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Industrial Rent Growth: Down But Not Out

SAN FRANCISCO-'Improving economic conditions will fuel a recovery in demand for industrial real estate,' says AMB Property's Swift.

By Alyson Grala | Updated on April 07, 2010

SAN FRANCISCO-US industrial rents are down 20% to 30% from their 2008 peak and well below levels that support new construction. In some markets, rents are at levels not seen in the last 30 years on a nominal basis and much lower on an inflation-adjusted basis. As such, there is a dearth of new product, as today’s rents deter developers from starting new projects.

Given the current landscape, it is easy to conclude that recovery is nowhere in sight. But new research from locally based AMB Property Corp. indicates that rents are expected to rise at a far greater rate than inflation. Rents are very likely to increase in many markets in 2011 and even more broadly in 2012. “We set forth the analysis that leads us to this conclusion as well as our thoughts on the possible magnitude on this cyclical recovery,” says David C. Twist, vice president of research for AMB.

Following eight quarters of negative net absorption, national availability reached a historic high of 13.9% at the end of the fourth quarter, and 2009 experienced the worst industrial net absorption on record at a negative 265 million square feet. Encouragingly, says Twist, the negative trend decelerated over the course of the year, slowing to a negative 38 million square feet in the fourth quarter, and new construction came in at an all-time low of 71 million square feet in 2009, as prohibitively low market rents made construction financially unfeasible. “Despite these challenging head winds, our analysis indicates that not only will demand recover, but it has already begun to do so in some submarkets,” he adds. “In fact, we may have reached an inflection point in many coastal markets during the fourth quarter, as demand was flat and availability was unchanged at 12.1%.”

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