large requirements gradually picked up in the third quarter of 2009. Similar to New Jersey, Los Angeles is struggling with decreased trade flows through the San Pedro ports, which have had a negative impact on demand. According to Meyer, rental rate appreciation is not expected to begin until this trend reverses.

The market also houses the nation's highest balance of delinquent CMBS loans, with $1.7 billion outstanding. The industrial sector accounts for 38% of that balance, making Los Angeles extremely attractive for buyers looking to capitalize on properties in default. Investors would also be wise to look at New Jersey, where the amount of ownership distress is set to grow in 2010 as market pricing continues to transition and loans struggle to be refinanced as they approach maturity.

And while the Inland Empire has low exposure to the troubled CMBS loans plaguing other markets, drastic changes in underwriting criteria and a sharp drop in effective rental rates could give investors the opportunity to acquire properties at highly discounted rates.